Divestment of Ontario Northland Transportation Commission Special Report December 2013 Office of the Auditor General of Ontario Office of the Auditor General of Ontario To the Honourable Speaker of the Legislative Assembly I am pleased to transmit my Special Report on the Divestment of Ontario Northland Transportation Commission, as requested by the Standing Committee on Public Accounts under Section 17 of the Auditor General Act. Bonnie Lysyk Auditor General December 2013 © 2013, Queen’s Printer for Ontario Ce document est également disponible en français. ISBN 978-1-4606-3177-5 (Print) Cover photograph credits: ISBN 978-1-4606-3178-2 (PDF) Ontario Northland Transportation Commission (ONTC) Table of Contents 1.0 Reflections 5 2.0 Background 6 3.0 Summary 9 4.0 Review Objective and Scope 13 5.0 Detailed Observations 14 5.1 FINANCIAL OVERVIEW OF ONTC OPERATIONS 14 5.1.1 Chronology of Key Events Up to October 2013 16 5.2 CHALLENGES OF ONTC’S MANDATE AND GOVERNANCE STRUCTURE 16 5.3 ONTC SAVINGS COMMUNICATED IN THE 2012 ONTARIO BUDGET 18 5.3.1 Interpretation 1—Internal Savings to the Ministry of Northern Development and Mines 19 5.3.2 Interpretation 2—Estimated ONTC Divestment Costs and Liabilities to be Managed 19 5.3.3 Interpretation 3—Elimination of Operating and Capital Subsidies to the ONTC on a Go-forward Basis 22 5.3.4 Interpretation 4—Full Financial Impact of the Divestment of ONTC Based on a Multi-year Business Case Analysis 22 Appendix 1—Excerpts from the Addendum to the 2012 Ontario Budget—Report on Expense Management Measures 25 Appendix 2—Recent Operational Initiatives 26 Appendix 3—Chronology of Key Events in the ONTC Divestment 28 4 Special Report Special Report Divestment of Ontario Northland Transportation Commission sive business-case analysis. This information, 1.0 Reflections along with information we obtained during our work, indicates that there are both known and not-yet-known costs associated with There are several key lessons to be learned from divesting the ONTC. The known costs may be the Ontario Northland Transportation Commission as high as $820 million, and recouping this (ONTC) divestment process. They are: amount by the government no longer paying Any undertaking as complex as the sale of a • the ONTC the normal annual operating and government agency, especially one with the capital subsidies it has been providing could scope and reach of the ONTC that involves well take a decade or longer. The Ministry hundreds of millions of dollars, nearly 1,000 advised us that costs will be managed to avoid jobs, and key services to dozens of smaller the worst-case scenario and that the payback communities in northeastern Ontario, will depend on how divestment transactions requires a thorough business-case analysis and other initiatives are finalized. It also that provides objective, complete and defens- indicated to us that detailed due diligence is ible information for decision-making. After planned to be performed on any future ONTC announcing on March 23, 2012, its plan to business-line divestment proposals provided divest the ONTC by March 31, 2013, the gov- to the government for specific approval. ernment stated in an addendum to the 2012 Constructive ministry/agency relationships Ontario Budget (see Appendix 1) that this • and effective governance are critically import- measure would save $265.9 million over the ant. The Ministry of Northern Development next three years. However, this did not clearly and Mines (Ministry) and the ONTC did or fairly communicate the potential financial not have a trusting or open relationship, so impact of the proposed divestiture. Also, the transparent and open communication did not risk was high that these savings would not be consistently occur. As well, with complicated achieved because they were dependent on the initiatives such as divestments, for which optimistic assumption that divestment would there is no pre-established blueprint for gov- occur within one year of the announcement. It ernment to follow, it is important that there was only well after the divestment announce- be clarity around roles and responsibilities. ment of $265.9 million in savings that the Our sense in this case was that there could government obtained the information that have been more clarity. As a result of keeping would normally be needed for a comprehen- 5 6 Special Report the ONTC out of initial divestment discus- efforts associated with divesting the ONTC, we sions, the Ministry’s ability to provide the acknowledge that, on a long-term basis, divesting government with complete information, and the ONTC would reduce the taxpayer burden. On therefore a complete initial financial analysis, the other hand, without change, there may well be was impacted. With the establishment of the socio-economic benefits to justify subsidizing the Minister’s Advisory Committee, the role of the ONTC. However, this is a policy decision for the ONTC’s Transition Board became less clear. government of the day to make, and it is not up to There is a need to clarify the governance of the Auditor to comment on whether the proposed the ONTC to ensure that ongoing operations divestment is a good or a bad idea. are not negatively impacted during this period This report provides context around the of change. March 23, 2012, public announcement on potential • Stakeholder involvement in major initiatives is savings from the ONTC divestment and highlights important. The government made the ONTC the importance of full and clear communication divestiture announcement without consulting when a significant initiative like this is undertaken. key stakeholders such as customers, unions, and the ONTC Board of Directors and senior management. This in turn created uncertainty in the marketplace about the ONTC’s operations 2.0 Background and its ability to obtain new business opportun- ities. There is a lack of information around what The Ontario Northland Transportation Commission the ONTC will look like in the future or whether (ONTC) was established as a Crown agency in 1902 there will even be an ONTC. The government under the Ontario Northland Transportation Com- has since said that going forward, it will consult mission Act. Headquartered in North Bay, the ONTC northerners to seek possible alternatives to an reports to the Ministry of Northern Development outright sale of ONTC assets. and Mines (Ministry). • Planning for, and funding, long-term capital Until March 2012, the ONTC was mandated requirements is important in order to provide under its Memorandum of Understanding with services using infrastructure that is safe and the Ministry to provide efficient transportation reliable. In the case of the ONTC, ongoing and telecommunication services in northeastern annual capital spending has not been suf- Ontario as directed by the government of Ontario ficient to plan for and complete improvements through the Minister from time to time, including to properly maintain the infrastructure for the following: which the ONTC is responsible in northeast- • support and promote, through the services ern Ontario. Instead, the ONTC has had to delivered by the ONTC, northeastern Ontario rely on annual capital plans with periodic economic development, job creation and com- special requests to the province when such munity sustainability; funding was deemed absolutely essential to • through its services, support, promote and ensure that services could continue and safety enhance linkages and clustering between risks were managed. communities within the region and between There is little doubt that without change, the northeastern Ontario and other regions; operation of the ONTC in its current structure • deliver price-competitive transportation and will require taxpayers to subsidize its operations telecommunication services that are safe, reli- on an annual basis. While we believe that the able and responsive to customers, residents government initially underestimated the costs and and businesses in northeastern Ontario; and Divestment of Ontario Northland Transportation Commission 7 • deliver services in a financially efficient boards, First Nations communities, homes and and effective manner with an objective of businesses in the region. improved cost recovery and self-sustainability. • Refurbishment Services shares space with In fulfilling its mandate in the sparsely popu- Rail Services at the ONTC’s mechanical shops lated Northeast, the ONTC has operated at a loss in North Bay. In 2004, ONTC obtained an each year. For instance, in the 2012/13 fiscal year, it $81-million contract to refurbish 121 GO Tran- had operating revenues of $97 million, but required sit commuter rail cars over a six-year period. operating and capital subsidies from the province However, in 2011, based on a public tender, totalling $78 million. Over the past decade, it has Metrolinx awarded a $120-million GO Transit required total operating and capital subsidies of refurbishment contract to a Quebec-based firm. almost $500 million. It has more than 940 employ- The ONTC’s business lines have been segregated ees and services 53 northeastern communities as either commercial (rail freight, refurbishment, through four primary business lines: telecommunications and motor coach services) • Rail Freight Services provides passenger and or non-commercial (Northlander and Polar Bear freight service from the James Bay Lowlands Express train services). Its infrastructure has aged to Toronto over 1,100 kilometres of track and over the years, and the ONTC’s 2009 Long-Term infrastructure. The Northlander passenger Sustainability Plan estimated that over the follow- service between Toronto and Cochrane was ing 15 years it would need more than $735 million cancelled in September 2012, but the Polar to cover capital costs to repair its aged infrastruc- Bear Express between Cochrane and Mooso- ture. Figure 1 illustrates how the ONTC’s historic nee still operates. The ONTC owns and oper- capital spending has been below the industry ates more than 400 locomotives and rail cars, benchmark of 17% of commercial rail revenue.