Public Accounts Committee on Oct. 7th, 2009

[The Chair, Liberal, Shawn Murphy]

I call the meeting back to order.

The second part of this meeting, the last hour, is to deal with the special examination on crown corporations. In this case here it is VIA Rail Canada.

The committee is very pleased to have with us, for this hour, from the Office of the Auditor General, Sheila Fraser. She is accompanied by René Béliveau, principal. And from VIA Rail Canada Inc. we have Mr. Paul Côté, the president and chief executive officer. He is accompanied by Robert St-Jean, chief financial and administration officer, and Christena Keon Sirsly, chief strategy officer.

On behalf of the committee, I want to welcome you all.

As in the previous meeting, I will ask for opening comments, first of all from you, Ms. Fraser.

[Sheila Fraser]

Thank you, Mr. Chair.

Mr. Chair, I will now highlight the findings of our special examination of VIA Rail Canada Inc. I am accompanied by René Béliveau, Principal.

We conducted our examination from June 2007 to February 2008. We found a significant deficiency in the systems and practices of VIA Rail. VIA does not have reasonable assurance that it will be able to meet the strategic challenges it currently faces. These challenges could have an impact on the fulfillment of its corporate plan for the 2007-2011 period.

The Corporation does not own most of the railway tracks that it uses. For any extra usage, it must negotiate with the owners. The corporate plan is premised on successful completion of the current negotiations with the principal provider of access to the railway track network, within VIA Rail's prescribed funding envelope. A new service agreement is thus critical to the Corporation's ability to meet the objectives set out in its corporate plan. As of the drafting of our special examination report, the outcome of negotiations was uncertain and the Corporation had not established contingency plans to be put in place should negotiations fail.

The 2007-2011 corporate plan further assumes growth in ridership and revenue. This will pose a significant challenge for VIA, which has had difficulty meeting similar objectives in the past. For example, the 2002-2006 corporate plan projected revenues that were $230 million higher than actual revenues. It also projected better on-time performance, but the actual performance remained below 80%.

In other areas, we found that the corporation had improved its practices, notably the human resources and marketing and customer focus. We also identified certain areas requiring improvement, particularly information technology, security, and environmental management.

VIA Rail has accepted all our recommendations and has indicated that it would move quickly to address our concerns. As we completed our examination in February 2008, I cannot comment on measures taken since then, so the committee may wish to inquire about the actions the corporation has taken to respond to our recommendations.

Mr. Chair, this concludes my statement, and we would be pleased to answer any questions the committee members may have.

Thank you.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Fraser.

We'll go to Monsieur Côté.

[Paul Côté, President and Chief Executive Officer, VIA Rail Canada Inc.]

Good afternoon, Mr. Chairman and members of the standing committee. Thank you for the opportunity to appear before you today.

I would like to express my appreciation for the remarks of the Auditor General and for the valuable work performed by her office. The relationship between the corporation and any external auditor often takes an adversarial tone, but this is certainly not the case for VIA Rail. The Office of the Auditor General brings a wealth of unique knowledge and expertise to the special examination process, and VIA welcomes the opportunity to benefit from that expertise. We found the approach taken throughout the 2008 special examination to be both insightful and constructive. The observations made in the report have been valuable. VIA fully supports and has already acted on each recommendation in that report.

We also appreciate the recognition given to VIA's progress since the previous special examination, particularly with respect to continued improvements in governance practices, and in the successful transformation of our Human Resources function into a more strategic resource for the corporation.

The Special Examination identified one significant deficiency which I will address momentarily. First, however, I would like to say I am gratified by the balance of the report's conclusion that the management of the corporation's financial, human and material resources is economic and efficient, and that VIA's activities are carried out effectively.

The significant deficiency is related to VIA's planning process, which failed to provide reassurance that the corporation can achieve its planned objectives within the framework of available government funding. Two main reasons are cited for this finding.

First, the report notes that VIA's planned performance targets depend on access to the rail infrastructure. When the report was written, as Ms. Fraser just said, the existing train service agreement with CN, which owns most of the infrastructure, was about to expire, and the report indicates some skepticism about negotiating a new agreement that would ensure the access we need. However, since then, we have, in fact, negotiated a new 10-year train service agreement with CN, which came into effect this past January. Overall, the agreement has been simplified and modernized to reflect changes in VIA's operations over the years, and it provides the kind of stability in track access that was missing when the Auditor General's report was written.

In addition, with the current capital investment program, VIA is working closely with CN to improve the capacity of the infrastructure for increased passenger rail traffic. Last July we jointly announced the VIA–CN Kingston subdivision project, an infrastructure investment valued at more than $300 million. It will improve capacity and accessibility for our trains on the Kingston subdivision and will provide guarantees on track access for future additional frequency. Negotiations are continuing with CN, and we expect that they will be completed shortly.

A second major reason cited in the report highlights concerns about VIA's ability to achieve its objectives such as the financial targets set out in the 2002-2006 Corporate plan.

[Terence Young, Conservative, Oakville, ON]

On a point of order, there's no translation.

[The Chair, Liberal, Shawn Murphy]

Perhaps you could go back to the previous two paragraphs, Monsieur Côté. You might want to slow it down a bit.

[Paul Côté]

It's to give you more time for questions.

I'll give it a shot.

There is no doubt that the inability to obtain greater access to tracks in order to add frequencies had an impact on VIA meeting these financial targets.

Market conditions also played a role, such as in 2003 and 2004 when the Canadian travel and tourism market fell into an unprecedented downturn.

Compared to the industry as a whole, VIA actually performed fairly well. And of course, financial targets were adjusted with the 2003-2007 corporate plan, and with each plan since then as a normal part of the planning process.

However, the experience over the past five years including the current economic crisis highlights a real concern about VIA's ability to respond to drops in market demand within its current operating mandate.

When demand drops, any business needs to cut costs to balance revenue shortfalls. A manufacturer, for example, will pull a product line, or postpone the launch of a new product. But for VIA, a huge portion of our costs are pre-determined, without reference to market demand. We operate mandated services, with little room for flexibility when it comes to the core costs of keeping trains running, whether people are getting on board or not.

This is just a fact of life for VIA, the way our operating mandate is currently defined. And it raises issues that go beyond the scope of the Auditor General's special examination report.

The report, quite rightly, recommended that VIA should identify and clarify risks that affect its ability to achieve strategic objectives, preparing contingencies that spell out how to respond to such risks and the potential impact on government funding. Our current corporate plan identifies and quantifies major risks related to passenger revenue, fuel cost fluctuations, train service agreement changes, expense fluctuations, and the benefits of investments in equipment and infrastructure.

In addition, we regularly review our operations to identify ways in which we can reduce our dependency on government funding. In 2009, this has included realigning train capacity to demand, adjusting service delivery staffing levels, and reducing other discretionary expenses. We will also review and renegotiate purchasing contracts.

The summary of the main findings in the special examination report identifies three other areas for VIA to address concerning information technology, environmental management, and security.

A new position of chief information officer was created and filled in July of this year to oversee VIA's information technology strategic plan and to ensure that the strategic objectives are achieved efficiently. As recommended, we are incorporating an IT, information technology, risk management framework as part of our new information technology security program. All critical elements of this security initiative will be completed by the end of next year.

With respect to environmental management, we are continuing to implement our environmental management system as the report recommends. We are particularly focused on the identification, assessment and control of environmental risks through a risk evaluation methodology. Full implementation is targeted for the second quarter of 2010.

Finally, VIA has completed a full review of employee and contractor positions to identify appropriate security level clearance requirements. We agree that this is a critical step to protect passengers and employees, as well as capital assets. A new security ratings system will be in place next year.

In fact, we have acted quickly to implement all 14 recommendations contained in the special examination report. In each case, implementation is either already complete, or will be completed, in the near future.

I believe we are fully addressing all the concerns raised during the Auditor General's special examination and that VIA has benefited as a result.

The recommendations have helped us to develop better strategic planning and better operating frameworks throughout the organization. That is a significant achievement, and it underlines the real, constructive value of the work performed by the Office of the Auditor General.

My colleagues and I will be happy to discuss these results in more detail with you and answer any questions you may have.

Merci.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Côté.

Ms. Crombie, you have seven minutes.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Thank you, Mr. Côté, for your presentation.

You are faced with some significant challenges, as the Auditor General has pointed out: accurately projecting revenues; ridership; on-time performances that are under global rates; and you have the added challenge of not owning your own rails.

The Auditor General did not obtain reasonable assurance that the corporation could achieve your objectives that were set out in the strategic plan to significantly improve the corporation's financial viability, which would be to increase your revenue by $180 million, or 39%, and increase ridership 30%, which you outline. So are you on track currently to meet these goals to increase ridership and revenue? On track--no pun intended.

[Paul Côté]

No, I appreciate that. It's a good choice of words.

The report we're discussing covered the period 2003 to 2008. If you're talking about 2009, I have to tell you we are having difficulty meeting our revenue targets.

When we established our targets in the late fall of 2008 for approval by the board and submission to the government, of course nobody could have anticipated how serious the recession we're going through now would be. So we're missing our targets pretty much along the same line and parameters of the industry, so somewhere in the range of 12% to 15%.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

You talked about increasing capacity. Will increasing capacity increase ridership and then revenue?

[Paul Côté]

Yes, it will. However, increasing capacity comes with negotiations with Canadian National for increased and improved infrastructure. These negotiations that are progressing well with CN are the ones I referred to in my comments, and we're hopeful that very shortly we'll have the framework for these programs to start; we expect them to be completed within the next 24 to 30 months.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Is there an aggressive marketing plan in place to address the ridership issue?

[Paul Côté]

We do have a marketing plan we review every year with the board. We have a customer plan, a marketing plan, and a sales plan. This marketing plan will have to be reviewed, not only in the case of additional frequencies, but as you know, the investment program also includes significant improvement to the fleet, so a modernization of the equipment in the western Canada corridor and in the east.

So when all these components are available in the timeframes they'll be completed in, we'll certainly create a more aggressive marketing plan.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

What was the impact of the strike last summer?

[Paul Côté]

In what sense? Financially?

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

That, and did it have any long-term impact on ridership and goodwill and all that?

[Paul Côté]

It did. In the end, when we look at the offer we put out on the market afterwards, with deep discounts to entice people to come back to the train, we ended up in a positive financial position in that we created enough new induced traffic.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

But discounted traffic; you were giving away--

[Paul Côté]

Discounted traffic, but due to the large volume, we ended up in a positive financial situation.

But from a reputation point of view, going through a strike is never a pleasant thing to do.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Okay. I have two more questions.

With respect to on-time performances, they've been low as well, lower than.... I think there's a benchmark provided; you're at 80% of performance. How does that compare internationally to the U.S. or Europe? We've heard you can set your clock by German trains.

[Paul Côté]

Comparing those networks is very tricky, because, first, when you look at Europe and the networks that are mostly on everybody's radar screen, the high-speed train that works operates in isolation. There is no freight traffic; it's on its own, so you can achieve very high numbers, and they do achieve very high numbers. I know in Japan they hit 99% on time, but that's all they've got. They only have Shinkansen trains and that's it. It's the same thing in other networks.

In our case, we share infrastructure, and I must say that over the years it's been a challenge. Recently, through this new train service agreement, I think we've provided for a much better framework to manage it. The results to date in 2009 indicate a significant improvement. We're above 85%, and we're happier now than we were before this agreement.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Just as a quick final question, because I think I'm almost out of time, the last budget announced there'd be a new train through Peterborough and Oshawa-Whitby, and I wondered if that was part of the strategic plan.

[Paul Côté]

I didn't catch your question, sorry.

[Bonnie Crombie, Liberal, Mississauga—Streetsville, ON]

Is the new train route through Peterborough, Oshawa, and Whitby in the strategic plan?