On March 9th, the Government of Canada released a Request for Expressions of Interest to build and operate High Frequency Rail. This represented a noticeable change in scope from previous announcements, particularly in terms of seeking to outsource VIA Rail’s corridor operations to the private sector partner for 30 to 50 years. (For details see our news article)
Transport Action believes that outsourcing train operations and revenue risk is not an appropriate application of the public-private partnership model; and cautions prospective private partners to think carefully about the risks that they are being asked to take on.
We detail some of the potential risks below, together with mitigations where we have been able to identify them. If the government is committed to the outsourcing of operations, it must reduce the project and performance risks. Without prompt action on the majority of these matters, the public should also be extremely wary of the risk premium that could be demanded by a private sector partner.
Public-private partnerships depend on the transfer of risk from the public sector to private sector partner or consortium. The general principle is that the risks transferred should be more readily measurable and manageable by the private sector than by the government, allowing for accurate pricing of risk by bidders.
This can benefit taxpayers if the overall cost of a project comes down as a result, and when infrastructure is procured together with its future maintenance this tends to result in higher initial build quality and lower lifecycle costs. A contract can also incentivize cost control and good project management during the build; and deter politically motivated change orders that could cause delays and cost overruns.
The private sector is good at pricing design-build-maintain or design-build-finance-maintain projects for linear infrastructure like roads, bridges, and railways, but it is unreasonable to ask the private sector to accurately forecast intercity passenger numbers up to 50 years into the future and to price the plethora of externalities and uncontrollable risks that would accompany taking over the operation of VIA Rail’s services in the Windsor-Quebec City corridor.
The success of the HFR project, including future ridership and revenues, will depend on many factors that will remain matters of public policy and are not manageable by the private partner. Furthermore, several project risks that we have asked the government to address over the past several years, as the HFR proposal has been studied, have not yet been addressed.
The foremost new risk introduced by the extended procurement timeline is that the government does not intend to make a final decision to proceed before the next federal election in 2025. Given this history of previous High Speed Rail studies, this creates a risk that bidders will be wasting their time.
While High Frequency Rail has enjoyed cross-party support, ten years of study without a result is bound to become a target for opposition parties, so there’s a strong possibility that a change of government would be accompanied by a delay in the procurement process, significant changes, or outright cancellation of the project.
Mitigation: Commit to financial close before 2025. This would require acceleration of the procurement timeline and starting the Impact Assessment process immediately based on the route options studied by the Joint Project Office.
The federal government does not appear to have taken any steps to purchase, option, or place development holds on lands that might be required by the project. This includes the former railway right of way between Havelock and Glen Tay, land that might be required to avoid villages and sharp curves along the 19th century alignment. This creates a risk that the currently studied alignments become unbuildable due to other developments or that additional compensation is required to secure necessary lands at a future date.
Mitigation: Canada and the Canada Infrastructure Bank should immediately take steps to secure land options and development holds along the studied alignments and for development around stations.
The HFR project is intended to upgrade existing railway rights of way, with only a minimum of new construction or reinstatement, but the government has not yet taken steps to secure access to the rights of way that would be used. This would include at least Toronto to Havelock, Coteau to Montreal, and Montreal to Quebec City via Trois Rivieres. The government’s failure to protect access to the Mount Royal Tunnel at an early stage has already had a serious adverse impact on the project, and the potential route into Toronto using the Don Branch has not been protected either.
Mitigation: Canada and the Canada Infrastructure bank to negotiate the purchase of key shared rail corridors or an ownership stake in them. The model used by the Commonwealth of Virginia to expand service south of Washington D.C. could be considered.
One of the main challenges that HFR seeks to address is track capacity and on time performance when operating over other routes owned by other railways. The JPO report says nothing useful about this crucial issue of amending the regulatory framework for operations over Metrolinx, Exo, CN and CP infrastructure, which must still be used by HFR trains to reach city centres. In many cases, significant upgrades including grade separations will be needed. With the existing network of services being also transferred to the private partner as the “local services” this issue becomes even more important. Without a complete overhaul of track access agreement and regulations, including expedited adjudication of disputes, the new operator would be just as constrained in its ability to deliver frequent and reliable services as VIA Rail is today.
Mitigation: Develop an updated regulatory framework, potentially backed by new legislation such as a Fair Rail for Passengers Act, to restore dispatching priority for passenger trains and strengthen the negotiating position of intercity passenger rail operators. This would also include laying out the terms under which capacity upgrade costs would be monitored and electrification of existing routes could occur.
Although the procurement documents specify that the project should use Class 7 track with train operating at 200 km/h and possibly faster, no such classifications exist in Canada. While a study for track classifications 6 through 9 was begun in 2017, and the safety case for classes 6 and 7 completed in 2020, the update to Canada’s Track Safety Rules published in December 2021 did not include the expected regulations. Therefore, the private partner faces uncertainly about the technical requirements and design standards that apply to the project.
Mitigation: The government should swiftly finalize and publish the necessary standards.
The federal government and VIA Rail have not yet responded to Amtrak’s proposal to reinstate services between Chicago and Toronto. As currently envisaged, these services would use the Detroit-Windsor tunnel rather than running through Port Huron and Sarnia. That would significantly strengthen the case for adopting the London-Windsor portion of the Ontario HSR proposal as part of the government’s vision of extending HFR to Southwestern Ontario, with the possibility of some Canadian trains also running through the tunnel to Detroit to serve the Detroit-Toronto travel market.
Mitigation: The government should explicitly include the capacity for cross border services in the project scope and provide clarify on border security and customs preclearance arrangements for these services.
HFR will compete primarily with road and partly with air travel for intercity travel in the corridor. How both these modes will develop and be regulated is an unknown. With the shift to electrification of vehicles, the model of funding roads through gasoline taxes is likely to become unsustainable. Whether the government responds with road pricing or by continuing to offer free-to-use highways funded through general taxation will either sharply increase or reduce demand for alternative modes.
Similarly, the unsustainability of short haul fossil fueled aircraft has been recognised with air-rail partnerships and by public policy mandating a shift to express rail in Europe, but whether such policy might be introduced in Canada is a largely unknown.
The recent deregulation of the intercity bus market in Ontario also presents both challenges from low-cost competition and opportunities for partnership and increased connectivity. Thus far, the new entrants have targeted the Toronto-Ottawa market with low-cost offerings, and any move to deregulate the bus market in Quebec could increased competition throughout the corridor.
Mitigation: Federal leadership in a nationwide ground transportation strategy that includes restoring motorcoach routes to northern and rural communities lost over the last few years.
Population forecasting more than a decade into the future is an inexact science, and the building of HFR itself will end the infrastructure drought which has held back cities along its route.
Population growth in Canada is likely to remain largely driven by the rate of immigration to Canada, which is federal policy choice. The populations of cities along the HFR and local services corridors will almost certainly continue to grow over the next 50 years, but how that growth is distributed, to what extent that growth is constrained by housing availability, and whether new housing developments will be transit-friendly rather than sprawling, will all be matters of public policy.
The performance of Canada’s economy will also influence ridership demand, although this is partially cushioned by a contract term that spans several economic cycles. The location of employment centres will be determined by the land using planning decisions of municipal and provincial governments.
The population shift over the past two years away from the Greater Toronto Area to smaller cities is also a good example of the kind of unanticipated changes that might occur in future. The technological basis for a major shift to remote work had been possible for at least a decade, but this did not manifest in practice until the pandemic forced the issue. It is not yet clear whether these two related changes will result in an increase or decrease in overall ridership.
Mitigation: The project agreement could be negotiated to include a subsidy/premium formula based on a detailed demand model of city pair populations and population growth.
Passenger numbers on intercity trains will depend upon the quality of the rest of the public transport network to get passengers to and from stations. Transit and intercommunity bus services are the responsibility of the province, and in many cases have not been well connected to rail to enable seamless journeys. Each HFR station and train station on the existing network should become a multimodal transportation hub for the community, but to achieve this requires federal leadership in a nationwide ground transportation strategy that includes funding that incentivises improved connectivity and fare integration between transit systems.
Mitigation: The federal government should establish a long-term operating funding framework for transit and a strategic plan for closing intercommunity transportation gaps. This could significantly reduce ridership and revenue risks and maximize social outcomes.
The private partner would be expected to take over operation of all of VIA Rail’s existing corridor routes as the “local services.” In many cases, the adequacy of these services to meet demand has been constrained by infrastructure bottlenecks. The extended decision-making process around HFR has diverted attention from addressing these bottlenecks, for example to deliver plans to increase services in Southwestern Ontario as proposed by VIA Rail in 2014. These opportunities to resolve bottlenecks and serve additional passengers should not necessarily have to wait until the completion of the HFR project.
Transfer of the “local services” will also include responsibility for the upkeep of several stations with heritage designation, and there is currently a maintenance deficit for many of these structures.
There are also some services for the crucial Toronto day-trip market that are taking a very long time to reinstate after the pandemic, and the longer these trains remain unavailable, the harder it will be to win back potential ridership as people rearrange their lives around other travel modes.
Mitigation: The government has already announced some funding for stations in budget 2022, together with “no regret” infrastructure works ahead of HFR in budget 2021. There should be clarity about what this funding covers and an accounting of its adequacy.
Previous cuts to VIA Rail services on the Kitchener and Niagara Falls routes created a service vacuum that has been filled by the expansion of Metrolinx services. This was further extended to London on a pilot basis in fall 2021 and the recent Ontario provincial budget suggests further Metrolinx involvement in that route is being actively considered by the province. These developments have not been conducted on a very collaborative basis, resulting in ridership cannibalisation, additional costs, and forcing the rescheduling of VIA Rail services from Sarnia through Kitchener due to the exhaustion of track capacity through the Georgetown area.
Mitigation: Canada and Ontario need to discuss whether the Toronto-Kitchener-London service is to be “downloaded” to the province and therefore in or out of scope for the HFR procurement.
Transit oriented development is one of the proposed additions to the project scope. While transit oriented real estate development around stations can contribute to potential ridership, the Canadian real estate market is currently overheated after a few years of rapid gains, so volatility is likely between now and the expected commencement of the HFR project.
Accurately forecasting the value of these side projects for the purposes of the procurement will be challenging, and undertaking them requires an additional set of business capabilities around real estate development that is not closely related to rail transport. It would also be reasonable for the government to impose some affordability criteria on residential developments around HFR stations, together with clustering of other social amenities, rather than allowing the partner to purely maximize revenues.
Mitigation: The private partner should consider asking the government to retain responsibility for this aspect of the project. The government could secure or option relevant land parcels, and work through the Canada Lands Company and Canada Mortgage and Housing Corporation to coordinate transit-oriented development around stations that is aligned with Canada’s National Housing Strategy.
If the door is opened to private sector participation to the Canadian passenger rail market, it is reasonable to expect that a future government will open it further, particularly if pressured in international trade negotiations. The more successful HFR is, the more likely that other rail operators will insist on access.
The government’s stated desire is to sustain what they believe would be the benefits of private sector involvement over the multi-decade term of the project also suggests further openness to competition. This could occur along similar lines to European open-access operators, offering low-cost services alongside the existing high-amenity service model.
Mitigation: Rather than allowing uncertainty about future competition, the government and development partner could agree to set a “sunrise date” for the opening of train paths for potential competitive service offerings 10 or 15 years into the contract term.
The overly long study and procurement process for HFR, lack of transparency, and poor global track record of rail privatizations mean that the private partner would start out with a lot to prove, and unions have already launched a campaign opposing privatization. Any underperformance or delay in delivering the promised services could lead to a wider campaign to remove the contract operator.
The apparent threat to the sustainability of the remainder of VIA Rail’s national network from the outsourcing the majority of current operations and management capabilities is also likely to amplify concerns that investment is being targeted unfairly toward two particular provinces, as well as creating uncertainty about any projections for numbers of passengers making connections to and from these services.
The government would also need reconcile the strict Canadian ownership requirements for commercial airlines domiciled in Canada while potentially allowing full foreign ownership and profit repatriation of HFR operations.
Mitigation: Increased transparency with robust public communication and consultation by the Government of Canada and the development partner; plus clear commitment to sustainable passenger rail for all Canadians through renewal of the long-distance train fleet and federal partnership in projects like the Calgary-Edmonton corridor and restoring services on Vancouver Island.
The risks outlined above all feed into the difficulties a private partner faces in arriving at an accurate revenue forecast. With the best currently available data and best will in the world, forecasting decades into the future is an ambitious and speculative exercise at best, yet the private partner will be expected to price the project based on sharing revenue risk, and potentially absorbing significant losses.
Long term ridership and travel demand in the corridor is going to be more dependent on public policy than the operational details of HFR, assuming the target travel times and frequencies are delivered. The only certainty is that public policy on issues like housing is going to have to change. How will the government handle road pricing or congestion charges once the gas tax is gone? What will immigration policy be in 2040? Will the integration with local transit needed to make complete journeys easier actually happen? Potential private sector partners have no “secret sauce” that will allow them to control for such policy risks in the way they can control construction risks. Even small changes to federal, provincial, and municipal public policy will have compound effects over time that are likely to completely invalidate whatever ridership forecasts are prepared today.
There’s a litany of failures and bail-outs when the private sector has taken on operating and revenue risks in passenger rail elsewhere in the world, so the onus is on the Government of Canada to clearly demonstrate that it is not setting a potential trap for the private partner and that the proposed procurement model represents good value for taxpayers.
However, the entire value for money comparison in the released version of the Joint Project Office report was entirely redacted before being made public, and the section on project risks was also fully redacted. The risks section was given only half a page, clearly not representing anything close to a comprehensive project risk register. This lack of transparency is deeply problematic.
In order to ensure the success of the project, Transport Action strongly urges the government to return to the original plan, inviting private partners to undertake the measurable and tractable task of building and maintaining the new infrastructure required for HFR, rather than wasting several more years attempting to outsource VIA Rail’s operations, with a high likelihood of failure due to the risks outlined above. This would allow the government to start the impact assessment and property acquisition processes to build the route that has already been studied over the last five years, while keeping operations under public ownership.