Transportation service faces huge challenges in 2015
Liberals, corporation at odds on how to contain costs
VICTORIA — B.C.’s transportation minister says he’s frustrated with the slow pace of change within BC Ferries and says the corporation should look at cutting back on managers and free rides for employees before it looks for increased government subsidies and higher fares.
Todd Stone said the quasi-private ferry corporation needs to place just as much emphasis on finding internal efficiencies as it does on its three traditional financial “levers” — fare hikes, route reductions and increased taxpayer subsidies.
“Don’t forget there is a fourth lever, that’s efficiencies and the internal operations of BC Ferries,” Stone said in an interview with The Vancouver Sun.
“Things like the vacation program, employee passes, management levels, these things all add up. And there has to be, I think, as much emphasis there as on the other three areas.”
The comment highlights a rising tension between the provincial government and its former Crown ferry corporation. BC Ferries is facing pressure from the province to cut costs as it struggles with low ridership, financial losses and the looming prospect of billions in ship and terminal upgrades.
Both sides have been at odds since Stone ruled out potential cost-saving changes to the routes between Nanaimo and Metro Vancouver in November.
The efficiencies were floated by BC Ferries to help reduce future fare hikes, and could have included closing one of Nanaimo’s two ferry terminals and shuffling some or all of the traffic to Tsawwassen to avoid expensive terminal upgrades at Horseshoe Bay in West Vancouver.
Government’s snap rejection clearly upset ferries CEO Mike Corrigan, who said he has limited options left if the government won’t look at changes on the major routes that make up 80 per cent of his budget.
“The formula is pretty simple: BC Ferries efficiencies, (plus) service levels, (plus) government contributions, equal fares,” said Corrigan. “Those are the variables. So if you hold a couple of those variables constant, the other has to change.”
The province has faced fierce criticism from coastal communities in the past two years for cutbacks to service in minor and northern routes. The government has all but ruled out letting ticket prices rise or injecting new cash into the system.
Fares are “about as high as they can get without really impacting ridership,” said Premier Christy Clark.
Even so, the cost of a ferry ticket is likely to be the hot topic in 2015. Prices will rise 3.9 per cent.
In late March, the independent ferry
The formula is pretty simple: BC Ferries efficiencies, (plus) service levels, (plus) government contributions,equal fares.
BC FERRIES CEO
commissioner will announce the “preliminary” ticket price caps for 2016, which will once again ignite public debate over the affordability of the coastal ferry service.
It’s then up to Stone to decide whether to boost the province’s current $175-million annual ferry subsidy, to keep rates down, or cut coastal service. The ferry commissioner sets the final rates in September.
There’s “minimal flexibility” on government’s subsidy, said Stone. To make matters worse, an extra $80 million the government pumped into BC Ferries over four years to keep rates low ends with a final payment of $11.5 million in 2015/16. Stone is noncommittal on if he can make up that cash.
Instead, he’s focused criticism on BC Ferries internal spending.
Stone questioned whether BC Ferries’ vacation division needs to exist and if so whether it requires expensive downtown Vancouver office space, and wondered why BC Ferries keeps providing free passes to current and former employees when it “actually costs the ferries millions of dollars a year.”
BC Ferries has said managers only make up five per cent of its workforce and the free employee pass program costs “virtually nothing” because there is plenty of empty capacity on its ships.
CEO Corrigan said there’s “only so much the company can do” to reduce a largely fixed-cost budgets that is made up of routes mandated by the provincial government and crew levels set by Transport Canada.
The retail and catering services on ships — often dismissed by critics as overly lavish cruise ship-like amenities — make money and reduce pressure on the budget, said Corrigan.
The corporation has already internally scrutinized its $3-billion capital plan for new ships and terminal upgrades and thinks everything it is doing is justified to maintain the ferry system over the long term, said Corrigan.
“With a $3-billion capital plan over the next 12 years, to think we’re going to be able to freeze fares. I’m not sure that’s going to happen,” he said.
“But I’d sure like to see them at inflation or below inflation. It’s going to require a substantial contribution from government.”
The government, in contrast, is “not convinced they need to spend that much” on capital, said Stone.
BC Ferries has trumpeted the fact it will save millions annually by converting two large vessels from diesel to liquefied natural gas fuel, as well as overhauling its reservation system.
But Stone argued the government had to demand the quasi-private corporation pursue those measures.
Technically, the BC Ferry Corporation is supposed to be independent of political interference, after the Liberal government spun the Crown corporation off into a private entity in 2003.
But successive Liberal ministers have slowly exerted more control since the 2008 economic recession undercut ferry ridership and BC Ferries’ finances. Stone admits he can only go so far. “As awkward as it is and as difficult as it is for some people to understand, and I get it, the way ferries is structured today I don’t have the authority to order Mike Corrigan to reduce management levels or to eliminate employee pass programs.
“It’s frustrating. I tell you, if BC Ferries was a Crown corporation, if I did have the authority on this, we would have seen quite some time ago a similar program as we implemented in ICBC through a government audit in 2012 where we eliminated 500 management positions at ICBC and thus saved about $50 million per year in doing so.”
The ICBC audit found runaway management costs at a time when front line employees were being reduced and prices were rising. The audit prompted the then CEO to resign.
It’s a “valid question” to ask whether BC Ferries’ quasi-private structure is still relevant if the corporation can’t find the internal savings publicly suggested by government, said Stone.
“The single greatest challenge we have with making any changes to the current structure relates to debt. BC Ferries’ debt based on the current structure is not rolled up on the province’s bottom line. If that debt was on our bottom line it would very potentially impact our credit rating and drive up borrowing costs, that means less money for health care, education and indeed ferry investments.
“That’s why when people suggest just bring it back into government and all of its problems will go away; No. 1, it’s not as easy as just saying that, there are implications largely related to debt, and secondly the challenging financial realities at BC Ferries don’t just go away if it was more formally part of government versus its current structure.
“Nevertheless we’re tackling the challenges here as best as we possibly can and with as much energy as we can possibly muster to do everything we can to get those fares down as soon as possible. We’re making good progress. We’ve got more work to do.”