Poor ONTC-MNDM relationship has big implications

Ontario Auditor General, Bonnie Lysyk, released a special report in Dec 2013 about the Divestment of Ontario Northland Transportation Commission.
In that report, she spoke about the relationship between MNDM and ONTC as it affected the planned divestment 

 "The Ministry of Northern Development and Mines (Ministry) and the ONTC did not have a trusting or open relationship, so transparent and open communication did not consistently occur."

Although the mandate of that special report was to investigate the accuracy of the savings estimate put forward by MNDM to justify the divestment, (it was found to be wildly inaccurate), she did identify this relationship to be a fundamental problem in the execution of public policy in Northern Ontario.

I believe if the dysfunctional relationship was to be investigated in a comprehensive manner, it would show far more damage to Ontario than an overly optimistic assessment of cost savings that had no regard for value of service.

To begin with, I lifted the description in the critique done by Gravelwatch of the MNR's huge 2009 study of the Aggregate Resource in Ontario which suggests the process may have been flawed.

Ontario’s Ministry of Natural Resource carried out a set of studies called SAROS (State of the Aggregate Resource, Ontario Study). MNR commissioned a set of six papers about the State of Aggregate Resources in Ontario. MNR summarized the results of this work in a publication called the Consolidated Report, which presents 26 key findings about aggregates in Ontario. The critique given here concludes that MNR’s summary needs a broader perspective and too often takes an industrial point of view.

I don't know enough about the aggregate industry to comment on the validity of Gravelwatch's criticism, but I would like to draw attention to the facts used in Saros Paper 2 - Future Aggregate Availability & Alternatives Analysis.  (WARNING - file takes a long time to load)
The Feasibility of Alternative Modes of Transportation begins on page 76 and makes some claims that I would like to comment on.

First of all, the 1992 report relied upon, for a lot of issues with rail transport, is entitled "Aggregate Resources of Southern Ontario" and many of those issues are not applicable to Northern Ontario.

It goes on to state that the 1992 report relied on a 1980 report "Mineral Aggregate Transportation Study" which dealt with selected source areas in the Saugeen area and Manitoulin Island.  Again, this is NOT Northeastern Ontario where rail infrastructure, owned by ONTC, is already in place.

In the "Source Assumptions" on page 82, the rationale for selecting North Bay as the terminal for access to northern aggregate resources is not adequately explained.  I suspect it had a lot to do with the fact that CN, who MNDM obviously relied on for rail expertise instead of ONTC, does not operate further north in the region than North Bay.  

That location minimizes the financial benefit of selecting the old Sherman or Dane iron ore pits as locations for the initial source of aggregate for the proposal.  Both sites are owned by the Miller Group and have their own unlimited source of aggregate, they have rail infrastructure already in place and they are fairly remote from communities where production activities may disturb local populations.

So if we accept the exclusion of these two natural sites for aggregate production and instead accept the CN premise that North Bay is the logical choice to assess the proposal, what then?  

CN operates minimal yard operations in North Bay, having pulled out of a joint yard agreement with ONTC in the 1990's and relocating their operations to their own yard, which they reduced by 3 or 4 tracks to capitalize on the value of unused rail.

Now, to accommodate the increase in traffic, they suggest, through MNDM, that there will be a need for extensive capital costs to acquire land for stockpiles and new tracks.  This totally discounts the value of utilizing the ONTC 21-track yard next door and all the existing attached infrastructure that could be used for train building, train testing and car repair.  Instead they tally up huge capital costs for the acquisition of land and construction of a new yard.  They also list issues relating to available mainline rail capacity as though the one freight train per day (2 when you count the Northlander passenger train that existed then) would impede the proposed gravel trains.

Even the congestion that may have arisen on the CN section of track south of Washago has diminished since CN has taken to routing most of their trains via the US instead of Ontario.

The report calls for the construction of loop tracks to accommodate the gravel trains, an expensive alternative to a conventional yard.  I am assuming CN wanted loop tracks to alleviate the need of re-marshalling trains at the turnaround point and thereby circumvent the need for car inspection and brake testing required by federal law.  If the train stayed intact, it would not require this safety feature regardless of the fact that the miles travelled would be the same.

The actual freight rate quoted by CN for these trains is unknown, but ONTC's major customers used to rely on CP quoting rates through Sudbury to keep CN rates competitive.  This study does not appear to offer any rail alternative to what CN proposed.  The proposal also called for trains to return empty disregarding the potential for hauling and disposal of construction waste.   This is a huge problem for the GTA and may be more politically and environmentally acceptable than hauling GTA garbage. 

There is no doubt changing the "close-to-market" policy for aggregate extraction will result in higher financial costs.  But whether or not those costs are marginal is not fairly evaluated in this study.  ONTC deserved an opportunity to make their case for the social benefits that can be achieved at the lowest possible financial cost.  

MNDM's failure to include ONTC in these discussions is a testament to that dysfunctional relationship.  That failure had a big impact on the MNR decision to stay with the "close-to-market" policy for aggregate production, which in turn, had big implications for all of Ontario.





 

Comparing two Telecom Deals

The 2013 Financial Statements of the Municipality of Kincardine contain the following entry

In July 2013 the council of the Municipality committed to selling the assets of Bruce Telecom   At that date the tangible capital assets of Bruce Telecom were considered held for sale and were therefore recognized at their net recoverable amount and removed from tangible capital assets 
The council accepted an offer to sell the tangible capital assets of Bruce Telecom on January 21 2014 for a price of $24M An impairment of 8,388, 297 resulted from writing down Bruce Telecoms tangible capital assets to this value

The revenue from Bruce Telecom in 2012 was around $18M with $17M in expenses. I do not know if those expenses include depreciation or not.

So the value of the assets of this corporation were $32.4M dollars and the company sold for $24 M with no further financial contribution required by the Municipality of Kincardine to Eastlink.


The 2013 Financial Statements of ONTC contain the following information about Ontera

Assets (in thousands)

Ontera                                               Cost    Accum   Net Book
                                                                       Deprec         Value

Equipment                                165,828 127,368       38,460 
Buildings                                      6,751    4,421        2,330    


Ontera
Sales revenue                                                              28,408 
Operating Expense                                                       22,692 
Excess of revenue over expenses before the undernoted      5,716 


Amortization of capital assets            5,151 
Employee future benefit expense        1,720 
Gain on sale of capital assets -             (26)
Interest expense                              1,084 
Deficiency of revenue over expenses  (2,239) 

Ontera was sold for $6M with a further capital contribution of $15M by the Ontario government.

I am no financial expert, and would welcome the opinion of someone knowledgeable about the details, but it seems to me that MNDM made a very poor deal for the Ontario government.  The Competition Bureau may be doing the Ontario taxpayer a favour if they block this deal.

The need for the Competition Bureau to review this transaction has been known from the outset.....if indeed the deal is blocked, it will be very interesting to see MNDM's "Plan B".....and how long it takes them to let the public know what it is.