The Ways and the Means

MR. KARN:

Reverend Sir, distinguished guests, ladies and gentlemen: Today our speaker is perpetuating that finest of traditions of presidents of Canadian National and Canadian Pacific in honouring The Empire Club of Canada with an address when matters of unusual national significance arise regarding transportation.

I refer to the late Sir Edward Beatty who spoke to the club in 1919 and 1924, to the late Sir Henry W. Thornton in 1922 and 1929, Mr. R. C. Vaughan in 1942, and the late Donald Gordon in 1951, 1954 and 1962.

Prior to the incorporation of Canadian National Railways in 1919, the right-of-way for these eight appearances had been established by addresses on transportation by earlier Canadian statesmen--Mr. H. J. Pettypiece in 1904 on "Railway Taxations", Mr. W. F. Maclean in 1905 on "State Ownership of Railways", Mr. J. A. Ewan in 1907 on "Grade Crossings" and Mr. S. J. McLean in 1909 on "Railway Regulations".

In summary, four speakers on railways in our first five years--none for ten years--then eight addresses in fortythree years--followed by none for the past fifteen years. Lest our speaker today might think that his address is going to be the thirteenth on railroading, let me assure him that this is not so. We have another tradition in this club--that of appointing forthright nominating committees whose reputation for railroading innocent members to the position of president even surpasses in speed and efficiency that of the famous Tokaido Express.

The magnitude of CN's present operations, encompassing more than 24,000 miles of rail line and about 85,000 employees, often obscures the fact that it evolved from nearly 700 separate companies, the majority of which had operated independently under their own names. The range of activities of these companies included railways, and shipping lines, telegraph communications and express operations, elevator, warehouse, land and townsite companies. Among them was the first railway in Canada--the Champlain and St. Lawrence, which was chartered in 1832 and began operation in 1836.

Included in its visible assets today is a world famous tower reaching above Toronto--of which we are all very proud--from which its president might see on a politically clear day almost all the way to Otto Lang's office in Ottawa, if not to the Crow's Nest Pass in the Rockies.

Our guest of honour is a native of Rodney, Ontario, near which is located the University of Western Ontario where he earned a B.A. degree in economics and political science in 1952, followed by an honorary LL.D. degree in 1975. In 1959 he was awarded his PH.D. degree in economics from Duke University in Durham, North Carolina.

Since early times, there has been a strong impact of politics on railways and of railways on politics. Economics also plays a major role and it is not surprising that Dr. Bandeen should find a challenge in the CN empire where he began in 1955 in the Research and Development Department, becoming Director of Corporate Planning ten years later. From 1968 to 1974 with the speed of the CN Turbo he whistle-stopped through the positions of VicePresident, Corporate Planning and Finance; Vice-President, Great Lakes Region; President, Grand Trunk Western Railroad; Executive Vice-President, Finance and Administration to President and Chief Executive Officer. Throughout this meteoric rise he has continuously emphasized the need for CN to earn an operating profit.

Among his many other interests, he finds time to support the Arctic Institute of North America, Bishop's University, the Canadian Economic Policy Committee, the Quebec General Council of Industry, the Quebec Provincial Council of Boy Scouts of Canada and the Stratford Shakespearean Festival Foundation of Canada, to name a few.

Two weeks ago today, the Minister of Transport presented for first reading in the House of Commons, Bill C-33, an Act to amend the National Transportation Act, the Department of Transport Act, and the Railway Act. It is therefore most timely and a great privilege for me to introduce Dr. Robert Angus Bandeen, President and Chief Executive Officer of Canadian National to speak on the subject "The Ways and the Means".

DR. BANDEEN:

Ladies and gentlemen: I am going to speak today of current developments in the business aspects of Canadian National--and their relevance to the future of the services we provide to Canadians.

At the outset, it is important to define the type of institution Canadian National is. This may seem almost redundant before such a well-informed audience, but experience has shown that in the past many misunderstandings have arisen because people have varying perceptions of what Canadian National is, and what it should do.

Perhaps it is easiest to begin by defining what Canadian National is not, and what it cannot do. It is not a department of the federal government, and its employees are not civil servants, even though it is owned by the people of Canada. It is not, as Donald Gordon once made clear, an experiment in socialism. It was set up as a pragmatic way to continue the operation of railways which, at the time of their completion more than half a century ago, did not have sufficient traffic to be self-supporting. And it is not an agency set up to eliminate regional disparities and subsidize ailing industries, though it can be the instrument for implementing such policies when they are decided upon, and financed, by the appropriate level of government.

From its inception following the First World War, Canadian National has been a business-oriented corporation set up to run certain transportation, telecommunications and other businesses on a sound, commercial basis.

The original mandate of CN was confirmed as recently as last month when the Minister of Transport wrote to our Chairman that although "the impression has persisted that Canadian National should be used as an instrument of public policy even at the expense of its commercial performance, it is the view of the government that CN should make every attempt to conduct its affairs with a commercial attitude and in a commercial manner."

Over the years the effectiveness of CN's financial performance has been masked by such items as inherited debts, and inadequate depreciation in earlier years. Governments have sought to assist particular regions or shippers or services by paying subsidies to us--and other railways rather than paying them directly to the real beneficiaries.

But Canadians have reaped dividends in the development of one of the most extensive and modern railway networks in the world, which provides essential overland transportation at rates which are amongst the lowest of any of the major nations. It is this network of rail services, built by optimistic railroad pioneers at the turn of the century, that has helped Canada to enjoy the rapid economic growth of the past three decades.

It takes only a few moments of thought to realize that Canada with its vast expanse, its widely dispersed population and resources, and its severe climate, is more dependent on good rail service for movement of its goods than almost any other nation.

How would the grain from the prairies, the coal from British Columbia and Alberta, the forest and mine products and the many manufactured goods move to market if it were not for railways? Seaways and canals freeze. Trucks are becoming increasingly expensive as fuel costs soar. Only railways can provide the year-round, low-cost land transportation these essential Canadian exports need to reach markets at competitive prices.

It has been estimated that Canada's total trackage ranks third in the world in terms of length and fourth in terms of traffic. When you take into account Canada's position with regard to other industrial nations, this is a clear indication of the importance of railways and the effectiveness of the job they have done to date.

We, in Canadian National, are particularly concerned now with raising the capital required for the replacement and expansion of this system so that the future transportation needs of Canada can be provided for. Our annual capital requirements are in excess of $400 million dollars, if we are to keep operating on our present basis and allow for the predicted element of growth in traffic.

Now, there seems to exist in some quarters a quaint belief that Canadian National has a pipeline to the federal treasury, and we only have to turn on the tap to get the money we require from the federal government. Sometimes I wish this pleasant myth were true. The facts are that we have to raise our own capital in a number of ways, including selling preferred stock to the government.

Late last year, for example, we went to the European money market with a major bond issue. The bonds were not guaranteed by the government. But we were pleased when we found that the demand was so great that we were able to increase the original amount planned from $75 million to $85 million, and reduce the interest from eight and one half to eight and three-eighths percent. This, I think, is some indication of the reputation of Canadian National among overseas businessmen. The only problem is that bonds represent debt capital, and part of our difficulty in CN is that our ratio of debt to equity is too high.

Looking to the long-term future, we would like very much to have the freedom and flexibility enjoyed by other large corporations, such as our friendly competitors, Canadian Pacific, to raise equity capital through the sale of stock. But equity capital brings up a word which has become one of the most emotion-packed issues of this time. The word is "profit".

Obviously, in order to attract equity capital, to encourage investors to share in the risks and benefits of the venture, you must have a track record of profits. Yet, when it is suggested that CN should run at a profit, some people react as if it were an indecent proposal. It is a sad reflection on the lack of understanding of how our economy works that so many people regard "profit" as a dirty word.

Many people--particularly younger ones--seem to associate the word with wicked capitalists, corporate rip-ofs and playboy millionaires. They don't seem to realize that anyone who belongs to a pension plan, who owns an insurance policy or even has a bank account has a vested interest in profit-making.

In his recent book, The Unseen Revolution, Peter Drucker revealed that in the U.S. workers own, through their pension funds, one third of the equity capital of American business. Drucker points out that "the U.S. is the most socialist country in the world . . . if socialism is defined as ownership of the means of production by the workers." Indications are that in Canada, the percentage of stock owned by workers through pension funds is not nearly as high as in the U.S., but the trend is in the same direction.

It is interesting to note that in the CN pension fund some 38% of the investment portfolio of $1.2 billion is made up of stocks in various companies. I must hasten to point out right now that under pension laws it is forbidden for any of the pension funds of CN employees to be invested in the company. But I am sure that the pattern in the CN Pension Fund is similar to that of other large investment funds contributed to by millions of Canadians through pension plans, insurance premiums and similar operations aimed at improving their financial well-being.

If CN were to "go public" it would provide another opportunity for Canadians and the financial institutions to which they entrust their savings to invest in a worthy Canadian enterprise. I was surprised when some people chose to regard the possibility of CN selling equity stock as a giveaway of the railway. It is hard to believe anyone would consider that all those large companies which sell their shares on the Toronto and other stock exchanges are "giving themselves away".

All CN would like is to be able to tap the same sources of equity capital for the long-term improvement of its services. For those who fear that CN might be sold out to top-hatted capitalists, it should be reassuring to know that the Government of Canada would remain the majority stockholder.

While those who made a direct financial investment and shared the risks of our enterprise could expect a direct financial return, there would be a form of dividend to every Canadian in the development of our services made possible by an infusion of new equity capital.

A profit-making railway system relieves the federal government of one of its many burdens, freeing up funds for other services which cannot be provided on a commercial basis. But a concern that many people seem to have is that an operation cannot be profit-making and socially responsible at the same time.

It is difficult to understand how such ideas can gain wide currency in a society which enjoys one of the highest standards of living and such a wealth of creature comforts because of the efforts of profit-oriented enterprises and individuals. Does anyone really believe that a policy of providing goods and services without regard to costs or economic viability and expecting the government to pay the losses can work in the long run?

We, in Montreal, have had a chilling example of what can happen when this type of approach is given any kind of free rein. In seeking to provide the Olympic Games with facilities and services which would do Canada credit, the City of Montreal has landed itself with a debt in excess of $200 million. Paying it off is going to be a heavy burden on the present and future generations of Montrealers and is going to limit the funds available for other services.

I mention the example of Montreal and the Olympic debt only because it is well-known. It is not intended as criticism of the people involved. Because I know that there are many other cities and communities across Canada where the failure to impose rigid controls on costs has substantially increased the amounts required to pay for major projects and has imposed heavy burdens on local taxpayers. Soaring prices of materials, increasing labour costs, delays through disputes and high interest rates are affecting almost every major project in the same way as they hit the Olympic Games.

Canadians are beginning to realize more and more that government at any level is not a Big Daddy with an endless supply of money. The public purse is only as deep as the taxpayers' pocketbook.

But one thing I would like to stress is that concern for costs and an orientation towards profits does not mean that an organization such as CN cannot have a sense of social responsibility. Canadian National, despite its concern to be commercial, has been the instrument for achieving a number of socially-desirable objectives in Canada in the past.

How many people are aware, for example, that Canadian National founded the national network of radio stations which became the basis of the Canadian Broadcasting Corporation? It all came about in the 'twenties when the president of CN at that time, Sir Henry Thornton (who was, incidentally, an American with a British title) wanted to have Canadian programming in the radio cars that were then being attached to passenger trains. The radio stations stretched from Halifax to Vancouver and were located in CN hotels in some places. They brought Canadian listeners such network programs as the first hockey broadcasts and, exactly half a century ago, the celebrations of the 60th anniversary of Confederation in Ottawa. A number of the CN employees engaged in the radio department transferred to the new entity when they were taken over by the organization which later became known as CBC.

In the same way, when Canada needed a national airline, Trans-Canada Airlines was set up as a subsidiary of Canadian National. Originally almost a department of the railway, Air Canada has now, you might say, learned to fly on its own and the last corporate links are due to be severed shortly.

Canadian National is also playing an important part in the moves towards establishing new methods of providing passenger rail service here in Canada. Perhaps the pioneering example is here in Toronto, where we have worked closely with the Ontario government in the provision of GO Trains. The big breakthrough here was the recognition by provincial and municipal authorities that they could not expect the railway to provide much-needed rail commuter services at a loss.

The benefits of such services accrue to the local community through better transportation, increased property values and savings in facilities for more expensive and less effective modes of moving people. Therefore, it is only fair that any subsidies required should come from those benefiting from the services rather than being imposed indirectly on other customers of CN.

The provincial government took advantage of the rights-of-way and the knowledge available through CN, and thanks to this spirit of co-operation you, here in Toronto, have a commuter system which is the envy of many urban areas throughout the world.

The provision of inter-urban and trans-continental passenger train services across Canada is more complex and involves much larger expenditures, but some of the same approaches and the same spirit of co-operation can help bring improvements which will benefit all Canadians.

Over the years CN has sought to promote passenger trains with new marketing efforts, new colour schemes and a limited amount of new equipment. We have established clearly that it is impossible to provide in Canada a rail passenger service which is at the same time adequately equipped, priced to meet the competition for other modes and financially self-supporting.

Since it is clear that those Canadians who want to continue to travel by train will have to be subsidized by other Canadians, it is important that the total costs involved in providing the service be identified, and any losses be paid for in full by the government. The elected representatives of the taxpayers are the right people to decide just how much should be spent on passenger train subsidies--and make provision for the supply of the money. Passenger trains should not have to rely on a hidden subsidy from the customers of other CN services.

The Minister of Transport has announced recently his intention to set up an agency to market and operate passenger services in Canada. The new organization would, it is hoped, be able to integrate the passenger services of CN and CP Rail, and plan for the future development of passenger trains in Canada.

One of the major problems of the past has been that without a sound financial basis it has been difficult to raise capital for the new equipment and facilities required to operate a truly modern system of passenger trains. With the government prepared to underwrite the losses in full, it should now be possible to overcome this handicap.

Canadian National welcomes this move to develop rail passenger service, and is ready to help in every way possible. There are many decisions to be made and implemented, and announcements will no doubt be forthcoming on these. But I feel it will be a much better situation for Canada in the future when railways will no longer be in the position of having to operate passenger trains which, because of the lack of capital and less-than-adequate fares, could never meet the standards expected by the travelling public.

With the total costs of providing modern passenger train services clearly identified, Canadians will be able to compare this mode with others, and decide through their elected representatives where public funds earmarked for transportation can be spent most effectively. I only hope that in these comparisons the total costs involved in other modes, including their impact on the environment and non-renewable resources, are fully taken into account.

The implementation of more candid and rational approaches towards transportation costs--and who shall pay for them--has created great controversy in certain parts of Canada.

Over the years, there has grown up the belief that certain areas or certain commodities or certain people are entitled to a free ride--or at least one substantially below the costs involved in providing the service. But the facts of economic life are that there is no such thing as a free ride. If the person benefiting from the service does not pay, then someone else has to.

As operators of transportation services we do not object to free rides in principle. All we say is that if it is decided for political or other reasons that someone should not pay his way, then whoever makes that decision should be made aware of just how much the fare is, and should also indicate who will pay the bill.

There is a growing realization in Canada of the folly of open-ended subsidy programs which seem to be based on the assumption that supply of public funds is inexhaustible. The provision of transportation services is a good field in which to start a return to reality.

We, in Canadian National, want to have the freedom to explore and develop the many ways there are to provide Canadians with transportation and other necessary services on a sound, commercially-oriented basis. Our concern with efficiency and profitability is aimed at providing these services to Canadians at costs which are not beyond their means. That, I feel, is the best way we can discharge our social responsibilities to all Canadians.

MR. KARN:

I would now like to call upon Dr. John Fisher to express the appreciation of the audience.

DR. FISHER:

Mr. Chairman, distinguished guests, ladies and gentlemen: Mr. Chairman, you mentioned that politics and transportation have always been intertwined. Ever since Confederation, transportation has been at the centre of the political storm. Confederation was built on the promise of a railroad. Ever since then, governments have been concerned with transportation. Some provinces have even threatened to secede--not Quebec--because of poor transportation. Out west, the hottest political issue there is transportation--again.

I belong to that romantic age that remembers the railroads with great affection and warmth, especially the sleepers that crossed the country. It was a great way to get to know Canada, have a rest, and get a lot of work done. I've prepared more speeches, written more notes, read more books on trains, where there were no telephones to bother me, than at home. I'll never forget the Winnipeg goldeye they used to serve, and fresh Restigouche salmon, and fresh berries along the road, those magnificent chicken pot pies--all served on real china, on real linen, with real waiters who you weren't afraid to speak to.

Those were glorious days. What a great way to learn about Canadian geography. When you were tired of working or reading, you just looked out the window and counted the Christmas trees, or watched Canada slip by, or counted the gopher holes, or looked in awe at the height of the mountains.

Those days have gone, haven't they, Doctor. Can't blame CN. Can't blame CP. It was just the inexorable winds of change that blew the passenger train off the tracks.

But the roadbed of transportation is still there. As you pointed out, it appears that now the problem is in new dimensions, new equations entirely. Now it's computers, and towers, and microwaves, and electronic magpies chattering across the country. Now it's containers, and unitisation, palletisation, and pipelines. Now it's airlines. And this one might be the most explosive of all transportation topics in our history: What language is spoken between a pilot and a controller on the ground? In Quebec, that is probably the most sensitive of all issues at this moment.

Transportation and its problems are still with us, Dr. Bandeen. But I was greatly encouraged by your comments. You see it in a new dimension. I thought it was great to have a man from a publicly owned institution come here and talk about profit! I wish you would go across this country and talk about profit, and ask people where would the pensioners be without profit? It is profit and hard work that made this country.

It was great to hear those words and to hear your vision, your pioneering in the new equations. You're thinking big. I came to the conclusion that there's nothing band-aid about Bandeen.