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• 1. Introduction
• 2. Possible Impacts
• 2.1 Flow of Funds Priority
• 2.2 Sensitivity Analyses
• 2.3 Demand
• 2.4 Other Benefits
• 2.5 Cost Overruns
• 2.6 Impacts on VIA Rail in the Corridor
• 3. Next Steps

APPENDIX D
The Lynx Proposal

1. Introduction

The Lynx Consortium has completed a pre-feasibility study to construct an 854 km high-speed rail line between Quebec City and Toronto passing through Montreal and Ottawa. Before capital can be raised and construction started, the Lynx public-private consortium must carry out the detailed 41-month Project Development and Financial Close Phase. Governments and private partners would share equally in financing this $102 million mandatory second phase of the project. To a large extent the proposed route would utilize existing rights-of-way, but essentially all new track devoted exclusively to passenger transport. A Toronto-Montreal express trip is anticipated to require 2 hours and 21minutes. Trains would operate approximately every hour over the day with half hourly services during the peaks.

A number of advantages are acclaimed for the project, including benefits to the environment, stimulation to the economy, improvement of service to travellers, reduction of requirements for other infrastructure and stimulation of Canadian export industries.

The results of the studies that they have undertaken to date have convinced the Lynx Consortium that the private sector alone cannot provide all the capital for the project. They therefore suggest a mixed public/private partnership. Governments and/or public agencies would be responsible for providing the infrastructure, while the private part of the consortium would be responsible for supplying the rolling stock and systems and for operations. The public agencies would lease the infrastructure and civil works to the private sector concessionaires. Under this plan governments would be responsible for $7.5 billion and the private consortium $3.6 billion.

The rate of return to the government sector over the life of the project is calculated to be 12.4%, a rate higher than the cost of borrowing money to governments, indicating that there can be a net positive cash flow to the governmental sector.

The Lynx Consortium also has not made any assumptions of how the government financing might be split among the three governments that could be involved: Canada, Ontario and Quebec.

2. Possible Impacts

The most obvious impact of the plan is the high level of investment required from the public sector, $7.5 billion. In addition, however, there are other impacts, including the following:

2.1 Flow of Funds Priority

The financial proposal that the Lynx Consortium is putting forward includes a priority ranking for the allocation of revenues from operations. This ranking is as follows:

• taxes;
• operating and maintenance expenses and ongoing capital expenditures;
• equipment and technology debt (that borrowed by the private sector);
• debt service on ridership standby facility;
• minimum return to private sector equity investors (set at 10% of equity);
• infrastructure and civil works lease payments (85.5% of remaining cash flow) together with dividend on equity (14.5% of cash flow).

It can be seen that the lease payments on the government owned infrastructure is the lowest priority for the distribution of any operating surplus. This has the impact of transferring the major part of any risk to governments. The private sector achieves a return of investment of 10% before any funds are distributed to governments.

2.2 Sensitivity Analyses

The Lynx Consortium reports include discussion of a number of sensitivity analyses. The attached Table 1 taken from this report summarizes these sensitivity analyses. It can be seen that the internal rate of return to the governments is sensitive to changes in the assumptions with respect to the last slice of the financial pie. For example, if the ridership is 5% below what is forecast, the internal rate of return drops from 12.39% to 10.25% and if it is 25% lower, the return is 6.81%. (All of these figures include in the calculation of the rate of return to the governments the $110 million savings per year attributable to the discontinuance of VIA Rail operations.)

Table 1
Sensitivity Analyses

	Internal Rate of Return
	Governments1	Private Sector2
Base Case	12.39%	21.50%
Construction Costs + 10%	9.85%	20.75%
Construction Delay + 1 year on Civil Works	10.64%	19.66%
Interest Rates - 50 bp3 + 100 bp + 150 bp	14.97% 8.83% 7.64%	21.89% 20.64% 20.21%
Inflation + 0.5% + 1% - 1%	12.72% 12.99% 12.00%	22.09% 22.62% 20.42%
Ridership + 5% - 5% - 25% Slower than projected ridership increase4	14.94% 10.25% 6.81% 9.42%	22.60% 19.91% 14.78% 16.74%
Operating Expenses +10% - 10%	11.23% 13.69%	20.81% 22.10%
Source: Lynx Consortium Submission, Part C, p. II-3-3. 1 Internal rate of return has been calculated using Level 1 - Governments' net cash flow from the project (i.e. infrastructure and civil works lease payments, less government debt service payments to the holders of infrastructure and civil works notes, governments' contribution to the Project Development and Financial Close costs and governments' contribution to the Public Financing Entity). 2 The returns on private sector equity are calculated solely on the basis of projected dividend payments. 3 A reduction of 50 basis points in the Base Case interest rates brings them in line with current interest rates (March 1998). The Base Case thus conservatively overstates the various debts interest rates. 4 Debt service would remain possible through partial usage of the debt reserve account which would be replenished in the following years.

2.3 Demand

The demand estimated by the Lynx Consortium is estimated at 11.1 million passengers in 2008. This corresponds to a demand estimate for a Quebec City-Toronto section of 8.8 million in 2005 in the tripartite study. It is difficult to make a judgement whether one forecast is superior to the others, but the comparison indicates that some caution should be used in using the ridership and revenue forecasts put forward by the Lynx Consortium.

2.4 Other Benefits

The Lynx Consortium puts forward other potential benefits of the high-speed rail project, including benefits to the environment, reductions in the need for other types of infrastructure (airports, highways, etc.) and stimulation to the Canadian export economy. These impacts were investigated in the tripartite study and were found to have some weight but to be quite minor in their extent and probably much less than would be produced by investments in other types of projects. Therefore, these benefits, although real, probably should not swing the balance in making a decision on the Lynx project.

The Conference Board of Canada, an independent, not-for-profit research organization, conducted an economic impact analysis of the Lynx project. According to its results, the Project Development and Construction Phase will directly create 69,206 person-years of work across Canada, indirectly create an additional 56,921 person-years, as well as induce 49,031 person-years. In total 175,158 person-years of work will be created in this phase, where the bulk of employment will reside in the provinces of Ontario and Quebec. The employment impact stemming from the Operation and Maintenance Phase is forecast to average, on an annual basis, 3,657 direct jobs, 712 indirect jobs and 2,008 induced jobs over its 60-year life. Total jobs created on a permanent basis will, therefore, average 6,377 annually. However, it is important to emphasize that these results do not take into account the loss in economic activity that may occur in other sectors of the economy. As such, the results presented should be considered as a ``gross'' impact.

The Lynx proposal claims that its high-speed train can be an important contributor to Canada's environmental efforts by offering a wide range of solutions:

• electrically powered, using energy from largely renewable resources, the Lynx would reduce fossil fuel consumption in the corridor by 20% by 2025;
• per passenger, the Lynx operates at just 51% of auto energy consumption;
• impact on the physical environment is minimized by the Lynx team's commitment to use existing railway rights-of-way wherever possible, and to conduct responsible environmental impact studies prior to construction in accordance with government requirements; and
• by 2025, the Lynx is projected to carry 15.9 million corridor travellers each year. By diverting even a small percentage of present air and auto travellers, the Lynx will relieve congestion at airports and on highways and greatly reduce the need for new or expanded infrastructure.

2.5 Cost Overruns

Although the Lynx Consortium says that it is responsible for any cost overruns, it makes an exception for:

...cost overruns that are necessary to achieve deliverables for environmental, land and rights-of-way, legislative and regulatory issues and permitting or that are due to significant changes in the economic situation or arise in consequence of such overruns⁵.

This is obviously a significant "out" for the consortium.

2.6 Impacts on VIA Rail in the Corridor

It is quite possible that VIA Rail, as we know it today, could not continue with another agency operating between Quebec City and Toronto. This would cause disruptions in passenger rail services in other parts of the country. There are also financial implications. The current VIA Rail labour agreements include clauses on job security. If all of VIA Rail or sizeable portions of VIA Rail were discontinued, these job security provisions would kick in. Transport Canada has estimated that these obligations could total $135 million per year for quite a few years. The financial implications of discontinuing the Quebec City-Toronto portion would obviously be smaller than this, but they may be quite significant.

Rather than taking these implications into consideration, the Lynx Consortium's proposal assumes that there will be a saving to the federal government if VIA Rail services between Quebec City and Toronto were discontinued. The Lynx Consortium's financial analysis includes an amount of $110 million per year (in 1996$) in VIA Rail subsidy savings to the federal government. This amount plus inflation has been deducted from the cash outlay in calculating the rate of return to the governments. If this amount is not included, then the financial rate of return to the governments is reduced from 12.39% to 9.05%.

If all or a substantial portion of VIA Rail operations are discontinued, then the question will arise as to what to do with the remaining assets. There may be some markets for the new rolling stock for regional services in the United States but other assets of VIA Rail do not have obvious other uses.

In order to ensure that the Lynx system provides high-speed travel, most intermediate stops are eliminated. Between Toronto and Quebec City the potential stops are listed as: Toronto East; Kingston; Ottawa; Autoroute 13 in the Montreal suburbs; Central Station in Montreal; Laval; Trois-Rivières; Ancienne-Lorette; and Quebec City.

Certainly VIA Rail services will be affected in the Quebec City-Toronto corridor as the major flows support service to the small cities. It is possible that local services to locations, such as Oshawa, Cobourg, Belleville, Brockville, Cornwall, St. Hyacinthe and Drummondville, might be provided by a private operator to feed the high-speed rail line, thereby complementing this service with travellers from other smaller centres.

3. Next Steps

Having built on the public investment in the three governments study published in 1995 with their own resources, the Lynx Consortium suggests that the next step should be a second phase, Project Development and Financial Close, which is intended to result in a concession agreement between the governments and the private consortium.

This next phase will include the following key tasks:

• investment grade ridership forecasts;
• environmental assessment;
• design sufficient to produce definitive capital, operating and maintenance costs;
• construction planning and project management;
• testing and research;
• regulatory and legislative issues;
• confirmation of availability of rights-of-way;
• financial analysis and structure, modelling and arranging.

The expected cost of this next phase would be $102 million and suggests that the governments and private partners would share equally. Not included in the $102 million are environmental assessment and analyses of the availability of the land. The consortium suggested governments should be responsible for these studies for an additional $16.5 million.

This is not simply an invitation to participate in new studies. The consortium is asking for a commitment by the governments. Under the terms of the agreement proposed by the consortium, if the projections of the consortium are confirmed by the additional studies but the governments nevertheless decide not to make the investment, the governments would be responsible for the private share of the next phase as well as their own part. In other words, the consortium is asking for a commitment now, at least to the extent of $118 million, to the project, subject only to what can be described as a due diligence process.

The proposed agreement says that the governments will have to reimburse the consortium if the "success criteria" are achieved and the governments decide not to go ahead or if one or more of the success criteria is not achieved and such failure is not attributable to the Lynx team. In other words, the governments are required to pay for Phase II unless the Lynx Consortium has made assumptions and estimates which are found to be faulty.

This is obviously a very serious undertaking for the Government of Canada to make. It should only be entered into after completing a full assessment of the benefits and costs of the project to Canada as a whole.