Railways and Shipping-Report
this bill became necessary by reason of the ascertained income deficit arising from the operations of the railways, and full explanation of this bill was given in the House of Commons by the Minister of Railways and your committee reported the same without amendment.
2. Bill No. 34-
Your committee also had under consideration Bill No. 34 "An Act respecting the Canadian National Railways and to authorize the provision of moneys to meet expenditures made and indebtedness incurred during the calendar year 1932."
The object of this bill was to authorize the Canadian National Railways to issue securities to the extent of $61,500,000 for the purpose during the year 1932 of financing where amounts available from net operating income or investments may be insufficient. This sum is made up of the following:-
(a) Net income deficits, including profit and loss, but not including interest on Dominion
government advances, not exceeding $42,784,610
(b) Equipment principal payments, sinking funds, miscellaneous maturing or matured notes and other obligations secured
or unsecured, not exceeding.. 11,681,651
(c) Construction and betterments, including coordinations; acquisition of real or personal property, and working capital,
not exceeding 7,033,738
Total $61,500,000
The detailed statement of the financial requirements and estimated capital expenditures for the year ending December 31, 1932, was placed before your committee, amounting to the said sum of $61,500,000, and while the management of the system last year expressed their intention of reducing operating expenses and have put into effect economies which they affirm will approximate $28,000,000 in the years 1931 and 1932, yet the difference between estimated operating revenue and estimated operating expenses for the current year falls far short of meeting the interest on the funded debt in the hands of the public, w'hich, without regard to any interest due to the government, this year amounts to the sum of $56,849,244.65, an increase in 12 months of $1,634,267.18. Reference to the annual report of the company shows that the net additional capital expenditure for the period of nine years from January 1, 1923, to December 31, 1931, amounts to the sum of $419,669,620.64 which has imposed an additional annual interest burden of $20,936,821 for the same period and accounts for approximately 37£ per cent in the increase of the annual interest charges due to the public. There is also
$1,357,650 due the government for interest on unfunded debt.
In the light of the aforegoing it is difficult for your committee to appreciate, from a business standpoint, the wisdom of some of the capital expenditures made and included in the total increase above referred to. Doubtless had the present world depression not so adversely
affected the system or continued for such a great length of time, better results from these capital expenditures would have accrued to the system. In view, therefore, of the results of the past two or three years, your committee strongly recommend that until there is marked improvement in the earnings of the system, capital expenditures should be limited strictly to the barest necessities, always consistent with efficiency.
Your committee had under consideration also the annual report for the year ending December 31, 1931, and have agreed to report the same.
3. Operating Expenditures-
The operating expenditures for the year 1932, exclusive of eastern lines, are estimated at $139,304,000, while the operating revenues for the same period are estimated at $157,248,000.
The operating revenues for the year 1931 amounted to the sum of $177,273,738, or approximately $20,000,000 more than the estimate for 1932.
In view of the rapid decline of the operating revenues, your committee are impelled to recom-men'd that the most stringent economy be exercised by the management in all the controllable operating expenditures, and in this regard your committee recommend that with respect to executive officers and other salaried officials of the railway, a thorough revision of salaries downward be made. In the report of your committee for the year 1931, a specific recommendation to that effect was passed and in response thereto the report from the subcommittee of the board of directors, directed to the lion, the Minister of Railways and Canals, dated the 16th February, 1932, was submitted to your committee. This report announced that on July 31, 1931, a horizontal cut of ten per cent, affecting all officials and officers in receipt of salaries of $4,000 and over, became effective, and has resulted in an annual saving of $545,652, affecting in all 828 officials and officers. This means that the annual cost of the said 828 officials theretofore amounted to approximately $5,456,200. The sub-commitee of the board of. directors were of opinion that specific rather than further horizontal reductions in salaries should be made, and stated that an examination of the salaries exceeding $5,000 Avas under way, having in view additional economies. No subsequent report lias been received, but your committee concur that specific rather than a further horizontal reduction in salaries should be made, and in this connection desire to point out that in a statement submitted and produced to the committee, it would appear that as of July 21, 1931, there were 96 officials receiving $10,000 and over and 37 officials receiving $15,000 or over. Your committee are of opinion that the salaries paid to the high officials are excessive and should immediately be substantially reduced.
Your committee would further point out that there would seem to be a multiplicity of officials and the number of higher paid officials should be substantially reduced, especially those acting in the capacity of assistants to heads of departments. Your committee therefore recommend that the sub-committee of the board of directors set up to deal with this matter be instructed to put into effect immediately the principles underlying this recommendation.
Included in the activities of the sub-committee of the board dealing with the salaries of the
Railways and Shipping-Report
executive heads and other officials, was the subject matter of the remuneration received by the president. Under the terms of his contract of engagement dated September 23, 1929, the president shall receive a fixed annual salary of $75,000 per annum, without any extra fees or remuneration of any description. It has come to the attention of your committee that the president is still in receipt of an additional $5,000 fee from the Ontario Car Company and the special annual allowance for expenses not to be specifically accounted for approved by the board of directors on November 18, 1929, amounting to $15,000, and your committee recommend that the matter of the receipt of said fee of $5,000 shall be again considered by tbe board of directors with a view to its possible cancellation. With respect to the special allowance of $15,000 your committee recommend that the payment of the same be reviewed by the board of directors as being inconsistent with the terms of his contract of engagement.
Following the recommendation of your committee of last year, made on the suggestion of the president, a Royal Commission on Transportation has been set up by the government and is now functioning. This commission has not yet finished its labours or reported its findings. Your committee are not desirous of anticipating the findings of the commission but your committee are of the opinion that the report of the commission which it is anticipated will be brought down shortly should be studied with the greatest care, not only by the government itself, the systems of railways concerned, but by the Canadian people generally, so that the views of the commission may be thoroughly understood, and if deemed advisable given effect to at the next session of parliament.
4. Maritime Freight Rates Act and Eastern Lines-
Your committee have also had under consideration item No. 317 in the estimates providing for the payment to the Canadian National Railway Company as required by the Maritime Freight Rates Act of the deficit incurred during the period under review on eastern lines. The amount of the estimated deficit is $6,217,400, and in addition the sum of $1,750,000. representing the estimated amount by which the revenues of the lines will be lessened during the year by the reduction of rates applicable to eastern lines by the application of the Maritime Freight Rates Act. In view of the legislation existing your committee are of opinion that the amounts asked for are necessary and proper to give effect to the letter and spirit of the Maritime Freight Rates Act, and in the operation of the eastern lines. Your committee are, however, of the opinion that the two items above referred to, the deficit in operation of the eastern lines, and the amount required in operation of the eastern lines, and the amount required to reimburse the national railways for reductions in tolls under the application of the Maritime Freight Rates Act should not be included in the same estimate. and should be severed and shown separately, even if legislation to effect that end is necessary, and respectfully recommend that appropriate action in the premises be taken so as to provide that the amount required to provide for the payment of the deficit in operation on the eastern lines be entirely severed from the amount required to be paid in reduction of tolls under the application of the Maritime Freight Rates Act.
Your committee has also had under consideration item No. 316, being the amount required under the Maritime Freight Rates Act to provide for payment from time to time during the fiscal year 1932-33 of the difference, estimated by the Board of Railway Commissioners and certified by the said board to the Minister of Railways and Canals, as and when required by him, occuring on account of the application of the Maritime Freight Rates Act between the tariff tolls and the normal tolls, referred to in section 9 of the said act, on alt traffic moved during 1932 by the independent railway companies mentioned therein, and your committee are of opinion that this amount is necessary to implement the provisions of the act in that regard and should be granted by parliament.
5. Canadian Government Merchant Marine-
Your committee have had under consideration
item No. 314 in the estimates, relating to loan to the Canadian Government Merchant Marine, Limited, to be applied in payment of deficits in operations of the company and of the vessels under the company's control during the year ending December 31, 1932, amounting in all to $440,009, a decrease of $148,500 over the previous year.
Your committee have also considered the balance sheet of the company and are of the opinion that the said sum of $440,000 is required for the purpose of the company and should be granted by parliament. Your committee reiterate their views and believe that the time has come when the government should, if possible, abandon the policy of operating a government merchant marine, and if possible arrange for a sale or lease of the fleet, and where practicable, and not contrary to imperial or inter-dominion relations, make arrangements with other shipping companies so that the trade of Canada may be protected.
6. Canadian National (West Indies) Service-
Your committee have had under consideration
item No. 315 in the estimates, relating to the loans to the Canadian National (West Indies) Steamships. Limited, to be applied in payment of deficits in operations of the company and of the vessels under the company's control, during the year ending December 31, 1932, and interest requirements, which amounts to $820,000 as compared with $755,000 for the year 1931.
The year ending December 31, 1930, resulted in an operating loss of $523,136.98. while the operating loss for 1931 was $446,568.53, which is slightly above the amount of the subsidy previously paid to an independent company by the government for a much inferior service. Your committee are in agreement with the principle that this steamship service is a matter of treaty obligation and should be continued, but your committee are of opinion that the utmost vigilance should be exercised by officials directing and in charge of this steamship line so that, if possible, the cost of operation to the dominion should be reduced to a minimum, consistent with efficiency, and at the earliest possible moment turned into an operating profit. The service performed by this line on both routes is an excellent one and should be constantly brought to the attention of the Canadian people whenever and wherever possible with a view to their patronizing the service.
3134 COMMONS
Railways and Shipping-Report
With respect to the traffic originating in the British West Indies, served by the ships, your committee are of opinion that every effort should be: made to induce the residents and commercial interests in such colonies to patronize the service thus made possible for them at so great an expense by the Canadian people, to the fullest possible extent.
7. Expense Accounts of Officials-[DOT]
Your committee have had under consideration the question of expense accounts of executive and other officers of the company. After fully considering the matter, your committee desire to record their belief that there should be a much stricter supervision of all expense accounts, and before payment they should be supported by vouchers and that other necessarv evidence of payment should be presented to a properly constituted committee of directors set up for the purpose of examining and passing on same and that payment of all such expense accounts, whether submitted bv the president executive heads or all other officials should be strictly limited to business purposes and that with respect to company entertainment accounts, only those authorized by the same separate «mcl controlling body should be approved. Last year your committee made a strong recommendation in reference to this matter and reiterate what was then said, especially in relation to such matters as club dues, entertainments and donations. A system of control similar to that in vogue in the best regulated industrial houses, finance and other institutions is required, and your committee earnestly recommend that the board of directors forthwith put in effect such effective control as is necessary in the premises. The subject matter is one that cannot be effectively dealt with by a parliamentary committee but the principle involved is an important one, and in the opinion ot your committee the best qualified body to deal with the matter is the board of directors.
These recommendations should apply specifically to all officers of the company irrespective of their rank or station.
8. Audit-
According to the evidence submitted to your committee on a previous occasion it has b^en shown that the government employs a reputable hrm of chartered accountants to make a running audit of the railway operations. The auditors sign the annual report and give a certificate attached to the consolidated balance sheet in which they state:-
"We have examined the books and records of the companies comprising the Canadian National railway system for the twelve months ended the 31st December, 1931. The investments in road and equipment appearing in the of the companies as at the 1st January, 1J23, were accepted by us.
We certify that, in our opinion, the above consolidated balance sheet is properly drawn up 8° a.s exhibit a true and correct view of the attains of the system as at the 31st December, ailc* we further certify that, in our opinion, the relative income and profit and loss accounts for the year ended the 31st December, 1931, are correctly stated."
^ our committee are of opinion that the audit now in effect is not sufficient and should go much further, and the auditors should be empowered to go into every phase of the system's operations with power to call atten-
tion to any matter calling for comment in their judgment similar in principle to the powers vested in the auditor General of Canada.
9. Financial Control-
Heretofore there has been control of the capital expenditures of the company but down to a comparatively recent date the expenditures on operation were vested entirely in the executive heads of departments, and were subject only to the review of the president. No such power should be vested in any one man or small group of men under the same control. In no sense can such a system be
deemed to be effective, and in the opinion of your committee, this position should be remedied forthwith.
On the 2nd June, 1931, a special by-law No. 18 was enacted by the board of directors establishing a finance committee under the authority of the statute relating to the company, which by-law was duly ratified by order in council No. P.C. 1398, passed on the 17th June, 1931. There was already governmental control of capital expenditures under the statute. By-law No. 18 provides for the
setting up of a committee of the board of directors to be known as a "finance committee" to consist of three members of the board, namely, the president of the company who was to be the chairman of the committee, the director holding the position of deputy minister of railways and canals, and the director holding the position of vice-president in charge of the legal affairs of the company. The by-law further provides that such finance committee shall, notwithstanding anything in any other by-law to the contrary, have supervision and control over all matters relating to the capital expenditures of the company, and particularly in respect to the provision of the moneys therefor and the allocation of such moneys. The by-law as enacted and confirmed is silent with respect to expenditures for operation and maintenance and in the opinion of your committee the scope of the by-law should be immediately enlarged by appropriate action on the part of the board so as to provide that two additional members of the board shall also be members of the finance committee and that all expenditures for materials and/or supplies, or expenditures of any other character, save and except payrolls, amounting in value to say $25,000 or over, should first be passed upon by the finance committee and subsequently ratified by the board or the executive committee. Your committee are of the opinion that such a provision would have a healthful and beneficial effect not only on the volume of purchases, especially as unanimity on the part of the entire committee is necessary under the terms of the by-law, but also the manner and character of purchases, and your committee earnestly recommend that immediate steps be taken by the board to give effect to the principles underlying this recommendation.
10. The President's Residence-
Your committee had under consideration the fact that on the eighth of August, 1930, pursuant to a resolution of the board of directors passed on September 23. 1929, the residence No. 1415 Pine Avenue, Montreal, was leased by the railway company for a period of ten years, as a residence for the president at an annual cost closely approximating $20,000.
Railways and Shipping-Report
Having regard to all the evidence adduced and having special regard to the president's contract of engagement, dated September 23, 1929, as ratified and confirmed by his contract with the government dated October 25, 1929, whereby the prisident agreed to serve as president and chairman of the company, including the various constituent and subsidiary companies comprising the system, and for the full and entire services to be performed from time to time for the fixed annual salary of $75,000, without any extra fees or remuneration of any description, and in addition, but subject to the by-laws, rules and regulations applicable, all reasonable out-of-pocket expenses incurred in connection with the duties of his office or offices, your committe are of opinion that the leasing of the residence appears to your committee to be in contravention of the contract of engagement and even if legal was unwise and should not have been authorized.
The whole transaction in the opinion of your committee was a successful attempt by the board of directors to do indirectly what could not be done directly by expenditure on capital account, namely, to procure a residence for the president free of rent, taxes and repairs, and your committee consider that the action of the board of directors in this regard indicates that while they may not have exceeded their legal powers they did not exercise that degree of prudence, care and judgment requisite in the premises.
Your committee recommend that the whole transaction be reviewed and investigated by the directors, with a view to ascertaining its legality, and if possible obtaining its recision.
11. Off-Line Offices in the United States-
In recent years a large number of off-line passenger and freight offices have been established in leading cities of the United States, with a view to obtaining traffic for both branches of the service.
Data received with respect to the expenses of and gross receipts from all such offices show that results have been fairly satisfactory with respect to freight traffic but with respect to passenger traffic the results achieved so tar liave not been commensurate with the cost.
Your committee investigated with some care the situation with respect to the New York passenger office now located at 673 Fifth Avenue. The initial cost of acquiring these premises and of alterations amounted to the sum of $429,223.05, and the annual cost of operation including the rental of the premises 505 Fifth Avenue, formerly occupied as passenger offices and which are still under lease and at present unoccupied, is now $252,902. The °toss amount of passenger traffic sold in 1931 was $502,353, including transportation sold on other lines.
Your committee recommend that the whole question of the New York and other off-line passenger offices should be carefully reviewed by the management in conjunction with the board of directors.
Your committee further recommend that careful consideration be given by the management and by the board to the question of closing such of the offices, both passenger and freight, as have not achieved satisfactory results, and also of cooperating with other railway systems by joint arrangement so as to effect as much saving as possible.
12. Pensions-
A memorandum respecting the various pension schemes in effect was submitted to your committee.
On December 31, 1931, there were 2,476 retired officials and employees on the pension list and the total pensions paid for 1931 amounted to 1,248,000.83.
These pension systems comprise: -
(1) The Intercolonial and Prince Edward Island railway employees provident fund, which is still in force.
(2) The Grand Trunk Railway of Canada superannuation and provident fund, scheme, closed in 1907 and the presently subsisting Grand Trunk scheme.
(3) The Canadian National Railway pension scheme, set up in 1929, and in force at the present time.
All of the above mentioned schemes have legislative sanction and authority, but inasmuch as in a return filed with your committee it appears that during the past five years numerous employees received pensions in excess of what the pension schemes applicable to such employees call for your committe are of opinion that attention should be called to this apparent excess of jurisdiction.
Your committee are of opinion that the whole situation respecting pensions should be reviewed, not with any view to reducing statutory pensions but with the view to putting the pension schemes on a sound economic basis, including, if deemed desirable, the inclusion of . the principle of contribution.
Your committee is of opinion that inasmuch as the pension schemes now in effect are statutory the payment of amounts in excess of the amounts called for by such schemes are not justified in principle, and your committee recommend that the attention of the board of directors be called to this situation, with a view to taking such action in the premises as may be deemed desirable and just, having regard to the fact that the principle of pensions is an established principle and crystallized into legislation.
13- .
Your committee realizing that the exercise
of political patronage or influence in the operation of this publicly-owned enterprise would do great injury recommend continued vigilance on the part of all concerned, to avoid the introduction of practices so detrimental to the public interest.
Your committee recommend that the proceedings and evidence taken be printed as an appendix to the Journals of the House, and that 700 copies be printed in blue book form, 500 in English and 200 in French.
Your committee are glad to state that the report is unanimous.
A copy of the minutes of proceedings and evidence is tabled herewith, all of which is respectfully submitted.
R. B. Hanson,
Chairman.
By unanimous consent, Mr. Speaker, I beg to move, seconded by Mr. Duff, that the seventh and final report of the select standing
