May 29, 1939

LIB
CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

Is it clear that the terms of the well-recognized agreements between the unions and the companies are reflected in this legislation? For instance, there is the point just raised by the hon. member for Vancouver East, to which reply was made by the minister, as to what constitutes a lay-off or a severance. I imagine that is covered in the agreement between the men ana the companies. If the language of the measure preserves such contracts and agreements, then of course the situation is safe; but if the language is such that it might vary contracts or agreements, a serious question at once arises, and one which ultimately could result in differences of opinion between the workers and the companies. It seems to me we should take care that in this measure the language shall be such as to assure the preservation of the status of the different agreements.

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LIB

Clarence Decatur Howe (Minister of Transport)

Liberal

Mr. HOWE:

The schedule now before the committee is practically in the language of the Washington agreement negotiated between the brotherhoods and the railways. This bill and schedule has been submitted to the eighteen brotherhoods who hold agreements with railway companies, and the wording has received their detailed examination and approval.

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CON
LIB

Clarence Decatur Howe (Minister of Transport)

Liberal

Mr. HOWE:

I think there is no doubt *whatever that the spirit of the agreements is carried out in its language.

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CCF

Abraham Albert Heaps

Co-operative Commonwealth Federation (C.C.F.)

Mr. HEAPS:

When the bill was before

committee on the last occasion I raised a point with regard to what I thought was unfairness to long-term employees who under the cooperative provisions of this measure might be laid off. The minister said he felt that the men with short-term service would be the ones who would likely be laid off. While there may be a certain amount of truth in the minister's statement, he must know that over a period of years there has been a continual process of laying off in the railway shops, as well as in other sections of railway activities, and the result is that to-day one will find very few working on the railways who might be described as short-term employees. Most of the employees are men

who have had service of ten or more years, and that condition has developed as a result of the continual lay-offs which have been going on over a considerable period. The figures I placed before the committee a few days ago indicate that only two-thirds the number of persons are employed on the railways as compared to the number employed seventeen years ago. The figures indicate that men with shorter terms of service have been laid off, and that only those having comparatively long terms are being retained. I suggest, therefore, that there is still a certain amount of unfairness in a clause which deals with compensation for men having service of, say, fifteen years or more.

However, as the minister has pointed out, this plan has been approved by the representatives of the great majority of railway employees, and I have no desire to ask the government to change anything which has thus been approved by the government on the one side and by the representatives of employees on the other. But if a large measure of cooperation becomes effective, as a result of legislation now in effect, this matter of compensation would no doubt be an important one confronting railway employees.

There is another matter which I believe should be brought to the attention of the minister; it is directly connected with the matter now under consideration. Hon. members realize the great financial loss suffered each year by the country through the operation of the railway companies. In the operation of the Canadian National we lose almost $1,000,000 a week, and that loss is almost exclusively chargeable to interest payments to bondholders. If we did not have that huge interest charge to meet the load would be much lighter. On two occasions the committee which deals with the Canadian National Railways has recommended that the government attempt to do something to lighten the burden of interest charges.

In one of the annual reports of the Canadian National Railways I find that in the period 1S75 to 1S83 perpetual bonds bearing five per cent interest were issued to the extent of over $20,000,000. There was another issue of perpetual bonds from 1S58 to 1876 to an amount of $13,000,000, bearing a five per cent interest rate.

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CON
CCF

Abraham Albert Heaps

Co-operative Commonwealth Federation (C.C.F.)

Mr. HEAPS:

I will come to that. In 1883, four per cent perpetual bonds were issued to the extent of $119,000,000; in 1884 four per cent bonds amounting to $1,499,000. Then

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in 1884, four per cent perpetual guaranteed stock was issued to the extent of $60,800,000. In 1921 there was an issue of six and a half per cent guaranteed debenture bonds. Six and a half per cent is an outrageous interest charge for a government to have to pay on what might be considered a bankrupt railroad.

I do not see why something should not be done in connection with the high rates of interest paid on these perpetual bonds. The bondholders ought to bear in mind the fact that in order to meet these obligations the government is compelled to borrow money. Some hon. members will say that if we do not pay the full guaranteed rates on these securities which go back to 1858, 1875 and 1884, it would amount to repudiation. But if the yields on some of these bonds were calculated carefully it would be found that they have been paid four and five times over. In spite of what might be said, the time has come' when these rates should be cut down to three or possibly 2i per cent.

Short-term Canadian National railway bonds have been issued bearing an interest rate of only two per cent. In 1935 there was an issue of $13,400,000 at two per cent, and in 1937 there was an issue of short-term bonds at 21 per cent. If these interest rates could be brought down to the rate the government pay for money borrowed at the present time we could save considerably in excess of the $12,000,000 I suggested a few days ago on the interest charges of the Canadian National railway system.

Under this measure the railway system is to assume additional obligations. Have the government taken definite steps to do something in this particular regard? There is a strong feeling throughout the Dominion of Canada to-day that this reduction in interest charges should be made, in view of the fact that these obligations were assumed in connection with a bankrupt railroad. If I were a bondholder I think I should be ready to accept a considerable reduction in interest rates. I should feel much more secure with a bond bearing 2i per cent interest than with a perpetual bond bearing 5i or a bond bearing 64 per cent. I do not think people in any other part of the world would be prepared to be burdened with perpetual bonds going back to 1858, without having some redress against such high charges. For two successive years the railway committee suggested that something should be done, and I should like to know if the Department of Transport or the Department of Finance are doing anything about what I would almost term an intolerable situation.

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LIB

Clarence Decatur Howe (Minister of Transport)

Liberal

Mr. HOWE:

My hon. friend has touched upon what constitutes the real railway problem of Canada, that is, the funded debt obligations which have been laid from time to time on the Canadian National Railways. Through the years the Canadian National Railways has never failed to pay its operating expenses and, with one or two exceptions, it has paid all charges except bond interest. The debt charges on the Canadian National Railways are abnormally high when compared with the same charges on other railways. The average debt charge on class one railways in the United States is about 16 per cent of gross revenue. The bond charges on the Canadian Pacific amount to about 17 per cent and a fraction of the gross revenue, while the interest charges on the Canadian National amount to about 27 per cent of gross revenue, which of course is entirely out of line with the charges borne by other railroads.

Anything that we can do to reduce debt charges is a partial solution of the railway problem. But there we meet the difficulty that by far the greater proportion of Canadian National Railway obligations have been guaranteed as to principal and interest by the federal government. In the early days the component railways were built with money obtained from bonds guaranteed principally by the provinces, but through the years these guarantees have been gradually taken over by the dominion government. My hon. friend has pointed out that recent borrowings have carried interest charges as low as two per cent and not higher than 3i per cent. That we are able to borrow money for the railroad at these low rates of interest, practically the same as is paid by the federal government, is due to the fact that the guarantees of the federal government on railway bonds have been honoured absolutely. If there was to be any degree of repudiation, however slight-nothing could be done in connection with a guaranteed bond without there being some slight measure of repudiation-I think the inevitable result would be that the cost of refunding, and of borrowing new money for capital improvements, would be substantially increased.

There is a point that it is well to bear in mind in connection with these perpetual bonds. While it is true that they bear a date before the beginning of the present century, with the exception of one issue of Canadian Northern bonds they are all obligations of the Grand Trunk Railway. In that connection the agreement between the government and the bondholders is dated 1919.

Canadian National-Canadian Pacific Act

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CCF

Abraham Albert Heaps

Co-operative Commonwealth Federation (C.C.F.)

Mr. HEAPS:

But interest has been paid all that time.

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LIB

Clarence Decatur Howe (Minister of Transport)

Liberal

Mr. HOWE:

The bondholders have been receiving interest, but in 1919 the government took over the Grand Trunk Railway. A board of arbitrators was set up to determine the basis upon which the railway would be taken over, and it was decided that the government should continue to pay interest on the first mortgage, and certain other bonds and the preferred and common stocks were declared to be without value. As hon. members know, the government has carried out that agreement to the letter. Many times it has resisted demands, some made in this house, for the payment of the junior securities. We have refused to go beyond the award in that regard. I think the strength of our position lies in the fact that we have followed out the award in the payment of the interest on the senior securities.

This fact is very important in considering the position of these long-term and perpetual Grand Trunjc bonds. The basis of the purchase of the railway was that we would continue to pay the interest on these bonds, but would be relieved of certain other securities of the railways. As far as the government is concerned, in effect the date of these bonds is no further back than 1919. The average interest rate on all Canadian National bonds is slightly less than 4 per cent. This rate has been reduced from year to year as the bonds come due, and are refunded. The 6i per cent ifesue mentioned by my hon. friend comes due in a short time, I think within a matter of months.

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CCF
LIB

Clarence Decatur Howe (Minister of Transport)

Liberal

Mr. HOWE:

In any event the issue is comparatively small and it has not been deemed worth while to take drastic steps in respect of this particular issue. The Department of Finance has been studying the matter and conferences have been held with groups of bondholders. The Department of Finance and the board of directors of the railroad are constantly working on the various issues in an attempt to obtain adjustments more in line with present day conditions. Some progress has been made. One very important issue can be straightened out shortly, we think, by negotiation. I can assure my hon. friend that short of absolute repudiation everything is being done that can be done to meet the condition to which he has referred.

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CCF

Abraham Albert Heaps

Co-operative Commonwealth Federation (C.C.F.)

Mr. HEAPS:

Would it be possible to call in at any time any of the perpetual five per

cent bonds?

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LIB

Clarence Decatur Howe (Minister of Transport)

Liberal

Mr. HOWE:

It is not possible to call in a perpetual bond. That could be done only by negotiation or by repudiation of the perpetual feature. There is no call clause in these bonds. A perpetual bond is sometimes issued containing a clause providing for calling the bond after a number of years. A few dominion government bonds are in that position, but not these perpetual railway bonds. I should be inclined to agree that disregard of the perpetual feature would be the mildest form of repudiation that can be suggested; nevertheless it remains a type of repudiation. While some consideration has been given to the situation, no decision has been arrived at.

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LIB

Donald Alexander McNiven

Liberal

Mr. McNIVEN:

Would it be possible for the government to go into the market and buy these perpetual bonds-call them in in that way rather than repudiate?

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LIB

Clarence Decatur Howe (Minister of Transport)

Liberal

Mr. HOWE:

Consideration has been given to this suggestion.

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LIB

Robert Emmett Finn

Liberal

Mr. FINN:

On the question of repudiation, and I think it is only in the nature of a suggestion, hon. members would be in a better position to discuss the matter if they had before them a picture of all the outstanding obligations of the various companies taken over under the Railway Act of 1919, under Sir Robert Borden's administration, placing this tremendous burden on the country. There were the Grand Trunk, the Grand Trunk Pacific, the Canadian Northern and various smaller railways in some of the provinces. It was said the other day that there are over $440,000,000 of outstanding obligations in connection with the Intercolonial railway. The Intercolonial debt is not included in the Canadian National obligations.

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LIB

Clarence Decatur Howe (Minister of Transport)

Liberal

Mr. HOWE:

There is practically no outstanding bonded indebtedness against the Intercolonial railway, which was paid for in cash, as constructed, out of the revenues of the dominion.

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LIB

Robert Emmett Finn

Liberal

Mr. FINN:

Yes, and the obligations continued to be paid. That is the reason I suggested the other day that the Intercolonial railway is in an entirely different position from that of any other railway in Canada. It was built with moneys out of the treasury of Canada, and the interest is paid. Nevertheless when Mr. Fairweather of the Canadian National Railway management brings down his statement of outstanding obligations and outstanding interest, he brings down the interest charges or deficit outstanding to-day in connection with the Intercolonial. Sometimes he makes it $4,000,000 and sometimes $5,000,000. It turns out that there are two railways in the province of Quebec which

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were never a part of the Intercolonial railway. In Nova Scotia the Halifax and Southwestern railway was taken over. It was built with subventions from federal and provincial governments, and these obligations are included in the aggregate as outstanding against the Intercolonial railway. But the Intercolonial railway stands in a different position from the Canadian National Railway system. It is a separate railway entity. The obligation in connection with its extension and operation is an obligation on all the provinces of Canada.

Under the act of 1919, which I think was a bad thing, when the Grand Trunk in the United States became part of the Canadian National railway system, the Intercolonial railway, which was built as a term of confederation, became part of the system and subject to the railway commission. At that time we were enjoying special rates, which had been in existence for forty years, to allow us to get into the central markets of Canada. Those special rates were wiped out entirely by the War Measures Act introduced by Sir Robert Borden's government, and as a result we had to place on the statute book a freight rates dct. That act is an injustice to the people of Canada. Why? Because, while special rates were given to allow the maritime provinces to get into the central markets of Canada, the Canadian Pacific Railway comes in under the general freight rates act, and with respect to every dollar that is paid out in connection with an obligation of the Intercolonial railway, which was constructed as a condition of confederation, we have to pay the piper to the Canadian Pacific as well. If the old statute had remained on the books, continuing the special rates we had enjoyed for forty-three years, practically in perpetuity, the legal position of the maritime provinces in relation to the Intercolonial railway would have been such as no other part of Canada enjoyed.

We were foolish enough in 1919 to take over practically all the railways in Canada, the Canadian Northern with its huge bond obligations, the Grand Trunk and the Grand Trunk Pacific. My suggestion is-and I make it not in the way of criticism but for the sake of enlightenment-that the committee be given a mental picture of all the outstanding obligations in connection with the various railways now forming part of the Canadian National Railway system-the perpetual and other bonds, those bearing a high rate of interest and those bearing a lower rate of interest.

I suggest to the minister, who with his officers is giving this matter serious and continuous study, that when the tax-free war bonds were

called in, it was repudiation when we said they should no longer be tax-free but must be treated just the same as any other bond in that regard. I do not stand for repudiation in its broadest and largest sense, but I do suggest to the Minister of Transport, the Minister of Finance, and the government generally that they try to see what can be done in the way of lightening the load of interest obligations, as suggested by the hon. member for Winnipeg North-obligations that are bearing down heavily on the people of Canada. I think it is a larger question almost than the question of amalgamation versus cooperation.

The other day, when the Minister of Transport moved the second reading of this bill, I made the statement, which I believe was correct, that Mr. Fairweather, who is the financial expert and chief of the bureau of economics of the Canadian National Railways, stated before the special committee of another chamber that the Canadian National Railways had gone as far as they could in the direction of cooperation, in the pooling of services and the elimination of. certain railways. I read the report rather hurriedly, but it seems to me that that statement was made by him, and I believe also that it was contradicted by representatives of the Canadian Pacific Railway. The whole question is so involved that the people of this country are mystified as to the exact situation of the two systems. It is almost like being on that little boat, the Maid of the Mist, under Niagara Falls; you get on board the legislative barque of this parliament of Canada, and unless you have the real picture before you it is hard for an individual member to deal intelligently and fairly with the general situation.

As regards rates of interest on outstanding bond issues, particularly the perpetual bonds,

I cannot see that it would be in the nature of repudiation if this country should decide, after due study, that these perpetual bonds should give place, through a refunding issue, to a bond which is not perpetual. We have already refunded other outstanding obligations of the Canadian National Railways, and people have handed in their old bonds and accepted new bonds at a lower rate of interest. If that course has proved acceptable to the Canadian people who have sufficient money to own these bonds, surely if the attempt were made, not by force or duress, but through some financial compromise, we could reduce this heavy burden of interest which is weighing down our people and making such an inroad on the national income of a population of a little over eleven millions.

The problem is a serious one. The remarks I have made this morning are not in the way

Canadian National-Canadian Pacific Act

of criticism but are intended to have more light thrown on the subject. I believe that at some future time the Minister of Transport, with the assistance of his technical advisers, will be able to enlighten hon. members and the people generally with a complete picture of outstanding obligations, the rates of interest they bear, and the railroads against which they are charged. We could then deal more intelligently with the question of doing away with the perpetual bond issue by the issuance of a bond guaranteed by the government carrying a lesser rate of interest. I believe that our people are patriotic enough to bear at least part of the burdens entailed by these interest charges on our great railway system, which now extends, I believe, over 35,000 miles.

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May 29, 1939