A special release by lead analyst Daryl Dela Cruz of SkyTrain for Surrey
You can be said to have been researching transit issues in Metro Vancouver for many years, but you can still be wrong about what you know about transit issues.
If so, they would do themselves an injustice because, as provincial and federal taxpayers they too are funding the bottomless pit that is TransLink, its gold-plated SkyTrain projects and its unwieldy, costly governance structure.
In particular, when it comes to “achieving value for money,” it would be a relief for your office to settle once and for all the TransLink-manipulated comparative cost debate over SkyTrain versus Light Rail Transit technology.
If you were to do that – without political interference – I have no doubt you could save taxpayers billions of dollars in capital and debt-servicing costs.
That was a phrase that I had on my mind yesterday morning when I sent an e-mail to Liz James, the writer of the 3 paragraphs in the quote box above and a weekly columnist at the North Shore News. I was specifically intent on asking her where she based the research to support the above written claim in her most recent newsletter article, suspecting she used some particular sources I know to be filled with inaccuracy. In our e-mail conversation, she made the following claim about the Canada Line SkyTrain’s capital costs:
As for capital cost claims – the Canada Line was touted at $1.4 billion and ended up being over 2.1 billion before debt servicing costs were factored into the equation (Elizabeth James, North Shore News Columnist – Via E-Mail)
Firstly, the capital cost claim regarding the Canada Line appears to be misunderstood as the initial public sector funding commitment for the Canada Line never exceeded $1.4 billion. Regardless of whether the final total project capital cost at $2.1 billion actually exceeded a set construction budget, the initial public sector funding commitment was protected by an agreement set with SNC-Lavalin/Serco that ensured that the private sector would be responsible for any capital cost over-runs in building the project. This is highlighted in our Examining Canada Line History article, its accuracy of which was confirmed by InTransitBC themselves when they reposted it on the Canada Line Blog last month.
However, that is not the main point of this write-up.
The debt servicing cost claim by Ms. James is highlighted in red as as it highlights an incorrect and misleading claim that has been used by Metro Vancouver LRT advocates for a number of years now. There has been a serious misunderstanding of the term “debt servicing”: what it is, how it works, and why it is necessary.
The claim has been around since at least the early 2000s, according to this article [LINK] which was posted by Charlie Smith on the Georgia Straight at that time:
I have noticed that it has been frequently used by Lower Mainland advocates for Light Rail Transit and the SkyTrain-opposed. Malcolm Johnston of Rail for the Valley (which we have noted for the serious inaccuracy [LINK] in his claims):
and it’s happening outside of Metro Vancouver, outside of the SkyTrain vs LRT context and debate. Here it is again on a forum discussing the proposedhigh-speed rail in California:
…..$1B per mile as an average system cost is, if anything, underestimating the cost, not including debt servicing, and maintenance/operations expenses. (Trakar on CosmoQuest Forums)
These claims about debt servicing have lead to some even more heinous and misleading claims. Once again, Malcolm Johnston of Rail for the Valley claiming that debt servicing costs make SkyTrain cost $8 billion [LINK TO ARTICLE]:
None of these claims about SkyTrain debt servicing are correct. This is because the advocates who have insisted on crying wolf about debt servicing charges completely misunderstand the concept of debt servicing.
Debt servicing is officially defined as follows:
The cash that is required for a particular time period to cover the repayment of interest and principal on a debt. (Investopedia)
Debt service is the amount you pay on a loan in principal and interest, over a period of time. (About.com)
Debt service: the amount of interest and sinking fund payments due annually on long-term debt (Merriam-Webster)
Debt servicing by definition is to pay back a loan including interest. When a large-scale capital project such as a SkyTrain expansion requires millions of dollars in funding, the millions of dollars in funding is not able to be obtained right away by stakeholders and funding provisional. These stakeholders obtain loans to fund the capital expansion project, and these loans are paid back over time by way of debt servicing. This system is used for any large capital project where funding cannot be obtained immediately from existing cash reserves.
I would like to pose a question: If there are hidden debt servicing costs associated with investments in SkyTrain expansion and are in addition to capital costs, what exactly is the debt that is being serviced?
There is no answer to the above question. Debt servicing costs are not an addition to any initial capital costs paid for a capital project; They ARE the capital costs. They are the repayment of the loans that were made to create the finances for the capital costs.
The system is comparable to having and using a credit card. With most credit agencies, your cash payments made with the credit card during the month are billed at the end of each month, to be paid immediately or within 28 days. When you pay off your credit card bill, you are servicing your credit card debt. Your ability to pay off your credit card bill on time defines your credit rating.
Especially for larger capital cost projects, the debt service is usually spread out over a number of years in a process called amortization (1. The paying off of debt in regular installments over a period of time., 2. The deduction of capital expenses over a specific period of time (usually over the asset’s life) – Investopedia). This is a term you will see commonly used on financial reports made by transit agencies such as TransLink.
Here is an example of how debt-servicing and amortization works: As highlighted in the 2011 Annual report [LINK], Translink’s 2011 annual amortization payment to the Canada Line’s concessionaire (InTransitBC) was approximately $23.3 million (highlighted on page 74). These amortization payments to the concessionaire are paying off the $700 million private sector contributions that were made by the concessionaire (InTransitBC or SNC-Lavalin/Serco) to the Canada Line project’s capital costs. A total of $23.3 million in 2011 dollars is part of a repayment that has been amortized over the 30 years of the Canada Line concession term, adding up to a total of about $700 million in 2011 dollars. This, in addition to the $1.4 billion in initial capital costs paid by the public sector, makes up the $2.1 billion capital cost for the Canada Line.
This is the first time that TransLink is directly responsible for repaying a SkyTrain project capital debt, as the creation of TransLink in 1998 maintained that the provincial government (the original authority in charge of funding and building the first SkyTrain Projects – the Expo and Millennium Line) would retain the original SkyTrain debt. This may create a perception that the original SkyTrain’s debt servicing costs are hidden to the public. These costs are not hidden from the public by either agency in charge.
A Canada Line train crosses the Fraser River
The only thing that the use of the “not including debt servicing” or “hidden debt servicing” claims conveys with Lower Mainland Light Rail advocates is a sense of desperation. These advocates are so desperate that they will use any excuse to attack SkyTrain in favour of their dream LRT system, without the background research required to support the claim.
Those concerned with Metro Vancouver transit issues should take a second glance before trusting claims made by these Light Rail advocates.
DEBUNKING MYTHS: Light Rail advocates and debt servicing costs
