What is the Coastal Ferry Services Contract?
The Coastal Ferry Act authorizes the Province to enter into contracts for the operation of ferries on specified ferry routes. So far, BC Ferries is the only ferry operator that has such a contract with the Province. The primary feature of the contract is a commitment by BC Ferries to provide a defined number of “core” sailings on each of 24 “designated” routes. The key commitment by the province is to pay BC Ferries a “service fee” (currently on 22 of the 24 routes) for each sailing. The ferry services under the Coastal Ferry Services Contract started on April 1, 2003. For a copy of the contract, outlined below, and its amendments, click here.
Term and Renewal. The Contract’s term is 60 years and the two parties may agree to renew it for another 60 years. If it is not renewed the Province may purchase all the outstanding shares of BC Ferries at fair market value (determined as if the Contract had been renewed for 20 years), or may solicit proposals from others interested in providing ferry services on one or more designated routes. If the Province elects not to contract with BC Ferries for the provision of ferry services on a designated route after the expiry of the initial 60 year term of the Coastal Ferry Services Contract, BC Ferries has the right to require the Province to purchase surplus vessels that were used on that route for net book value, subject to certain conditions. If the Province fails to comply with the notice requirements in respect of the exercise of its renewal option, BC Ferries may renew and extend the term of the Coastal Ferry Services Contract for one additional period of 20 years on the same terms and conditions.
Performance Terms. The first performance term under the Contract was the five year period from April 1, 2003 to March 31, 2008. Each subsequent performance term is four years long.
Services and Service Levels. BC Ferries must meet or exceed specified core service levels in relation to designated ferry routes. The Coastal Ferry Services Contract specifies routes and core service levels per route (hours of operation, minimum capacity and frequency and number of trips), subject to an allowance for short term, temporary service disruptions.
Service Fees. The Province must pay service fees to BC Ferries for the provision of services. The service fees are estimated to be approximately $106 million per annum for the first performance term, and ranging up to $124.8 million in the last year (FY 2011/12) of the second performance term . The service fees consist of three parts:
- Ferry Transportation Fees. These fees are designed to make 22 routes (which would otherwise be loss-making) financially viable without cross subsidization from the three major routes, which receive no ferry transportation fee. The fees are payable on a monthly basis based on estimated trips and are reconciled quarterly.
- Social Program Reimbursement. This payment, which is estimated at $11.9 million annually for the first performance term, provides a reimbursement to BC Ferries for toll discounts established by the Province and given to students, seniors, the disabled and through the medical travel assistance program. The payment is variable based on volume and amount of discounts provided.
- Unregulated Route Fee. This fee provides funding for unregulated routes through a $1.7 million per year flow-through for private operators for the first performance term. In the event that aggregate costs payable by BC Ferries to those operators exceeds $1.8 million per year, the Province will pay an additional fee equal to the excess costs above $1.8 million to a maximum of $200,000.
Adjustment of Service Levels and Fees. Core service levels in relation to a designated ferry route may not be adjusted before April 1, 2005, but may be adjusted after that date by mutual agreement if such adjustments result in improved schedules, customer service or operational efficiency. With respect to core service adjustments put forward by BC Ferries, concurrence by the Province is not to be unreasonably withheld during the first performance term. Core service levels are required to be reviewed and may be adjusted by agreement of the Province for each subsequent performance term. Temporary service level reductions can be made at any time with authorization of the Commissioner, following an event of force majeure, as a result of a lawful lockout by BC Ferries, or (subject to certain restrictions) by mutual agreement. If BC Ferries deploys a new capital asset in the form of one or more vessels on a designated ferry route and the size of the new vessel or vessels enhances capacity on that designated route, the core service level in relation to that designated route may be amended at any time by mutual agreement of the parties and if such an amendment is made, the parties must amend all portions or provisions of the Coastal Ferry Services Contract affected by such amendment, including, as applicable, service fees.
Route Discontinuance. The Coastal Ferry Services Contract permits BC Ferries to apply to the Commissioner for authorization to discontinue a route after April 1, 2006. The Province is required to pay the service fees on such route until the date of discontinuance. If a vessel becomes surplus to BC Ferries’ requirements as a result of a route discontinuance authorized by the Commissioner, BC Ferries has an option to require the Province to purchase the surplus vessel for net book value, provided that BC Ferries has used all reasonable commercial efforts to redeploy the surplus vessel to another ferry route in British Columbia.
Unregulated Routes. BC Ferries is responsible for negotiating and administering contracts with independent operators on seven unregulated routes. Under the Coastal Ferry Services Contract, the Province provides funding to BC Ferries in respect of such unregulated routes, as described under “—Service Fees” above.
Option to Purchase Vessels. The Province has an option to purchase each vessel owned by BC Ferries (free and clear of all liens) for net book value if BC Ferries wishes to dispose of a vessel which is no longer needed. Subject to the terms of the Acknowledgement Agreement, the Province also has an option to purchase each of the vessels owned or leased by BC Ferries and used to provide services under the Coastal Ferry Services Contract upon the occurrence of an event of default under the Coastal Ferry Services Contract by BC Ferries.
Entitlement to Federal Subsidy. The Contract provides that the Province will continue to make available to BC Ferries the proceeds of a federal subsidy pursuant to the Canada / British Columbia Coastal Ferry Subsidy Agreement dated April 18, 1977. The subsidy agreement is terminable only by the joint agreement of the Province and the Government of Canada. In the event the Canada / British Columbia Coastal Ferry Subsidy Agreement is amended or renewed, BC Ferries and the Province must discuss the application of proceeds to BC Ferries under the amended or renewed agreement. The amount of the subsidy under the subsidy agreement was $24.0 million in 2003/04. The subsidy is adjusted annually based on the Vancouver Consumer Price Index.
Public Accountability. The Coastal Ferry Services Contract requires that BC Ferries hold public meetings and prepare audited financial statements, a business plan and conduct customer satisfaction surveys on an annual basis.
Indemnities and Insurance. BC Ferries has agreed to indemnify the Province from and against all losses and claims the Province may directly or indirectly sustain by reason of any act or omission of BC Ferries or any of its agents, subsidiaries, employees, officers, directors or subcontractors, in connection with the provision of ferry services, except for losses that arise out of or occur directly or indirectly by reason of any act or omission of the Province. BC Ferries is obligated under the Contract to obtain and maintain, at its own expense, marine protection and indemnity insurance for not less than US$500 million per incident to cover legal liability of BC Ferries for loss, damage or expense arising out of, or incidental to, the ownership, operation, chartering, maintenance or use of any vessel pursuant to the Coastal Ferry Services Contract, including liability for personal injury, illness or death, or loss or damage to the property of a third party and including pollution coverage. BC Ferries is also required to maintain hull and machinery insurance. Where applicable, the Province is to be named as an additional insured.
Events of Default and Remedies. The Contract provides that the following events will constitute an event of default under the agreement:
- BC Ferries fails to comply with any material provision of the agreement and such failure is not cured within 30 business days after notice, or longer if the failure would reasonably require more than 30 days to rectify;
- any representation or warranty made by BC Ferries or any information furnished or submitted to the Province by BC Ferries is materially untrue or incorrect;
- BC Ferries fails to give notice to the Province of a default under the agreement;
- an order is made, resolution passed or petition filed for the liquidation or winding up of BC Ferries;
- BC Ferries becomes insolvent or commits an act of bankruptcy or a bankruptcy petition or proposal is filed or a receiver of BC Ferries is appointed;
- BC Ferries fails to pay any sum owed by it which materially adversely affects its ability to perform its obligations under the Coastal Ferry Services Contract;
- BC Ferries ceases to carry on business as a going concern;
- any action is taken to enforce any security interests which materially affects BC Ferries’ ability to carry on business as a going concern;
- BC Ferries fails to make any payment due under one or more of the Terminal Leases; or
- BC Ferries fails to comply with any order issued by the Commissioner.
Upon an event of default by BC Ferries under the Contract, or at any time thereafter, the Province may:
- suspend or adjust any installment of the service fees;
- require BC Ferries to remedy the default within a period of time specified by the Province and if not remedied within that time period perform the obligations itself at BC Ferries’ expense;
- waive the default;
- exercise its option to purchase the vessels;
- request that the Commissioner issue an order requiring BC Ferries to remedy the default;
- bring legal action; or
- pursue any other remedy available to it at law or in equity.
In addition, the Province can terminate BC Ferries’ Terminal Leases (the terminals are provincially owned and leased to BC Ferries) upon the occurrence of an event of default under Contract.