Railway Restructuring: The Canadian Experience Allan Pozniak Canadian National: 1956-1997 Lecturer, McGill University: 1978-1990 Consultant to The World Bank: !997-2002 *Note: Slides Courtesy of Canadian National and Other Sources 11/20/2018

The Canadian Railway Environment Vertically Integrated Private Freight Railways: Canadian National Canadian Pacific Short Lines U.S. Railways Freight Railways own the Infrastructure High Degree of Competition 2 11/20/2018

The Canadian Railway Environment State Owned Passenger and Commuter Services VIA Rail Toronto GO Transit Montreal Commuter Service Vancouver West Coast Express Passenger and Commuter Railways pay the Access Fee to Freight Railways Passenger Services Subsidized by Federal and Provincial Governments Some Private Operators 3 11/20/2018

Canadian Railways - Last 10 Years 1991 2000 % Change Track Kilometres 56,281 46,491 -17.4 Employees 62,455 41,118 -34.2 Freight Cars (000) 116 104 -10.3 Locomotives 3354 3245 -7.1 RTKM (Billions) 246 322 30.8 Revenue per Tonne 35.52 24.29 -20.4 Revenue per TKM C$ .0244 .0224 -8.2 RTKM/Employee (000) 3,940 8,581 217.8 Operating Income (Million) 475 1,576 331.8 Consumer Price Index 15.2 11/20/2018

The Restructuring of the Canadian National Railway A State Railway 1929-1978 A Commercial Railway: 1978-1995 An Investor Owned Railway: 1996….. 5 11/20/2018

6 CN- A State Railway Monolithic Organization Deficits Financed by Government Mix of Commercial and Social Services Many Departments and Services: Hotels Express Trucking Marine Services Passenger Real Estate Oil and Exploration Communications 6 11/20/2018

CN - Transition to a Commercial Railway- Stage 1 Mandate: Commercial Business, Self Financing, Freedom to Manage Creation of Via Rail and Public Service Obligations Creation of 8 Subsidiaries with P/L discipline Creation of internal Cost centers and Charge back systems Focus on Bottom line 5 11/20/2018

CN - Transition to a Commercial Railway- Stage 2 Focus on Core Business Sell Subsidiaries Close Branch lines Customer Driven Change Culture Lower Cost Base 8 11/20/2018

Customer Driven External and Internal Customers Build World Class Marketing Organization “Everyone Works for Marketing” Extending Market Reach Global Business Strategic Alliances 11/20/2018

Culture Change Extensive Training Programs Leadership Program Top 200 Union Leaders “Managing Our Business” Top 1000 Supervisory Training Technical Training 11/20/2018

Lower the Cost Base Investments in Technology Network Rationalization Right Sizing the Work Force 11/20/2018

Investments in Technology Information Systems- Enabling Technology Communication Network Upgrades Intermodal Terminals Track Maintenance Automation Wagon and Locomotive Control Systems 11/20/2018

Results of Investments ONE: Customer Service Center Operations Management Center Locomotive Control Center Wagon Management Center Accounting Center Main Shop Streamline Infrastructure Maintenance 11/20/2018

Restructuring Results Business Volume Increased Significant Reduction in Resources Fewer Employees Fewer Wagons Fewer Locomotives Less Infrastructure 11/20/2018

Getting Ready to Privatize: Benchmarking CN - US Railroads Adopt World’s Best Practices Massive increase in Productivity: 1992-1994 Eliminate Regional Structure Sale of Remaining Subsidiaries Key Executives from the Private Sector 15 11/20/2018

16 The Final Step: The IPO Agreement with Government Hiring of Banking and Investment Advisors Evaluation of Assets Government Legislation Making the Case: The Road Show Initial Public Offering New Board of Directors 16 11/20/2018

17 The Results: Continued increase in Productivity Sale of Low Density Lines=Growth of Short Lines Acquired Illinois Central and Wisconsin Central to strengthen North-South Routes Increased Shareholder Value: 13.50 > 83.00 C$ 17 11/20/2018

Questions - ? ? 11/20/2018