Omnitrax versus Manitoba: Pallister up against shrewd negotiator

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This article was published 28/07/2016 (3720 days ago), so information in it may no longer be current.

Premier Brian Pallister was in a foul mood when he faced reporters on Thursday.

And who could blame him? With the closure of the Hudson Bay Port Company in Churchill and a serious cutback in rail service across northern Manitoba, Pallister is now facing in his first real political crisis. Complicating matters is that negotiations between the province and Omnitrax Canada, owner of the aforementioned rail line and port, are subject to a gag order.

Over and over again at a media availability Thursday, Pallister demonstrated his crankiness as he talked about Omnitrax’s efforts to play on the fear of northern Manitobans, all in a bid to wring more money out of the province. That is something Pallister is not willing to do at this point. “I don’t respond ever to threats.” he said in a low growl.

It’s a strong position to take, although it’s not clear how successful it will be in getting the port and — in particular — the rail line back up and running. For even though Pallister’s bombast was impressive, he’s up against a guy who is celebrated as a tough and unrelenting negotiator.

Pat Broe, owner of the Broe Group, the parent company of Omnitrax, is a self-made maverick entrepreneur who made a fortune in real estate, oil and gas and transportation. He’s an unapologetic Tea Party Republican, and a man renowned through his home state of Colorado as a toughest negotiator around, an allegation Broe does not deny.

“I’m happy with my reputation,” Broe said in a December 2015 interview in the Denver Business Journal. “I’ve done a lot of things wrong, but I’d say the tough negotiating style is not something I would have changed. I want to keep that negotiating style.”

Pallister is getting a taste of Broe’s negotiating style right now. With his decision to close the port and cut rail service, Broe is essentially holding northern Manitoba hostage. For what ultimate goal, it is not yet known. But the smart money belives that Broe wants a bailout.

In fairness, the company’s actions this week are partly in response to the fact that, following the dissolution of the Canadian Wheat Board, grain shipments through Churchill have all but disappeared. The loss of those shipments undermined the viability of both the rail and port assets.

However, the story behind that story is much more complex. And while Pallister is legally prevented from discussing the fine details, he did release a 2015 agreement between Omnitrax and the province that suggests quite strongly that the rail and port operator was not holding up its end of the bargain.

The agreement outlines a series of operating and capital subsidies available to Omnitrax for the 2015 shipping season. That is not in and of itself unusual; Omnitrax has been the beneficiary of $130 million in government grants ever since it acquired the rail line in 1997. What is unusual is that Omnitrax was being asked to meet a number of conditions before receiving any subsidies. This is a departure from past subsidy practices, where few if any pre-requisites were in place to trigger the flow of money.

In the agreement, the province demanded Omnitrax rescind a $3 per tonne surcharge it introduced two years ago. That is interesting given that sources confirmed this surcharge was responsible for prompting some grain companies, notably James Richardson and Sons, to abandon shipments through Churchill last season.

In addition to that per-tonne subsidy, the province was willing to provide a rebate on the cost of any capital work to improve port facilities. To collect, Omnitrax had to provide “supporting invoices and proof of HBPC having paid the costs claimed.”

Finally, the province agreed to provide additional support to offset operating losses at the port. Again, each of these claims had to be “accompanied by audited financial statements” and any additional supporting documentation as required by the province.

The stringent terms of this agreement reflect a growing concern among federal and provincial officials about what Omnitrax was, and was not, telling government about its operations. Government sources confirmed that for many years, Omnitrax had flatly refused to open its books to government. Omnitrax was constantly complaining about losing money on its Manitoba operations, but government had little in the way of hard numbers to back that up.

It now appears almost certain the Denver company is working diligently to create a situation where someone or something will come forward and buy them out of their Manitoba assets. Although market conditions are not favourable, there is no evidence Omnitrax was doing anything to drum up new business. When you add it all together, it appears to be a carefully constructed campaign to exit Manitoba.

It’s worked before. In 1995, CN threatened to close its line to Churchill and sell off the rails for scrap, prompting the federal and provincial governments to broker a sale to Omnitrax. To this day, Omnitrax has refused to confirm the sale price, widely believed to be in the neighborhood of $25 million. The port, a federal asset at that time, was thrown into the deal for a buck, along with tens of millions in taxpayer money to upgrade facilities.

Broe has always understood that these transportation assets have incredible political value, even if they are not commercially viable. And that government is much more likely to pony up when facing a crisis.

It’s a dangerous game of brinksmanship featuring two strong personalities, both unwilling to give ground.

At some point, and soon, someone is going to have to blink. The fate of thousands of people across northern Manitoba hang in the balance.

dan.lett@freepress.mb.ca