Published in Financial Post Comment - August 9, 2012
Canada’s railways rank among the best
A Leger poll taken earlier this year highlights some surprising attitudes by Canadians about freight rail. It seems a great majority of Canadians (87%) would support the government providing funding for rail. However, the freight rail industry is not asking the government for such subsidies, nor does it receive any today.
On the other hand, some rail customers are asking for subsidies in the form of legislation that would give them an advantage when negotiating freight service agreements with railways. The federal government is currently in the consultation phase of developing this legislation.
A coalition of shippers has been lobbying the government for regulated service agreements since 2006. This led to the 2008 Rail Freight Service Review, then the appointment of Jim Dinning to facilitate discussions between rail customers and railways toward commercial outcomes. Mr. Dinning’s report, released in June, makes it clear that commercial solutions are preferred over regulated agreements. In the meantime, a small minority of these shippers worked with the NDP to introduce a private member’s bill that would regulate service.
Mr. Dinning concluded that the commercial system can be improved, but like all win-wins, it must be built around reciprocal obligations including better forecasting and in some cases hard commitments for guaranteed service. It makes sense. And, as he states, it should be tried – “it just might work.” Canada’s railways agree with Mr. Dinning and oppose regulation of the industry when it comes to contracts between shippers and rail companies. These negotiations should be left to the marketplace.
Throughout this process, myths about rail service have been perpetuated that, in the interest of informed debate and good policy, need to be debunked. Let’s start with service. Canadian freight railways are today recognized as among the most efficient in the world. For the past several years, CN and CP have been improving service to customers, working with supply chain partners (such as ports and terminals) and signing commercial service agreements. These efforts have led to a high-performance supply chain, characterized by increased collaboration, efficient service and rail rates that are the lowest in the world. Changes effected by the rail sector have reinforced its role as the backbone of an integrated supply chain that has helped move Canada’s economy to take advantage of growing world demand for Canadian resources.
Another myth is excessive market power. CP and CN are ferocious competitors that battle each other and other railroads and modes of surface transportation in North America. The majority of customers have access to other carriers, including trucking, shipping, seaways and short-line railroads. Moreover, they have access to existing provisions under the Canada Transportation Act designed to give customers competitive options and ultimately impose regulatory outcomes on the railways.
Yet another abused term is the “captive” customer. Recently, the Quebec government announced the “Plan Nord” – an ambitious plan to develop resources in Quebec’s northern territory. As part of the plan, the government’s investment arm, the Caisse de Dépot, worked with CN to commit to a new rail line. This public-private partnership is cause for celebration because if it is built, it will enable mining products to be produced and to reach global markets.
The latest myth to be propagated is that railway customers co-operated in the Dinning process because they are interested in commercial solutions. The Dinning Report states: “Shippers expected the facilitation process to impose solutions that would provide shippers with more leverage in shipper-carrier relationships.”
The most desperate argument is that “railways will go back to their old ways” if they are not regulated further. Well, governments can always intervene. But the real question is why railways would abandon a business model that has led to very high levels of efficiency, that enables their customers to remain globally competitive thanks to the lowest freight rates in the OECD and that also delivers profits to their shareholders?
Canada’s railways are competing and they are doing well, a fact borne out through significant investor confidence. Today, companies aren’t complaining about rail service or efficiency and most are operating within a commercial contract or agreement that sets out obligations for both parties. That’s how commerce is supposed to run in a free market economy.
Before the federal government considers legislating commercial service agreements, it should reflect on Mr. Dinning’s advice.
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