Rail regulation acts as drag on sector

The cost of railway infrastructure projects and network acquisition is staggering, yet Canada’s railways weigh these concerns on a regular basis.

Rail’s air, trucking and marine competitors have an advantage from the outset in not having to build or maintain infrastructure.

Yet rail is resilient. Despite its capital-heavy requirements, rail can withstand under-investment for years. Eventually, however, a lack of capital catches up. It is reflected in lagging capacity and productivity. One significant reason behind railway under-performance is regulation and the reluctance of capital to invest in unnecessarily regulated industries.

The Conference Board of Canada has traced the relationship between regulation, investment and productivity in railways. It found that regulation results in deferred investment decisions and negatively affected productivity, while deregulation has the opposite effect: attracting capital and increasing productivity.

Thus, capital investment in Canadian railways suffered during the highly regulated years of the Western Grain Transportation Act (1983-96). By contrast, the 1996 Canada Transportation Act created a regulatory climate that encouraged new investment and doubled capital expenditures over a two-year period.

The history of Canada’s rail is the history of rate regulation. At different points in their history, over-regulation has brought Canadian and U.S. railways to the brink of ruin. However, the two countries have dealt with the crisis differently.

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The U.S. Congress deregulated the rail industry in one fell swoop with the 1980 Staggers Rail Act.

In Canada, the federal government committed in the 1980s to deal with the 1897 Crow’s Nest grain rates in light of urgent commission findings that tied the rate to a financial crisis with Canada’s railways. However, Ottawa ultimately refused to deregulate, which transportation deputy minister Arthur Kroeger blamed on the Liberals’ quest for western votes in the grain-rich Prairies.

Not only did the Crow’s Nest rate affect the railways and the Canadian economy, it also stalled grain industry advances.

The WGTA continued the preferential treatment of grain transportation. The act allowed the railways to earn money for three years with productivity gains clawed back in year four, which was hardly enough to encourage capital investment. It also resulted in excessive transportation of grain, lowering grain prices in eastern Manitoba and Saskatchewan, encouraging export grain production and discouraging value-added processing and crop diversification.

The WGTA was replaced in 1996 with a maximum rate scale on grain transportation. In his 1998 report, justice Willard Estey found the rate scale to be mileage oriented and insensitive to the true cost of transportation, discriminating against shipment to the port of Prince Rupert.

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Despite the Estey recommendation that the rate scale be repealed, former prime minister Jean Chretien’s government opted instead for a cap on rail’s grain revenue and a penalty to railway earnings in excess of an amount established annually by the Canadian Transportation Agency.

The Conference Board questioned the government’s commitment to a market driven system in light of Ottawa clawing back $178 million from railway revenue at the outset of the cap regime.

The board criticized the special legislation governing grain, saying regulation increased the risk for capital investment. It said regulation that favours one commodity is unique among similar industries and contradicts business discipline that emphasizes price signals and market forces.

Given these impacts, it is worth considering whether the revenue cap is smart regulation. The revenue cap applies only to grain and within that commodity only to some grains, only to some railways, only to some ports and only to movements west of Thunder Bay. With elevators, ports, trucking and marine providers moving the same grain without a cap on revenue, the common sense behind the regulation is lost.

Mary-Jane Bennett is a Vancouver-based consultant. She is author of Grain Freight Regulation in Canada published by the Frontier Centre for Public Policy, fcpp.org. This article has been edited for length.

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