Canada’s grain industry and farmers would benefit from more radical railway deregulation, an analyst from the Conference Board of Canada said last week.
“The evidence is very clear that with deregulation comes lower freight rates,” said Andrew Shea, who prepared a conference board report analyzing the impact of rail deregulation in Canada and the United States.
“I have no doubt the same would be true in the grain industry.”
The analysis endorsed the benefits of a commercial system of confidential contracts and giving railways the freedom to abandon under-used branch lines.
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It said that since Canadian rail deregulation began in earnest in 1987, competition has made the railways run better.
“Having fewer restrictions over market exit allows railways to sell or abandon track that is unprofitable,” said Shea’s report, which will be debated May 17 at a conference board seminar.
“It has been a win-win situation for shippers and railways. Shippers have access to a world-class railway system while also benefiting from lower rates. Railways have gained through achieving better financial performance.”
Shea said he did not include the grain freight system in his analysis because it isn’t deregulated.
“It is the only commodity that is subject to a rate cap,” he said in an interview.
“The benefits of deregulation have been denied that sector so far.”
Still, the railways that move the grain have benefited from deregulation in other commodities, he said.
Shea called the first major deregulation by the federal Progressive Conservative government in 1987 a half measure, which liberalized pricing options but did little to allow the railways to sever money-losing lines. CN Rail traffic density figures in 1993 were just 35 percent of the U.S. figure.
“There was too much line for too little traffic,” Shea wrote.
“CN and CPR were squeezed on the revenue side as prices fell, but were limited in their ability to cut costs by exiting unprofitable lines.”
The Liberal deregulation of 1996 went further, allowing more line abandonment.
The conference board report says that by 1998, CP Rail’s return-on-investment had risen to 12.2 percent while CN Rail’s had a 14.2 percent return before special charges. These rates of return still are lower than many other industrial sectors.
“Notwithstanding the post-deregulation North American rail revival, CN and CPR are only now making reasonable rates of return,” wrote Shea.
However, he said in an interview he had not analyzed the impact of rail abandonment on the costs of shippers such as farmers who have to drive further to deliver grain to more centralized elevators.
He did not know if the costs of higher delivery expense and reduced service would counteract the benefits from lower freight rates.
