Grain freight regulations inhibit productivity

Revenue cap It is worth considering whether the cap on grain earnings is smart regulation

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The cost of railway infrastructure projects, such as the Rogers Pass tunnel or network acquisition, is staggering.

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

And while rail can withstand underinvestment for years, eventually a lack of capital catches up and is reflected in lagging capacity and productivity. One significant reason behind railway underperformance is regulation and the reluctance of capital to invest in unnecessarily regulated industries.

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

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

At different points in their history overregulation has brought Canadian and U.S. railways to the brink of ruin. However, the two countries have dealt with their crisis differently.

The U.S. Congress deregulated the rail industry in one fell swoop with the 1980 Rail Staggers Act. Although the Canadian government — in light of urgent findings tying the rate to a financial crisis with Canada’s railways — committed in the 1980s to dealing with the 1897 Crow grain rates, it ultimately refused to deregulate.

Not only did the Crow rate affect the railways and the Canadian economy, it also stalled grain industry advances and undermined Canada’s unique status as world leader on the grain portfolio. The 1983 WGTA replaced the Crow rate, but continued the preferential treatment of grain transportation.

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

The WGTA was replaced in 1996 with a maximum rate scale on grain transportation. In his 1998 grain-handling and transportation review, Justice Willard Estey found the rate scale to be mileage oriented and insensitive to the true cost of transportation, discriminating against shipments to the Port of Prince Rupert.

Abandons market practices

Despite the Estey recommendation, that the rate scale be repealed and that Canada move to a commercial system, the Chrétien 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. Although the government claimed the cap would replicate market conditions, the revenue cap abandons market practices such as price signals and shareholder return.

The Conference Board of Canada 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. This, and the 2008 clawback of another $72.2 million, are the antithesis of a market-based system.

With regulation increasing risk for capital investment, the Conference Board of Canada criticized the special legislation governing grain. It found regulation favouring one commodity to be unique among similar industries and to contradict business discipline that emphasizes price signals and market forces.

Lacks common sense

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. To conform to a 2004 WTO ruling, U.S. grain moves through Canada under the revenue cap. With elevators, ports, trucking and marine providers moving the same grain without a cap on revenue, the common sense behind the regulation is lost.

Grain politics has been part of the history of this country. While the preferential treatment of grain may have advanced a nascent grain industry, that era is long gone. By eliminating the special treatment of grain, the federal government can eliminate barriers to investment, boost railway productivity and enhance the movement of goods in Canada.

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