Earlier this month, the federal government ordered Canada’s largest rail companies to ship more grain. If Canadian National and Canadian Pacific do not move one million tonnes a week – some 380,000 tonnes more than their average shipments during the 2012-13 crop year – Ottawa threatens to fine them up to $100,000 a day.
Such an arbitrary command might make sense in wartime or responding to a major disaster. With strong demand for rail transport from shippers of many goods besides grain, and other federal policies discouraging investment in more grain handling, however, it is perverse. A lighter federal hand will do more to encourage badly needed additions to Canada’s rail capacity.
Granted, this extraordinary intervention responded to extraordinary circumstances. One was a bumper harvest: some 80 million tonnes in western Canada – more than one-third higher than the average over the previous five years. A second is rising demand for many other products shipped by rail – not just oil, but other food, coal, metals and minerals, forest products and myriad manufactures. Then came a bitterly cold winter, which obliged rail companies to run shorter, slower trains.
Farmers went from glee over the rich harvest to distress: unshipped grain earns no revenue, and some threatens to spoil. So the government declared an “extraordinary disruption” under the Canada Transportation Act.
The squeeze on CN and CP will inspire little sympathy from grain farmers. Their relationship with the rail companies has been notoriously acrimonious through Canadian history. But even in the short term, the grain growers’ gain imposes costs – not just on the railways, but on everyone else who uses them.
The same rails and locomotives that move grain also move other things. Putting grain ahead means putting them behind. Railcars themselves are not interchangeable, moreover. And orders from Ottawa are no way to run a railway: the order will disrupt schedules and supply chains. If total rail shipments fall, the losses to others will outweigh the growers’ gains.
Longer term, moreover, command-and-control responses to rail bottlenecks hurt grain growers as well. Sensitivity to politics on the farm accounts for a peculiar feature of Canada’s current rail legislation: a limit on the amount railways can earn shipping western grain. A legacy of the days of government ownership and price regulation, the revenue cap is arbitrary – applying to shipments to certain ports and buyers but not others – and does not apply to any other commodities shipped by the same companies.
Numerous voices have warned that this arbitrary cap discourages investment in the grain-handling capacity that farmers want. Rather than easing or removing the regulation that is exacerbating the problem, however, the federal government appears ready to tighten its grip. The March 7 Order in Council was accompanied by an announcement from federal Agriculture Minister Gerry Ritz that the government would introduce legislation giving it new powers over grain shipped by rail.
The prospect of more command-and-control measures should worry shippers of all commodities, western grain included, and indeed Canadians far removed from rail transport. Rail transportation is a key network industry. Like other industries that move goods, services, people and information, it attracts policy makers’ attention not only because of concerns about market power of the providers, but also because its benefits spill widely over into the broader economy.
Rail is also highly capital-intensive. Many of the structures and equipment built and bought by rail companies are long-lived, and have little or no value in other uses. The risk of arbitrary interventions discourages investment. The result: underdevelopment of a critical part of Canada’s transportation infrastructure, and less capacity to move all products in the long run.
The Canada Transportation Act is up for review in 2015. Rather than legislating in haste, the government should use the time until then as a cooling off period, and an opportunity to remedy the harm done by the grain revenue cap. That approach will foster investments to get Canadian grain – along with fuels, metals and minerals, forest products, potash, other food, and everything else – to market far better than command-and-control can ever do.
William Robson is President and CEO and Benjamin Dachis is a Senior Policy Analyst at the C.D. Howe Institute.