A long-awaited report by the panel reviewing the Canadian Transportation Act will disappoint those in the grains sector looking for more accountability in the system that moves their crop to market.
The report “Pathways: Connecting Canada’s Transportation System to the World” is the result of an accelerated review of the federal legislation. The scheduled review was pushed ahead by a year in the wake of the grain transportation crisis of 2013-14.
So a lot of people in the grains industry were pinning high hopes that the review panel would recommend changes designed to ensure the railways do their part to get the right grains to the right port at the right time.
It’s important to note that the panel was assigned to look at the entire transportation system. Not surprisingly, the panel found that generally speaking, the transportation network is not in good enough shape to keep Canada competitive into the future.
“Our global infrastructure and related rankings have been declining and Canada continues to compare less favourably to other developed nations on a number of measures — a disturbing trend for a small, open economy in which prosperity depends on success in global trade,” the report says.
It goes further to suggest that when it comes to infrastructure investments, government priorities have been — we’re paraphrasing here — politically expedient and short sighted.
When it gets to the grains section, the conclusions are hardly surprising.
Murad Al-Katib, the grain sector lead adviser to the Canadian Transportation Act review secretariat, strongly hinted at various meetings last year that the review panel would find removing the Maximum Revenue Entitlement (also known as the “revenue cap”) conducive to increased investment in improved service. He stated that shippers care more about service than cost — as if the two were linked.
The federally appointed Grains Logistics Working Group found otherwise; evidence shows commodities not covered by the MRE do not receive better service or lower freight costs.
Nevertheless, the CTA review report recommends getting rid of the MRE over the next seven years because “an unfettered commercial framework provides greater assurance that supply chain partners who handle and transport grain will invest in innovative supply chain solutions to move grain efficiently in years to come.”
It also concludes that the MRE stifles innovation and found “no compelling evidence” to suggest grain shippers should merit special protection over other shippers.
It is here that the panel misses the point of the MRE, which is not to protect grain shippers, so much as grain farmers from gouging. Grain producers pay the full cost of shipping their grain, but they are not the ones negotiating the freight. As such, they are captive in a way that coal shippers are not.
As well, coal is coal, whereas grain consists of a multitude of commodities of varying qualities that must be picked up at numerous locations and delivered on a time-sensitive basis to the ships waiting at port. Poor railway service can mean demurrage charges, lost sales and reduced competitiveness.
The panel refers to, but does not cite, studies that it says “support the notion that Maximum Revenue Entitlement has had adverse effects on the efficient operation of the grain-handling and transportation system.”
Further, that regulation keeps rates higher than necessary by stifling technological and service innovations.
The report does cite a letter dated April 10, 2015 from CN CEO Claude Mongeau that states, “the regulatory framework for Western Canada grain is ill suited to promote sound railway investment through adequate pricing mechanism.”
We’re left wondering if CN also provided those aforementioned “studies.”
Mongeau’s conclusions are contrary to the findings of the Grain Logistics Working Group, which found no evidence to show that the MRE hurts the railways’ ability to invest and innovate. The MRE does not cap how much grain the railways can move, nor does it cap how much they earn. It merely caps the average rate they can charge per tonne, adjusted for railway inflation and the distance travelled. The more grain the railways move, the more they can earn.
That research found that railway profitability was actually higher under the MRE than if there was true competition in rail freight. It also found that while the MRE has little impact on service, the lack of competition does.
It remains to be seen what the Trudeau government will do with a report commissioned by its Harper predecessor. But from this desk, it appears that the CTA review panel has bought into the myth of deregulation as the go-to solution.
Deregulation must go hand in hand with competition. It is no longer a question of whether to implement open running rights, but how.