While oil and gas, mining and other commodity sectors struggle, the grain and agri-food industries are going strong. This is a good thing, since it accounts for 6.7 per cent of GDP and supports one job in eight, employing over 2.2 million people. Globally, Canada is the fifth-largest exporter of agriculture and food products.
However, there is a problem — that pipeline relies on a 40-year-old fleet of railway cars. A supply chain, like any chain, is only as strong as its weakest link, in this case an aging fleet of Government of Canada hopper cars.
Commencing in the early 1970s, the federal government purchased roughly 13,500 covered hopper rail cars for grain service, and assigned the cars to CN and CPR. At the time, CN was still a money-losing Crown corporation, and export grain rates were frozen at the same level established in 1927 under the Crowsnest Pass Agreement. The railways claimed that their earnings from grain traffic did not justify the investment in modern rail cars, and so the government purchased the rail cars instead of allowing the railways to raise their rates to farmers.
Today, about 8,000 of these cars remain in service, and they are an average of 37 years old. In theory, a rail car can last up to 50 years, but this rarely occurs in practice. Just like an automobile, the repairs required to maintain a rail car increase over time, until it is no longer economic to fix. Most rail cars are usually scrapped well before their 50th year, and hopper rail cars typically last between 35 and 45 years. As these types of rail cars age, they become increasingly prone to defects, such as jammed top hatches and leaking outlet gates.
The recent review of the Canada Transportation Act (CTA) also concluded that the existing grain car fleet is nearing the end of its useful life and must be expanded and renewed. The report suggested the federal government can play an important role in the development of a “strategic plan on how best this can be achieved and under what timelines.”
Modern cars larger
More importantly, the Government of Canada rail cars are smaller and longer than the rail car type that is typically used by competing producers in the United States. At 4,550 cubic feet, the Canadian government rail cars have 13 per cent less carrying capacity than the 5,200-cubic-foot rail cars used south of the border. And the Canadian rail cars are longer than the contemporary design. This limits the number of rail cars that can be carried by a unit train, and stresses track capacity at port.
Replacing the aging Government of Canada fleet with modern grain rail cars would result in an immediate improvement in the productivity of the Canadian export grain-handling system. In fact, CP has estimated that a more modern fleet of rail cars could increase the capacity of their grain unit trains by over 23 per cent, adding 3.8 million tonnes of additional capacity. If this same approach is extrapolated over the entire fleet of remaining government hopper cars, the increase in system capacity would be over 5.6 million tonnes.
Doing nothing is not an option. So, should the federal government make an investment?
On the surface, a federal investment in grain rail cars would seem to be consistent with the new government’s desire to invest in infrastructure to improve the competitiveness of the Canadian economy, and enhance exports. However, the financial performance of Canada’s railways has improved dramatically since the early 1970s, and a “corporate handout” of this scale is unlikely to be politically popular.
A second option is that the railways themselves should replace the government rail cars. For their part, CP has taken a firm position that it will not be making large investments in grain cars as long as its pricing freedom is constrained by the maximum revenue entitlement (MRE) formula. Plus, the federal government promised the shipping community that grain would be given priority policy attention and hinted that a “full review” of the grain transportation system would follow.
These promises have thrown the cold water of uncertainty onto the grain transportation market, just as the railways are tightening their belts due to the precipitous decline in the commodity markets.
A third option is worth considering. A private-public partnership with one or more private sector partners would permit the government and the railways to facilitate the renewal of the Canadian grain fleet without an undue burden on the public purse, and without needing to wait for resolution of the review of the CTA and any proposed alterations. Suitable partners exist with rail car expertise and capital to invest, but before this model can proceed, the government must first recognize that there is a problem and commit to address it.
Canada’s grain producers deserve a better, more modern supply chain and it is possible to achieve just that through a creative effort between the government and the private sector.
Bruce Burrows is a 30-year veteran of the Canadian transportation and infrastructure sector and an Ottawa-based consultant and lobbyist who has worked in the past for railways.