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Nov 07, 2023

Ottawa's extension of forced interswitching no way to run the railways

Will increase costs for shippers and ultimately all consumers By Daniel Dufort

Will increase costs for shippers and ultimately all consumers

By Daniel Dufort

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Canada's competitiveness relative to the U.S. is in decline and that affects our standard of living. Our GDP per capita is currently lower than it was in 2019 — an alarming development that should really be front-page news.

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The federal government is short on effective responses. Desperate attempts to extend tens of billions of dollars to foreign companies like Volkswagen so they will deign to invest in Canada are more symptoms of the problem rather than likely solutions. Our current situation brings to mind what former U.S. President Reagan used to say about government's view of the economy: "If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Thankfully, large swathes of our economy are still moving — some literally. A case in point is the railway industry, in which two Canadian companies — CPKC and CN — are uncontested leaders. Unfortunately for them, their success means the government has them in its sights and plans to regulate them in an even more harmful fashion than it already does.

The omnibus bill to implement the 2023 federal budget contains measures that will increase costs for railway shippers and ultimately all consumers. The extension of the regulated "interswitching" distance hides, under innocuous bureaucratese, enormous costs that will have to be shouldered by all rail shippers.

As things currently stand, shippers with access to only one railway but located within 30 kilometres of an interchange can avail themselves of government-fixed rates to have their cargo shipped to a competitor. The government is now keen on extending this distance to 160 kilometres — the distance that was in effect between 2014 and 2017, which was rightly criticized in former minister David Emerson's 2016 report. Regulations aside, choosing a different railway is something shippers can already do at an any given interchange, provided they are ready to pay for it.

To be completely clear: the federal government is forcing the railways to offer shippers a below-market rate set by the government for the transfer of train cars to the railway network of a competitor. That government-set price likely won't allow railway companies to break even. In the end, these costs are passed on to consumers and eventually paid for in large part by you and me at the checkout counter.

As everyone knows, goods and food prices have shot up in recent months. Unfortunately, instead of acting to slow rising food costs, the government's action risks exacerbating the situation with costly new regulation, all in aid of anti-market economic populism.

Encouraging the switching of cars from one railway to another undermines the fluidity of our logistics chains and can lead to delays. In fact, the hit to productivity of complicating our supply chains is largely what led to the elimination of the 2014-17 policy. Considering the supply chain problems we’ve faced since then, building back an extra layer of complexity seems reckless.

Both CPKC and CN already devote between 20 and 25 per cent of their revenues to capital investments that make our supply chains more resilient. By undermining these companies’ profitability, the government puts such investments at risk.

In order to score easy points with an electoral coalition, Ottawa is ready to risk a decline in the quality of our transportation infrastructure. American railway transport companies must be rubbing their hands with glee before this sad spectacle of self-sabotage as they stand from benefit from a slower and less efficient railway system up north.

If we really want producers and manufacturers in remote regions to be able to get their goods to market more cheaply, we need to look to other measures. Government policy based on an attractive fiscal framework and flexible regulation is more likely to attract new investment and exert downward pressure on prices. Unfortunately, what we’re being offered is the exact opposite of that.

Considering that we’re making ourselves objectively poorer while prices keep on climbing, a thorough review of the risks and dangers of our current approach to the economy is long overdue. We should start with the golden rule of policy: first, do no harm.

Daniel Dufort is president and CEO of the Montreal Economic Institute.

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