Preface

TRANSPORTATION POLICY IS A UNIQUE TOPIC among academics. Unlike experts who debate welfare, education, and the debt, transport researchers seem to have a united outlook: the best prescription for the transport industry is fewer regulations, lower subsidies, and less government ownership. Perhaps this explains why in the last 15 years the federal government has done much to deregulate, desubsidize, and privatize. However, academic opinion seems united in the view that there is still a long way to go.

This view is important because Canadian transport policy now seems to be advancing and standing still at the same time. Ottawa has said it wants to privatize air and sea ports, end most transport subsidies by 2005, and cut the red tape that strangles profitable mergers and raises business costs. At the same time, Ottawa has gone back on its promise to privatize Pearson airport. It is also taking its time about ending subsidies, and reforming the regulations that are crippling Canada's rail industry.

Making our own reforms

The needed reforms will come to the transport industry whether government wants them to or not. The question is whether that change will be on our own terms. If we dicker while other countries get their acts together we will pay a steep price. Right now the U.S. rail industry is being born again. Rail companies are merging, cutting costs, and coming to flexible agreements with their workers. In Canada, union rules and government hesitation are holding back the merger between the CN and CP rail. We have the potential to compete with the best in the North American market, but we may waste this potential if we delay reform and wait for events outside our country to write the details of our policies.

The present book is a collection of four essays on surface transport policy in Canada. Why surface transport? Experts know that there is still much to reform in this area, but the media and the public are less aware that something needs to be done. Air transport seems to get most of the publicity, perhaps because of the spectacular corporate battles between Air Canada and Canadian Airlines. The attention the airlines get is out of proportion to their economic importance. The purpose of this book is to help close the gap between the economic importance of surface transportation and its importance in the public policy debate.

Privatizing ports

In the first essay, David Gillen and Douglas Cooper ask whether Canada's sea and airports should be privatized. Privatization tends to stir strong emotions. It has devoted fans and bitter enemies. In principle, a privately-run port should run more efficiently than a publicly-run port. The private port has a bottom line. This means it answers directly to customers and shareholders. Customers (airlines, shipping lines, and passengers) can take their business elsewhere if they are not satisfied. Shareholders can look for other investments if the port managers do not keep costs down. Port managers and unions have to work in harmony to keep their clients happy because government is not there to pay for administrative blunders and labour disputes. Enemies of privatization fear that private ports will not behave responsibly. They will be noisy and will fail to build on a scale that can satisfy the economy's need for infrastructures. Perhaps worst of all, ports will try to exploit their customers by raising prices too high. If there are no other ports nearby, customers will be forced to pay the ransom.

What the evidence says

Either side in this debate may be right in principle. The answer lies in the evidence. Are private ports more efficient than public ports? Do private ports gouge their customers? Do private ports underinvest in infrastructure? Do private ports pollute and ignore regulations? Gillen and Cooper answer "no" to all questions. In the 1980s Britain privatized Heathrow, Gatwick, and Stanstead, as well as a number of smaller airports. Investment in airport infrastructure more than doubled in the three years following privatization. At Heathrow investors are putting $440 million of their money on the line to build a rail link to London that will cut the trip from one hour to 15 minutes. The question of whether ports can escape competition has been intensively studied in the U.S. The answer that is creeping out of detailed market studies suggests that airports have trouble evading competition. The same is true of seaports where improvements in the way containers can be loaded on trucks has opened up inland waterways as a source of stiff competition against the established coastal ports. The presence of competition is important because it forces ports to be efficient.

Evidence for private market efficiency in Canada is encouraging when set beside examples of publicly-run ports. The Canadian government has 14 airports in which the entire operations have been contracted out to private firms. These firms had lower costs than publicly-run firms. In a comparison of three federally-run Canadian airports with three privately-run U.S. airports, the Auditor General found that U.S. airports use 40 percent less manpower to give an equivalent level of service. Sea ports also suffer from problems. The port of Churchill loses about $6 million every year and is kept running for the naked political reason that closing the port down would lose jobs for the region.

On the final point of whether private ports are careless polluters and lax in their safety, we have only evidence from abroad to guide us, since Transport Canada owns almost all major airports. Evidence from Britain and the U.S. suggests that private airports are at least on par with publicly-owned airports when it comes to safety and pollution. Some private airports, such as Burbank Airport and Palm Beach airport have even led the way in finding new ways to deal with noise pollution.

In their clear and balanced essay, Gillen and Cooper argue that privatization is good, but that if Ottawa is not willing to go the full distance it can still improve our ports by handing authority for them over to the communities they serve. Decentralizing services can make for a better match of what customers want and what the airports provide.

Truck and rail

In the second essay, Norman Bonsor gives a straight account of Ottawa's tangled policy towards truck and rail. Regulations and subsidies in these two sectors defy principles of economic common sense. Our trucking regulations make prices too high and our rail subsidies make prices too low for trucking and rail to work at their best.

Via Rail is a depressing case of a company which works poorly because of subsidies. Over the last 15 years Via has eaten more than $6 billion in federal subsidies to charge passengers a third of what it costs to move them around. The run between Armstrong, Ontario and Winnipeg became infamous for the $8.73 dollars of subsidy for every kilometer travelled by each passenger. It would have been cheaper to send each passenger in a rented limousine. Even though subsidies have come down to about $300 million a year, Via still needs 33 cents of government money for every kilometer is carries a passenger.

The same sort of economic silliness troubles commercial rail. Under the name of the Western Grain Transportation Act (WGTA), rail companies got $779 million in federal money in 1991 to carry grain from the Prairies to distant harbours. Ottawa put these subsidies in place because an earlier scheme known as the Crow's Nest Pass Agreement was falling apart. Under the Agreement, rail lines had to keep rates to grain shippers low and steady. The rail lines were expected to make up their losses by charging other commercial customers high prices. In other words, the rail lines taxed some of their industrial customers to give farmers a cheap ride. By 1981 farmers were paying only 19 percent of the true cost of shipping their grain. For the rail lines, the only way out of this mess was to neglect their Prairie rolling stock. This gave them an excuse to limit service to their Prairie customers. The rail lines were not being cruel or negligent. They were listening to what consumers of grain were telling them: "We are not ready to pay you a premium so that you can carry Prairie grain to our bakeries." Consumers put a lower value on Prairie grain than it cost to grow it and carry it to them. Instead of letting the market close down an activity people did not value, Ottawa passed the WGTA in 1983. This Act got the grain rolling again by covering the rail lines' losses.

Professor Bonsor's essay explains that regulations may do as much harm as subsidies. Government is crippling the commercial rail industry by refusing to let the major rail lines abandon unprofitable tracks. Rail carriers are only allowed to abandon 4 percent of their tracking every year. CN estimates that 66 percent of its track carries only 10 percent of its traffic. At CP, 54 percent of the track carries 3 percent of its traffic. This surplus track is like a weight on the rail lines that slows them down in their competition with American carriers. Small private companies seem willing to snap up abandoned tracks and operate them as "short-line" services. But government is slow to approve the entry of short-line operators. Unions also make it hard on short-liners because they want to pass on to their new employers the extortionate contracts that bound CN and CP. Canadian taxpayers and rail users end up paying the price for lines that almost no one needs.

Things are more encouraging in the trucking industry. Direct subsidies there are low and regulations are dropping away. Canada had no choice but to follow the U.S. when it opened the trucking industry to competition in the 1980s. The main problem the industry still faces is that trucks pick up a hidden subsidy when they roll on roads the government pays to build and maintain. This subsidy further confuses the signals that might guide consumers of transport services in a wise choice between truck and rail. Prices and economic reality in both industries have parted ways. Professor Bonsor's masterful essay explains how we can bring them back together again.

Greased lightning

Gillen, Cooper, and Bonsor are critical of government's ability to manage transportation. But they believe that Ottawa's attitude toward truck and ordinary rail is becoming more realistic than it was. These authors give the reader hope that things can get better. However, Richard Soberman's piercing critique of high-speed rail suggests that an air of fantasy still hangs over some fields of transport policy.

High-speed rail is a glamorous hoax that Canadian politicians are slowly falling for. In recent years, interest groups have pressured Ottawa to build a high-speed rail line between Windsor and Quebec. Via Rail, Bombardier, environmentalists, train nostalgists, and a brood of transport consultants are telling politicians that Canada needs high-speed rail to pump up commerce between Ontario and Quebec. Their lobbying follows a familiar pattern. Make the case that there is a service the economy needs. All it will take is a little push from government to get things rolling. The benefits to commerce will more than balance the costs to taxpayers. The "little push" in this case is $1.6 billion to cover nearly 1/3 of the $5.3 billion costs of building the high-speed line. This hype about high speed rail is like the story of nail soup. In this tale a man enters a house promising to cook a splendid soup with a simple nail he pulls from his pocket. All the host has to do is provide a few side garnishings of potatoes, onions, meat, and carrots.

If we look past the hype we may see that fast trains may not make economic sense. The French TGV is the world's glittering example of high-speed rail. It serves a dense corridor of passengers and brings them large benefits. But, according to an OECD study, the money they pay will likely never cover the billions of dollars the French government sunk to design and build the TGV. Perhaps this is why the private market in France let government bite the costs. Private investors in North America seem equally reluctant to put their money on fast trains. In 1994 a private consortium made up of Bombardier, GEC-Alsthom, and Morrison Knudson Corp. gave up their plan to build a high-speed rail line. They wanted $3 billion of state money to help fund the $7.5 billion line. The state resisted the pressure and wisely passed a law forbidding any funding for the project.

Soberman's essay makes fascinating reading for taxpayers who want to understand what they will be funding if they get a high-speed rail line. His essay is also a rich source of ideas for policymakers who want to know what it would take to make high-speed rail a good investment. In order for a 200 kmh line charging $100 for the trip between Montreal and Toronto to break even, 4.7 million passengers would have to travel that line each year. This is 128 percent of the combined 1987 VIA, bus, and airline traffic along the same route. Instead of losing ourselves in such reveries, Soberman argues that government should look at whether there are cheaper, more sensible ways to upgrade our passenger rail lines. With some minor changes to our existing lines we may get faster trains that at least pay their own cost. These trains may not be as fast as the French TGV, but neither will they drain our pockets as quickly.

City of hope

The essay by Wendell Cox and Jean Love explains that cities are the last holdouts against the modern ideas that are sweeping through other fields of Canadian transport policy. Privatization, desubsidization, and deregulation are not welcome words to municipal planners. Their resistance to change is something to worry about because cities generate most of Canada's economic growth. The federal government seemed to acknowledge the importance of cities in 1993 when it launched a program to rebuild their infrastructures. Ottawa poured money into cities and sat back to watch the concrete flow. What no one seemed to mention is that concrete and other hardware are only part of what makes a city infrastructure. Management and attitude are equally important ingredients. The attitudes of the cities have been bad and federal handouts will probably make them worse.

The problem with many municipal governments is that they manage the city's transport services but face no clear bottom line. Buses and subways make losses because they pay too much money to their unions, and pay too little attention to their customers. Captive local taxpayers and sympathetic federal politicians are there to pick up the bill for this negligence. The easy money from these two sources numbs local leaders to economic realities. It is easy to risk $183 million on a high-technology Light Rapid Train (LRT) if you know someone else will be paying the bill. The city of Edmonton took this risk in the early 1980s and is now stuck with a technologically superior economic turkey. Alberta taxpayers are stuck with the bill.

Cox and Love explain that insulation from the bottom line has blinded cities to trends in urban transport. In large urban areas, suburbs make up 73 percent of the population. The city makes up only 23 percent of the population, and every year fewer people go to work in the city. This pattern of population means that trains are out and buses are in. Trains are good for serving a dense city core where many people travel. When the city core is no longer so dense or so popular, buses running along special routes are the best solution. Such "busways" can be built for 1/10 the cost of urban rail systems and provide citizens with better services than city trains. In spite of these advantages, Canadian cities stubbornly push for rail. Vancouver and Edmonton are two recent examples of cities where the urban rail obsession is strong.

These obsessions might not be serious if urban rail at least helped to unclog city roads at some reasonable cost. Evidence from the U.S. is depressing on this point. John Kain of Harvard University has estimated that the annual cost of attracting a new transit passenger on a rail system proposed for Dallas would be more than $55,000. This is enough to buy a new sportscar for each new passenger, every year. Results from other studies around the U.S. look pretty much the same.

An obsession with rail transit is not the only problem cities face. Every type of transport service Canadian cities provide is coming at too high a cost. Between 1970 and 1990 transit costs per kilometer travelled rose by 36 percent after taking inflation into account. Put differently, by 1990 transit systems spent $650 million more than would have been necessary to produce the same level of service if costs had been maintained within the inflation rate. Cost have increased because cities have insulated their transit systems from the need to meet a bottom line.

To the bring bottom line back into view, cities should either privatize their transit systems or contract out all services. The savings from contracting services out can be large. London's bus costs have fallen by 25 percent (adjusted for inflation) since competitive tendering began in 1985. Cox and Love challenge us to think about a Canada which might one day have the same good fortune as the British did when they decided to let the private market put transit back on track.

No pattern to the policy

Readers of the essays in this book may become frustrated to learn that there is no well-planned government policy that guides Canadian surface transportation. Lack of a policy is not alarming provided that government follows some principles. The principles laid out in this book suggest that government should try not to confuse the market by playing with the prices of transport services. Privatizing, deregulating, and desubsidizing are not the only ways to do this, but the evidence suggests that at the moment they are the best guides to follow.

- Filip Palda

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Last Modified: Wednesday, October 20, 1999.