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<< PREVIOUS CHAPTER | TABLE OF CONTENTS | NEXT CHAPTER >>Chapter 3
Guiding Principles and Themes for a Review of Transportation Issues and Policies
This chapter offers an overview of the Panel's approach to the issues, along with some of the common themes that arose in the course of the review. Subsequent chapters focus on specifics, often in relation to one mode. But the Panel tried to apply a consistent approach in reviewing issues and recommending action for all modes, guided by the principles described here.
Principles and Themes: Finding the Starting Point
Panel members brought to the process a range of experiences and perspectives. Over a period of months, however, consensus on several fundamental elements developed as a result of the consultations, submissions, discussions and debate. The main goal guiding the Panel was an efficient and effective transportation system, but other principles and themes emerged to complement and further this goal. What follows is a synopsis of these guiding principles and themes. The ideas are elaborated in the next section in relation to transportation issues and policies generally. Readers will also find the principles and themes permeating the discussion of specific modes and issues in the remainder of the report.Competition: The best means to an efficient and effective system is to rely on market forces. Ideally, competition is fostered through commercial means. There may be some situations, such as low-density or captive markets, that warrant targeted forms of regulatory intervention, but regulation should be used only to solve instances of market failure.
Pricing: Sending the right pricing signals to transport users will lead to the right amount of use and the right distribution among modes. Pricing may not be everything in making the system function well, but it is a key element. Public policy experience around the world demonstrates that the wrong pricing signals send objectives off track. Sending incorrect signals leads to inefficient infrastructure investment, industry production and location decisions, compounding inefficiencies over time.
Harmonization: Creating a 'seamless' transportation system faces many complications and barriers, including diversity in modal technologies, organization and provision of infrastructure, regulations, and levels of government oversight. Wherever possible, potential technical or institutional conflicts should be minimized or eliminated, especially given the strong link between trade and transportation. The Panel believes that harmonization or compatibility in all facets of transportation among countries (and within countries) is a policy imperative that should be supported and facilitated by legislative mechanisms.
Transparency: Information is essential for both government accountability and competitive markets. Citizens are both taxpayers and consumers, and the more they know the better. The Panel was struck by the limited amount of public data on transportation system functioning and performance. The result of greater access to information will be a transportation system that functions more efficiently and is more responsive to the needs of users and service providers.
Flexibility and Adaptability: The life cycle of legislation and regulation is often measured in years and decades, while markets, technologies and people change much more rapidly. The regulatory environment for transportation must be responsive to this ever changing world, and efforts must be made to adapt solutions rather than trying to create one-size-fits-all solutions.
Self-Executing Policies and Regulations: In developing public policy to facilitate a more efficient transportation system, government should design legislation in such a way as to encourage parties, to the extent possible, to mediate their own disputes, police their own problems, and measure and report on their performance. The requirement for detailed and expensive regulatory oversight should be avoided as far as possible.
Simplicity and Practicality: Throughout the Panel's review, the optimal approach was to choose options that were simple in concept and practical in application. In most cases this meant opting for the least interventionist solution and relying on market forces to deliver public policy goals. At the same time, the Panel was wary of proposals that were too simplistic relative to the complexity of a given problem or circumstance.
Applying these principles is often a question of balance — principles may overlap or conflict in different situations. The Panel sees the role of public policy and legislation as not necessarily to decide on the balance that should prevail in any particular situation. Rather it should be to create a commercial, civil, legal, and regulatory environment where such balances can be promoted according to the circumstances of those most directly concerned. The next section sets these sometimes abstract principles in the context of the Panel's work and national transportation policy generally.
The Objectives of National Transportation Policy
The seminal role of the MacPherson commission was described in Chapter 2. The commission drew a distinction between national policy and national transportation policy. National policy refers to the broadest goals: achieving a national identity and unity, economic development but accompanied by concepts of equity and justice, social welfare, and so on. Transportation may play a role in reaching these objectives, but the focus of national transportation policy is the health and performance of the national transportation system. The MacPherson commission recommended thatthe objective of a National Transportation Policy shall be to ensure that the movement of Canadian goods and people is effected in a manner which utilizes fewest economic and human resources. This is merely to say that, given the preferences of those people who wish to move themselves or their goods, the movement shall be accomplished as efficiently as possible.This recommendation was adopted in the National Transportation Act of 1967:
It is hereby declared that an economic, efficient and adequate transportation system making the best use of all available modes of transportation at the lowest total cost is essential to protect the interests of the users of transportation and to maintain the economic well-being and growth of Canada...Subsequently, the National Transportation Act, 1987 and the Canada Transportation Act of 1996 were explicit in stating that the way to achieve an efficient system was to rely on market competition as far as possible:
competition and market forces are, whenever possible, the prime agents in providing viable and effective transportation services... (section 5 of both acts)Regulation or other public action is called for where competitive forces are lacking.
By and large, these principles have guided transportation legislation and policy for more than three decades, although some principles have evolved very slowly for some modes. The Panel agrees: the central goal of national transportation policy is an economically efficient transportation system making the best use of all modes at lowest cost. As noted in Chapter 1, however, there is more to transportation than economics.
Legislative change in 1987 and 1996 brought several additional considerations into the statement of national transportation policy, including safety, accessibility to people with disabilities, and regional development. Additional objectives were suggested during the Panel's consultations: environmental goals and sustainable development, efficiency in energy use, co-ordination and integration of modes, and policies to sustain rural communities.
The Panel is acutely aware of the need to balance the fundamental goal of an economic and efficient transportation system with other benefits from the system through constraints or public obligations imposed on it. These issues arise at several points in this report.
Reviewing Transportation Issues and Policy: A Compass for the Journey
Subsequent chapters are structured by mode or questions from the Panel's terms of reference. This was a convenient way to address specific issues and make recommendations. Some themes are common to all modes and chapters, however. This section summarizes these themes, which together provide a compass indicating a consistent direction across modes for future legislation and policy.
Competition and Regulation
The Panel concurs with the current policy statement that the goals of transportation policy are best achieved by relying on market forces and competition as far as practicable. Competition takes various forms, including intramodal, intermodal, and market or geographic competition. But some competitive forces are stronger than others. Very limited or restricted competition is different from the market ideal.Where market structure restricts or prevents competition, government and industry should look for ways to promote competition and/or introduce regulations that attempt to simulate efficient competitive market outcomes. Where regulations are required, these should be as simple and cost-effective as possible. Regulatory mechanisms should be available in appropriate circumstances, but there should be incentives for parties to settle disputes commercially rather than to appeal immediately for regulatory intervention. Where regulatory decisions are necessary, the Panel believes regulators should have broad guidance or criteria to help them in their deliberations.
A commercial system requires that firms earn sufficient revenues to cover all costs, including long-run capital costs and return on investment. But even competitive markets do not guarantee survival; this depends on a firm's efficiency and on larger market forces that influence overall price levels and survival prospects, even for efficient firms. Where regulation is involved in determining prices and service, the complex cost conditions that underlie network industries make regulation inherently difficult and contentious. There is a role for differential or value-of-service pricing in reaching financial viability, but the need for such pricing does not imply complete freedom for suppliers of transportation services. Regulation is warranted where competitive forces are weak or lacking. Governments must weigh the benefits of intervention for users against the financial needs of carriers. These issues are taken up at length in subsequent chapters. They arise mainly with rail transportation, but the principles apply to other modes as well.
Pro-Competitive Policies
Arguments for stimulating competition rather than relying on regulatory intervention — that is, searching for pro-competitive actions instead of regulatory measures — received considerable attention in submissions to the Panel. One of the issues assigned to the Panel was the concept of 'competitive access', specifically for rail track. This would require that firms that own strategic infrastructure accept access to those facilities by would-be competitors. It is a highly controversial concept, and for good reason. It is potentially a real pro-competitive device, but it also raises fundamental questions about justice (property rights), operational co-ordination (safety concerns), and practical economics — notably owners' incentives to continue to invest in and maintain shared facilities. The concept of competitive access is explored at length in Chapters 4 and 5, but two points should be noted here.
- First, competitive access is not only a rail concept; it could arise in other modes whenever there is a need or an opportunity for competitors to share facilities.
This is why airports and ports are supplied by public agencies, not by air carriers — to ensure they are available to multiple carriers. Other potential access issues in air transportation include concerns about access to airport slots and gates that are already occupied by a dominant carrier and access to the dominant carrier's feeder network.
Similarly, most ports are common-user facilities, in part to prevent dominant carriers from forestalling competition from smaller carriers. The Panel has tried to be consistent in how such policies might work in the rail industry as well as in other modes.
- The second general point about competitive access is that it is not a non-regulatory solution to a lack of competition.
If access is provided, extensive regulation is required to oversee conditions of access and the price, to monitor safety and operations, and to settle disputes. Whatever the shortcomings of regulation versus relying on markets, they will carry over to a competitive access regime. Hence, an exploration of competitive access regimes must pay close attention to the implications for the regulatory agency and to the feasibility and cost of administering competitive access policies, whatever the mode.
Public Infrastructure and an Efficient Transportation System
Transport Infrastructure Investments and Economic Growth
The importance of transport infrastructure investments for economic growth has long been recognized. There was a surge of interest in this subject during the 1990s, following studies that correlated the proportion of public spending on infrastructure with economic growth.1 In this context, participants in the Panel's consultations often pointed to infrastructure spending in the United States under its Intermodal Surface Transportation Efficiency Act of 1991 and Transportation Equity Act for the 21st Century of 1998 (known as ISTEA and TEA-21).The Panel heard calls for similar expansion of public infrastructure programs in Canada. Transport infrastructure investment will be important for the country and its regions. At the same time, these investments do not guarantee economic growth; they must be targeted to where the conditions are right, where complementary resources are present and market developments are taking place. Management and decision frameworks must be in place to foster investment where it will produce the greatest overall return. It is not the Panel's mandate to evaluate specific infrastructure projects, but rather to review economic prospects and institutional frameworks to see whether they will facilitate the level and type of investment needed to sustain, expand and advance the transportation system. This theme recurs in several chapters.
Objective Infrastructure Provision and Funding
Infrastructure provision also affects the competitive balance of transportation modes. As explained in Chapter 2, the modes differ in the extent to which governments fund infrastructure investments and those investments are recouped from user charges.One interpretation of the dramatic shift in policy direction on infrastructure funding and user charges in the late twentieth century is that it was intended to enable more objective decisions, moving to regimes where infrastructure is paid for by users and investment in it is linked directly to user support. For railways, this was manifested in reduced regulation, elimination of subsidies, privatization of CN, and permitting rationalization of lines.
For air transportation, air navigation was devolved to a user-controlled 'quango' (quasi-autonomous non-governmental organization) to provide these facilities and pay for them. Large airports have been devolved to local authorities answerable to the community, and the airline industry has been largely deregulated (although issues of regulation have re-emerged in the airline sector; see Chapter 7).
For water transportation, although debate continues, the major ports are shifting to greater local control, the Seaway authority is now commercial, and — again the object of some controversy — navigation aids and facilities are subject increasingly to user charges.
The Panel concurs with these moves to link infrastructure investment and funding more closely, or even to permit direct control by users; indeed, we sought to refine and make these systems even more accountable to users. The Panel also believes this approach should be extended to roads and urban transportation. This direction is vital to improving the transportation system, and we see a role for federal leadership. Squabbles between federal and provincial governments over road funding and regulatory issues are well recognized by road users and are a regular source of complaint. Some parties believe strongly that taxes, fees, and other charges collected from transportation infrastructure users should be invested in maintaining and building that infrastructure. Users and provincial governments urged the Panel to help articulate a vision to overcome the current impasse. These issues are taken up at some length in several chapters.
The Panel believes that the transportation system will evolve most efficiently once more appropriate pricing signals are set and, under the direction of users and market incentives, applied to all modes. This report suggests ways of moving toward such a framework.
The Problem of Low-Density Markets
Some markets cannot support more than one transportation supplier. Examples include bus or air service to a small or even medium-sized community, or rail service on a branch line. The ideal is competition among suppliers, but a commercial firm has to generate sufficient revenues to sustain the provision of service. There are at least some economies of scale, so low-volume markets may not be able to support more than one carrier.These markets are not necessarily hostage to the supplier; an established carrier could be displaced by a more efficient rival. This is the concept of 'contestable markets'. The threat of market entry may be sufficient to prevent a sole supplier from exploiting what appears at first glance as a monopoly position. Removing or minimizing barriers to entry can facilitate this form of competitive pressure. Competitive forces take time to work, however, just as regulatory intervention does. For low-density markets, there may be periods when prices rise and/or service deteriorates from a competitive level, and it takes time before corrective forces — the market or regulation — can intervene.
Where markets are 'thin' and/or competition is absent, governments try to substitute regulation. But like markets, regulation is imperfect. Regulation brings costs — administration, delay and potential new sources of inefficiencies. It is a matter of balance and judgement whether regulatory intervention can compensate for the lack of market competition. It may not be practical to bring regulatory relief in all circumstances, including where traffic volumes are small.
The inability of small markets to support much competition is even more of a problem when it comes to infrastructure. All infrastructure exhibits at least some economies of scale; sizeable initial investments are required, especially relative to potential traffic volumes. As a result, full cost recovery from local users might not be realistic. The economics of larger volumes make cost recovery a practical policy for larger markets, but not necessarily for small ones.
No one suggests limiting infrastructure to what can recover its full costs. Social and political considerations require providing access and other services to residents in remote and low-density regions. But trade-offs are inevitable. The same level of accessibility and services, for example, will not be available in low-density markets. This problem is particularly challenging for a country with vast territory and limited population. Until recently, subsidies to infrastructure in low-density regions have been considerable. But as we move toward commercializing infrastructure supply where feasible, the problem of providing and financing infrastructure where there is little scope for cost recovery and self-finance becomes more visible. There is no immediate answer to the question of what the minimum or desirable level of support for low-density regional infrastructure is or how it should be financed. These challenges have existed throughout Canada's history, and they exist at all levels: national, provincial/territorial and municipal. Optimal infrastructure investment and financing where it is not commercially viable should attract considerable examination and debate in the coming years.
New Influences on Transportation System Efficiency
While not entirely new, two recent developments warrant greater recognition in national transportation policy:
- the importance of incorporating environmental costs in identifying the most efficient transportation system, and
- the constraints on policy design that may arise because of the significance of international and, particularly, continental trade.
In principle, in an economically efficient transportation system, both users and suppliers recognize the true costs. Just as public provision of facilities without adequate charging distorts users' choice of modes, failing to recognize environmental costs results in a less efficient transportation system and lower standard of living. This is particularly true for urban transportation, where it is clear that automobile use, especially during peak periods, imposes costs beyond those recognized by users and where transit prices are deliberately subsidized, partly in an attempt to counter the distortion of under-priced urban car use.
Incorporating environmental charges is not easy; there are controversies in establishing dollar values for them and figuring out practical ways to implement them. But the Panel believes that steps in this direction are needed to improve the economic and social performance of the transportation system.
The second issue that has emerged recently is the significance of international trade. Canada has long been a trading nation, but recent decades have seen international trade, especially with the United States, become even more important. With more trade crossing borders, the performance of the transportation system affects how well Canadian industries can compete. Moreover, the transportation system itself often competes directly with that of other countries. The policy and regulatory regime must therefore neither favour nor hinder transportation relative to other industries.
The economy and national standard of living will best thrive if Canadians can work in industries and services where they have comparative advantage. If transportation is taxed more heavily than other domestic industries, this puts the transportation system at a competitive disadvantage. Similarly, given growing trade and integration with Canada's large neighbour to the south, greater mutual consistency of policies may be needed, even if they deviate from what would have been optimal in a perfectly competitive world. This is not a hard and fast rule, but it is a consideration of growing importance.
Accountability and Transparency
Whatever the policy, the Panel believes that the level of public debate and sometimes even corrective action would be facilitated by greater visibility of transactions. Greater availability of data would foster additional private and public policy analysis.The Panel has attempted to suggest regulatory frameworks and infrastructure provision that would be more open to public scrutiny, along with the types of information that should be collected as a matter of course and made available for analysis.
Using Transportation to Achieve Non-Transportation Objectives
Transportation is a pervasive presence in the economy. It links industries and regions and trade. It is how goods and people move about in cities, cross the nation and travel abroad. Transportation is part of the economic base of regions. Because of its pervasiveness, transportation is sometimes seen as a means to achieve non-transportation goals, such as regional development, political integration, improving quality of life by enhancing mobility, and adding to interregional income transfers. Transportation investments or policies might play a useful role in some circumstances, but the Panel is generally skeptical about trying to use transportation to solve social or economic problems that go much deeper. The Panel concurs with the MacPherson commission's distinction between the broad goals of national policy and the more specific goals of national transportation policy. Like the MacPherson commission and subsequent inquiries, this review looked at transportation policy and its attendant legislation. Even if certain transportation policies can be used to achieve social goals, an efficient system is the appropriate foundation on which to base the pursuit of broader national policy goals through transportation.Achieving Balance
Convenience dictated a modal approach to drafting the Panel's report, but as far as possible, consistent principles and approaches were applied across the modes. The goal is an economically efficient transportation system. This implies efficiency within modes and across them. For all modes, the Panel prefers to rely on competition and market or commercial mechanisms if possible. If regulation is required, we looked for regulation that was cost-effective, that aimed for efficiency and that did not distort the efficient balance between modes.
For public infrastructure, the Panel sought rules and practices to foster an efficient balance across modes, along with mechanisms to promote efficient levels of public investment, efficient management and use of the infrastructure, and user charges that reflect investment costs. Accountability and management of infrastructure were important concerns in all modes. The Panel looked for policies and mechanisms to ensure that the presence of differing levels of public expenditures on different modes does not distort efficient use of those modes. This was the principle first laid out in the MacPherson report, and national transportation policy has continued to evolve in this direction. The Panel believes it is the correct direction, and we explore ways of extending this principle to roads and urban transportation while also taking into account the need to provide infrastructure for low-density markets.
In sum, while the Panel is comfortable with the central objective guiding Canada's national transportation policy for the past few decades, many issues require balance. There are trade-offs between efficiency and other goals. There are trade-offs between the benefits of regulatory intervention and the costs that accompany it. In the remainder of this report the search for the appropriate balance is apparent in many situations. The Panel does not have all the answers but endeavours to shed light on how national transportation policy and legislation should be amended to deal with these considerations.
Notes
1 The initial studies that received wide attention were by D.A. Aschauer, "Is Public Expenditure Productive?" Journal of Monetary Economics 23 (1989), 188-200; and "Does Public Capital Crowd Out Private Capital?" Journal of Monetary Economics 24, 171-188.<< PREVIOUS CHAPTER | TABLE OF CONTENTS | NEXT CHAPTER >>