Canadian Arctic Railway
Presented By: David Broadbent-President & CEO
Introduction
On behalf of the Canadian Arctic Railway we would like to thank the panel for
opportunity to make this verbal presentation. We offer a unique perspective on
several of the issues under consideration by the panel. Our perspective is unique
because in the short term we are planning to construct a new regional railway
across the Yukon, connecting Alaska to the existing North American railway
system. We are at the initial stages of our efforts, and are seeking private
financing for our capital needs.
In the long run we are committed to developing an heavy haul rail network in the
Canadian Arctic to facilitate the economic development of our rich northern
resource base as well as provide an enhanced living standard with increased
economic stability for our northern communities.
The Canadian Arctic Railway is a federally incorporated company with its head
office in Port Coquitlam, British Columbia.
Presently work is being carried out for project definition to define a route through
the Yukon with a connection to Alaska. This route would require the construction
of approximately 1800kms of new line and could be completed in 3 to 5 years
depending on the approval process. Once startup funding is in place economic
and environmental overviews of the total project will have to be carried out so
efforts can be focused on this initial route.
It is envisioned that the funding for the project would come primarily from the
private sector with the opportunity for some sort of public/private partnership to
deal with such issues as land use. By the completion of the project definition for
the first route a formula for first nation involvement will have been finalized,
environmental reviews will have been completed, construction permits will have
been obtained, and construction would start.
The project definition will require the establishment of approximately a 100-
person development team in Whitehorse, Yukon. Department heads have
already been recruited to set scope and goals for the project definition phase.
Recruiting for the full development team will commence upon obtaining initial
startup funding.
Depending on the construction standard selected, railway lines in Arctic regions
could be built for an average of between $300,000 & $400,000 per kilometre for
developmental standard and between $1,300,000 & $1,900,000 per kilometre for
mainline standard including bridges but not including any major tunnel work. The
projected economic outlook will be the essential ingredient to set the initial
standard to be used during construction.Canadian Arctic Railway
Not to be taken lightly, this would be a massive undertaking, with potential
positive effects for the whole of the Canadian and American economies. It is
envisioned at this stage to involve primarily private sector financing for new
construction. We are pursuing involvement of the governments through potential
issuance of land use rights from unused or undeveloped government crown
lands as well as assistance facilitating the environmental and aboriginal approval
process.
General Discussion:
The general perception even by many experienced railway people is that
railways are too expensive to build. The truth is quite the opposite, railways can
be built to many different standards just as roads can but on a much smaller
footprint and railways have residual value in so called non-perishable materials
such as rail, spikes, tieplates, etc. Another general perception is that railways
require much more stable soils conditions to be built; again the truth is quite the
opposite, railways can be constructed over terrain that would be too difficult or
near impossible for any other form of ground transport to negotiate. Railways
can negotiate permafrost year round better than any other known form of ground
transport not only because a properly built grade insulates the frost from ever
thawing but also the track section (including rail, ties, tieplates and ballast)
creates a large heat sink to dissipate the heat generated by wheel/rail contact
before it penetrates through to the subgrade. To put this all into perspective the
Russians have been servicing the city of Murmansk (pop: city-700,000, region-1.3million)
with primarily a rail link over hundreds of miles permafrost for over 85
years. Murmansk in latitude is slightly north of Tuktoyaktuk. Other major Russian
Arctic cities such as Archangel have also been serviced primarily by rail for many
decades.
Railways are essential to the Canadian economy, as a nation on a per capita
basis we have more mileage of track and carry more tonnage by rail than any
other nation on earth. The modern Canadian economy has been built over the
past 115 years on the backbone of our superb rail network. Even so the rail
network has only been developed in the southern third of Canada’s landmass.
We at Canadian Arctic Railway believe it is time to expand our rail network into
the northern extremities of our landmass to bring economic stability to the region
and allow the controlled development of our rich northern resource base in an
environmentally acceptable fashion.
Canada has very effectively used its rail network for developmental purposes in
past. We concur with the Government of the Yukon that the transport
infrastructure should be part of the economic development of the Arctic regions
and that there is a significant planning and support role to be played by the
Federal Government.
Nearly every other major nation on earth except Canada and the United States
are expanding not contracting their rail networks. This does not bode well in a
global economy where we risk falling behind, considering transportation costs are.Canadian Arctic Railway
one of the key elements in global trade and Canada depends on exports for our
very existence as a sovereign nation.
Presented By: Walter Young- Executive Vice President
The issues we would particularly like to comment on include:
- Access
- Competition
- Commercialism.Canadian Arctic Railway
- Railway Development
- Future Vision + Policy
In order to set the stage for our comments, it is worthwhile to step back,
and comment briefly on deregulation of transportation in both Canada and the
United States.
Canadian Context
Since the implementation of the National Transportation Act of 1987 the
following has been achieved in Canada.
1. The Canadian National Railway was privatized;
2. Federal Transport subsidy programs have been eliminated;
3. The combined national railways revenue per ton-mile has declined
35 percent;
4. Operating ratios have improved significantly, i.e. efficiency is
improving steadily.
Clearly the deregulation and competitive atmosphere of the NTA 1987 and the
CTA 1996 have succeeded in meeting the policy directives established by the
Federal Government.
The U.S. Context
Rail regulatory policy, or rather deregulation, accruing with the Staggers
act of 1980, was instrumental in the recovery of U.S. railroads from the financial
difficulties of the 1970's.
We would ask the panel to consider the American railroad situation prior to
the 70's when overly restrictive regulation was in place. The level of regulation
clearly did not foster commercial market forces, competition, or financial health.
In addition it would be instructive to exam the rate mechanisms that were in place
at the time. Rates were established in broad rate groups such that, for example,
a carload of lumber moving from Vancouver to Chicago would move at the same
rate, regardless of the actual routing even when drastically different routings over
various railways were possible.
We ask the panel to consider this in the face of calls from some quarters to
impose rates based on average revenues per ton-mile, for similar commodities.
This approach has not worked in the past and is not a recommended solution for
the future.
Issues Review.Canadian Arctic Railway
Access
A review of the panel's Interim Report on Competitive Rail Access, and
reading of the various position papers has heightened our awareness of the
issue. We believe we can add a unique perspective in that Canadian Arctic
Railway has not yet been constructed. Imagine you are meeting with potential
financiers. They of course are looking for a return on investment that is sufficient
to persuade them to invest in the railway in preference to other projects. You feel
obliged to disclose that once constructed and operational, others may have the
right to run over, force the movement of traffic, and demand service. All at
Federally regulated rates. These rates may not provide the commercial returns
necessary.
We would strongly suggest that in order to establish a new enterprise we
must have the commercial freedom commensurate with the "risks" of the
undertaking. Providing shippers with so-called competitive access to Federal
railways will only erode the ability of these railways to maintain commercial
viability.
Traditional running rights have always been possible between railways as
a matter of negotiation. We believe that running rights, in various forms, should
be the subject of direct discussion between operating railways. To the extent that
a change in the current Act is necessary, we would encourage the panel to
consider access a matter between railways, whether Federal, regional, or
shortline.
Competition
The panel has heard a great deal about competition and must wrestle with
the question of whether re-regulation or commercial freedom will achieve the
desired result. Competition, in and of itself, will not ensure a viable transportation
system. The panel has recognized the various forms of competition faced by
railways, that is, intermodal, intramodal and market or source competition. As
you examine the issues involved, we would urge you to take the perspective of a
railway operator. Not only are you faced with the task of growing the top line i.e.
revenue, you must build and maintain market share, and price all traffic in such a
manner that you recover your operating costs as well as a return-on-investment
sufficient to sustain the enterprise.
Pricing of traffic is an issue that receives a great deal of attention within
railways. When a new project comes along that will generate revenue and new
business, there is enormous pressure to competitively attract the business.
Small changes in pricing can and do make the difference in the selection of the
transportation provider. Therefore, those responsible for pricing decisions
become acutely aware of competition, and this is all part and parcel of the
negotiations between carriers and shippers. Pricing is a very sensitive matter,.Canadian Arctic Railway
and no executive wants to report to his Board of Directors that they lost a
contract by a narrow margin. They lost not only the margin but also all of the
revenue from the contract.
The forces of competition are present and working effectively under the
current act. A continued commercial/negotiated approach to providing
transportation will better serve Canada than increasingly detailed regulation.
Commercialism
Regulatory changes in Canada, privatization of CN, and elimination of
transport subsidies, have made the transport industry more responsive to the
marketplace.
We support the proposition that railways and rail freight users look to the
marketplace, and not to government, "for signals as to how to conduct their
commercial relations and move their products". (Interim Report)
Interswitching provisions within a 30 km radius are a reasonable proposition,
notwithstanding the national roads may find the prescribed rates inadequate.
Running Rights
Current provisions permit Federally Regulated Railways to apply to the
Agency where a commercial agreement cannot be negotiated. We would
suggest that this provision be extended to regional and shortline railways, with a
continue reliance on commercial negotiations between railways (with an appeal
process based on Commercial Arbitration).
Competitive Line Rates
It would appear that since 1988 only 5 applications have been made for
relief. Shippers see the "substantial commercial harm" (section 27), and
"commercially fair and reasonable rates" (section 112) of the CTA 96 as an
unnecessary barrier to Agency relief. We would suggest that these requirements
are appropriate for deregulated enterprises, and are in essence a commercial
threshold similar to that in place in the U.S.
Level of Service
Our only comment regarding the level of service provisions is that there is
linkage between pricing and level of service. Shippers naturally want the "higher"
levels of service at the "low" rates. These are matters for give and take in the
negotiations between railways and shippers. The CTA requires that railways
provide a common carrier obligation of "adequate and suitable accommodation",.Canadian Arctic Railway
yet also provides (section5) that competition and market forces are the prime
agents in providing viable and effective transportation services.
The right to-a-rate
This provision has only been used once since 1988, and therefore should
be eliminated.
Final-Offer-Arbitration
As a means of resolving disputes with carriers over service or rates,
Canadian Arctic Railway supports an independent arbitration process. We would
suggest that a commercial arbitration process would be more appropriate than
final-offer-arbitration.
Confidential Contracts
The migration of a majority of rail traffic to movement under confidential
contracts is testimony to their effectiveness in establishing commercial relations
between shippers and carriers. We suggest confidentiality is paramount to
maintaining competitiveness in all its forms and should remain a cornerstone of
the Act.
Future Vision & Policies
Regarding a vision for the future we believe that a broader context is
required, and that policy horizons should look beyond the current economic
cycle. The encouragement of economic development and new enterprise in
various regions of the country remains a worthwhile policy goal, along with
sustainability.
Again, from the Canadian Arctic Railway perspective, we find the current
act does very little to encourage new railway enterprises. The act seems to
provide solely for the establishment of so called shortline railways to operate
abandoned branch lines, hardly the ingredients for a viable short or regional line.
The lack of viability is evidenced in recent years by the takeover of shortlines by
larger conglomerates such as Omnitrax and Rail America. We suggest that if
Canada truly wants to develop a vibrant shortline/regional railway industry then a
number of steps need to be taken that would encourage a flow of investment and
capital to these enterprises.
Consider for the moment a number of financial incentives that could be
utilized to support the development of new or existing railway initiatives. These
might include flow-through share issues, which provide tax benefits for
shareholders for a number of years, as in the oil and gas industry. Other
mechanisms could be examined for potential application to railways or other
modes, for example; railway development bonds, improved capital cost.Canadian Arctic Railway
provisions, fuel tax relief based on environmental effectiveness, or a tax regime
similar to exploration and depletion provisions in the natural resource industries.
Such measures would contribute to the sustainability of transportation in
Canada and recognize that major enterprises move through various stages from
development to maturity. In particular, a developing and vital shortline/regional
railway system will contribute greatly to the economy of the country and in
combination with the National Railways will ensure transportation systems that
meet regional, national, and international requirements.
Summary Comments
We thank the panel for the opportunity to present our comments and trust
they have been helpful. We would summarize as follows:
1. Canada's transportation policy should continue to hold out
commercial freedom as an essential ingredient.
2. The transport act, as it pertains to railways, should maintain the
interswitching and confidential contracts provisions, while opening
up negotiated running rights between short line, regional and
national railways. Commercial arbitration should be substituted for
final-offer-arbitration.
3. The development of shortline and regional railways should be
encouraged through tax related, time limited, incentives.
4. Canada's vision for a viable transportation policy should extend far
beyond the horizon of the current business or economic cycle.