Canadian railways to press for policy reforms

TORONTO — Canadian railroads need tax breaks and less restrictive regulation in order to achieve the productivity gains necessary to compete effectively against U.S. railroads, said Canadian National president and chief executive officer Paul Tellier.

Tellier, speaking to The Canadian Club of Toronto earlier this week, said the federal government should pursue such reforms for the good of the economy. Freight exports account for 35% of Canada’s gross domestic product, he noted, adding that rail moves 40% of all Canadian export products — more than any other mode of transport.

“Canada’s low-cost and highly competitive rail transportation supports the competitiveness of Canadian industry,” Tellier said. “If our railroads are not competitive, Canadian shippers are profoundly affected.”

Tellier outlined a variety of measures that have improved the company’s cost efficiency — CN’s operating ratio in the most recent quarter was 73.3%. And while productivity — measured in revenue per ton moved one mile per employee — at CN has risen by almost 70% in the past five years, the gains trail those of the U.S. rail industry by 30%.

To make up the difference, Tellier said Canadian railroads need public policy reforms on taxes and regulation.

“We pay 14% of gross revenues in taxes, compared to just 8% for U.S. railroads and 8% for U.S. and Canadian truckers,” Tellier explained. “We build our own lines on our own rights-of-way. We maintain and police our lines. We erect our own traffic signals and control the traffic flow. And we pay taxes for the privilege of doing all this.”

The federal Capital Cost Allowance is another concern. “American railroads can depreciate equipment in as few as eight years. Canadian railroads must wait as long as 30 years,” he said.

Tellier said regulatory changes introduced by the Canada
Transportation Act of 1996 are “inseparably linked” to roductivity and safety gains posted by Canadian railroads in recent years, along with the emergence of short-line railroads. But more deregulation is needed, he said.

“When the CTA comes up for review next year, some of the shipping community will speak against it,” Tellier said. “But they will have a difficult argument to make when you consider Canadian rail freight rates are among the lowest in the Western industrialized world, and that we are an industry that still does not recover its cost of capital.

“We must continue to deregulate.”

Tellier listed actions CN has taken to become more productive, including its merger agreement with Illinois Central and marketing alliance with IC and Kansas City Southern Railway. If approved by U.S. regulators, CN’s network in North America would resemble a giant “Y” transecting the continent from east to west and north to south.

Tellier also said CN is projecting capital expenditures of more than $2 billion by 2001, and is taking further steps to lower its cost structure by eliminating antiquated work rules, ending life-time employment security benefits, pursuing smarter procurement policies, abandoning and selling under-used track, and making better use of its assets.

Tellier emphasized that government intervention that benefits Canadian railroads also benefits Canadian shippers.

“A few years ago, there were seven big railroads in the United States. Now, after consolidations, there are four. … This has consequences for shippers and for CN,” he explained.

“The new efficiency of the Big Four will help their customers compete in new markets. We’re already seeing this, for example, in the competition that Quebec paper mills now face in the northeastern United States.

“Canada’s ports also have a very large stake. On both the Atlantic and Pacific coasts, shippers can choose among port facilities that compete against one another on the basis of cost and efficiency. Rail transportation to the interior is a critical factor. Canadian ports need railroad partners as efficient as those in the U.S.”