The Transformation Of The CNR

Backgrounder, Transportation, Frontier Centre

It is one of the Chr├ętien government’s least talked about policy successes. The renaissance of the Canadian National Railway offers a unique object lesson in good public policy. Taking the CNR out of the public sector allowed it to jump onto the success track.

Once regarded as the sad sack of continental railroading, the CNR is now on the verge of becoming the largest rail company in North America. It is already one of the most efficient.

A few short years ago, the company ranked seventh in size. Cobbled together out of several bankrupt railways and set up as a Crown corporation, it consistently lost money, despite the infusion of $17-billion in federal subsidies between 1945 and 1995. Like most government enterprises, it was sheltered from accountability and the need to perform well. Bent down with old debt, riddled with inefficiency and beset by labour strife, it seemed an irretrievable basket case. What happened?

Doug Young, then Liberal Transport Minister, decided enough was enough and put the CNR on the block. He scrapped the 100-year-old Railway Act and replaced it with the Canada Transportation Act, legislation which deregulated our railways, airlines and ports. It allowed rail companies to rationalize their activities, to play to their strengths and trim their weaknesses. At the same time, it opened the market on abandoned track to short-line companies, which have much lower operating costs.

Most important, it allowed the CNR to run as a business instead of a national employment project. It steers more traffic with less than half the staff and reduced its costs as a percentage of revenue from 95% to 72%. The remaining employees, who have racked up enormous gains in productivity, make more money and annual losses are a thing of the past. First quarter earnings for 2000 will top $250-million. These results also shatter the myth of the no-talent civil service, since the CEO behind the handiwork is Paul Tellier, a former senior federal bureaucrat.

It is regarded as one of the most successful privatizations in Canadian history: The sale of shares returned $2.2-billion to the government’s coffers. The original $27 stock routinely trades above $40 and shares split two for one last summer. No longer exempt from income taxes as a Crown corporation, the company now pays hundreds of millions in taxes.

Moreover, the CNR is expanding. Its acquisition of Illinois Central augmented the company’s southern focus, a smart move considering that north-south rail traffic is growing between 10% and 15% a year, while east-west traffic is increasing at a rate of only 4%. It hopes to merge with the Burlington Northern-Santa Fe Railroad, the most efficient carrier in the U.S. This will make the CNR — whose corporate headquarters and identity will remain Canadian — the largest railway in North America and make the combined system even more efficient.

The expansive pace of trade under NAFTA makes the efficiency rating even more important. Trade between Canada and the U.S. has grown almost 10% a year since 1992, while the economy has averaged only 4% growth. Since deregulation, Canadian freight rates have declined 35% and are the lowest in the world, about two cents per ton-kilometre. Lower shipping costs make our products more competitive and that makes us more prosperous.

Nevertheless, there is a hitch. Although the CNR expected a degree of political opposition to the merger in Canada, it never anticipated that an American regulator would interfere with the deal. And that is what happened. The U.S. Surface Transportation Board denied a request for speedy approval of the merger. The agency put it on hold for 15 months, while it studies the issue.

The STB’s concerns stem from the rapid pace of rail company-integration in the U.S. Since 1980, the provider pool has shrunk from 66 major carriers to seven, with only four servicing most of the market. Unfortunately, the CNR had counted on the quick action the STB has demonstrated in the past. The company is now challenging the delay in court.

The STB’s worries seem unwarranted, because falling rates and much greater operating efficiency have accompanied the pattern of railway mergers since deregulation. The real check on any efforts large railways may make to gouge their customers comes from their most rigorous competitor, the trucking industry. The railroads’ share of the hauling market continues to slip, even as they spruce up their performance. More Canadian exports now move by truck, and that switch only took place over the last decade.

Our provincial and federal governments have spent a lot of diplomacy and time dealing with minor threats such as the worry about Devil’s Lake spilling into the Red River. The future of the rail line that runs right beside that river should receive some attention.

The CNR has come a long way. For Canada’s, and especially Winnipeg’s sake, it is important that it be allowed to grow.