Study Cites Privatization In Productivity Gains

Worth A Look, Regulation, Frontier Centre

In a page seemingly ripped out of the free-marketer’s handbook, a new study argues productivity has surged in Canada’s transportation sector over the past two decades primarily thanks to three factors: privatization, deregulation and increased competition.

From 1981 to 2006, while business productivity overall rose 0.2% on average per year, productivity increased 3.6% in the freight rail sector and 2% in the airline sector, according to the report yesterday from the Conference Board of Canada.

As for the trucking sector, for which the data go only as far as 2003, its productivity gains were about 1.8% a year, the report states.

The primary driver of those gains is the changes in the governance and ownership structure of the industry, including the privatization of Air Canada and Canadian National Railway Co., said Mario Iacobacci, the board’s director of research for transportation and infrastructure, and author of the report.

Other factors were the switching of the country’s ports, airports and air navigation systems services from government-controlled entities to arm’s-length, self-financing companies, Mr. Iacobacci said.

The deregulation of prices and increased competition brought on by the easing of other restrictions has also facilitated those gains, he said.

The transportation sector is now not only better-managed, but the savings it has realized are also being passed on to the consumer, Mr. Iacobacci said.

Freight rates, for instance, have fallen by about 2.2% a year, which translates into about a 70% savings in real terms, while airfares have also fallen by 25%.

By removing the influence of government on their operations, the sector is now better able to base its decisions on sound business practices, rather than political expediency, he said.

“In some instances it is the only way to do things. In other cases, we can do things more effectively,” he said. “[Government entities] are balancing the requirements of whole bunch of stakeholders and so the idea of trying to deliver the service in a cost-effective way is not the highest of priorities.”

The elephant in the room, of course, is the fact that Air Canada has already entered bankruptcy protection once since it was privatized in 1988, and now sits on the brink of another filing. But Mr. Iacobacci argues things could have been much worse if it weren’t privatized and the industry restrictions weren’t loosened.

Mr. Iacobacci is not advocating for a mass sale of government services, and says there is still a role for government regulation in most sectors.

For instance, he noted when the U. K. decided to put its public transit bus services out for tender in the mid-1980s, those cities without a central transit authority overseeing the design of routes not only lost ridership, but their costs soared.

Others, such as London, which used “controlled competition” to tender the routes that were overseen by a transit authority, flourished and prices fell.

“That’s why you can’t just deregulate them,” he said. “It has to be done carefully, because you are balancing public and private benefits.”

But the lesson learned could easily be translated into sectors such as water and waste management and roads, and even the Canadian public-transit systems.

A prime example in Canada, outside of the privatization of Air Canada and CN, has been the establishment of NAV Canada, which took over the oversight of the country’s air-traffic control systems in 1996 from Transport Canada.

Not only does the country now have one of the most state-of-the-art control systems, but the cost savings have been passed on in its lower fees, Mr. Iacobacci said. By contrast, the U. S. Federal Aviation Authority, which is still a government entity, has thrice failed to upgrade its system and runs on an antiquated system.

“What we have done is change the governance in a way that they can accomplish their mission more effectively,” Mr. Iacobacci said.