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Extension of regulated “interswitching” distance will increase costs for railways, shippers, and consumers

Daniel-DufortCanada’s competitiveness relative to the U.S. is in decline, and that affects our standard of living. Our GDP per capita is currently lower than it was in 2019 – an alarming development that should really be front-page news.

The federal government is short on effective responses. Desperate attempts to extend tens of billions of dollars to foreign companies like Volkswagen – so they will deign to invest in Canada – are more symptoms of the problem than likely solutions. Our current situation brings to mind what former U.S. President Ronald Reagan used to say about government’s view of the economy: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Thankfully, large swathes of our economy are still moving – some literally. A case in point is the railway industry, in which two Canadian companies – CPKC and CN – are uncontested leaders. Unfortunately for them, their success means the government has them in its sights and plans to regulate them in an even more harmful fashion than it already does.

railways interswitching shippers

Photo by Agnese Kisune

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The omnibus bill to implement the 2023 federal budget contains measures that will increase costs for railway shippers and, ultimately, all consumers. The extension of the regulated “interswitching” distance hides, under innocuous bureaucrats, enormous costs that will have to be shouldered by all rail shippers. (From the editor: See definition of interswitching below)

As things currently stand, shippers with access to only one railway but located within 30 km of an interchange can avail themselves of government-fixed rates to have their cargo shipped to a competitor. The government is now keen on extending this distance to 160 kilometres – the distance that was in effect between 2014 and 2017 – and that was rightly criticized in former minister David Emerson’s 2016 report. Regulations aside, choosing a different railway is something shippers can do at any given interchange, provided they are ready to pay for it.

To be completely clear: the federal government is forcing the railways to offer shippers a below-market rate set by the government for the transfer of train cars to the railway network of a competitor. That government-set price likely won’t allow railway companies to break even. Ultimately, these costs are passed on to consumers and eventually paid for in large part by you and me at the checkout counter.

We’ve all watched as goods and food prices have shot up in recent months. Unfortunately, instead of acting to slow rising food costs, the government’s action risks exacerbating the situation with costly new regulation, all in aid of anti-market economic populism.

Encouraging the switching of cars from one railway to another undermines the fluidity of our logistics chains and can lead to delays. In fact, the hit to productivity by complicating our supply chains is essentially what led to the elimination of the 2014-17 policy. Considering the supply chain problems we’ve faced since then, building back an extra layer of complexity seems needlessly reckless.

Both CPKC and CN already devote between 20 and 25 percent of their revenues to capital investments that make our supply chains more resilient. By undermining these companies’ profitability, the government puts these investments at risk. Simply to score easy points with its NDP electoral coalition partners, Ottawa is ready to risk a decline in the quality of our transportation infrastructure.

American railway transport companies must be rubbing their hands with glee before this sad spectacle of self-sabotage as they stand to benefit from a slower and less efficient railway system up north.

If we really want producers and manufacturers in remote regions to get their goods to market more cheaply, we need to look to other measures. Government policy based on an attractive fiscal framework and flexible regulation is more likely to attract new investment and exert downward pressure on prices. Unfortunately, what we’re being offered is the exact opposite of that.

A thorough review of the risks and dangers of our current approach to the economy is long overdue. We should start with the golden rule of policy: first, do no harm.

Daniel Dufort is President and CEO of the Montreal Economic Institute.

What is interswitching?

The Canadian Transportation Agency defines interswitching as the transfer of traffic between two railway companies (railways). One railway takes a shipper’s freight part of the way between origin and destination. It then transfers the freight to a competing railway with which the shipper has made arrangements for the rest of the haul. The transfer takes place at an interchange – where the lines of the two railways meet.

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