Railway Association of Canada

1
Railway Association of Canada

• Rail Issues and the Policy Making Process
  Opportunities for a Better Transportation Future
  in Canada
• Bruce R. Burrows
• Vice-President, Public Affairs and Government
  Relations
• Background Briefing for Transportation Policy
  Course
• TC Policy Group
• Nav Canada Training and Conference Centre,
  Cornwall, ON.
• May 2004

2
OUTLINE

• About the RAC
• Railways and Policy
• Where We Are
• Trade and Ports
• Challenges
• Short Line Sector Trends
• Governments Agenda and Rail
• Rail Can Do More Solutions
• Conclusion

3
ABOUT THE RAC

• Some 60 members We are the Canadian rail
  industry
• Represents virtually all Railway operating in
  Canada today
• Class 1s CN and CPR
• Short lines Over 40 across Canada
• Passenger
• Commuter AMT, GO, WCE, Capital Railway
• Intercity VIA
• Tourist 8 across Canada
• Together members carry
• 4 million carloads annually
• 1.8 million containers and trailers
• 53 million commuters and other train travellers

4
ABOUT THE RAC (contd)

• Formed in 1917 to help the war effort. Mandate
• Promote the benefits of railways in Canada
• Provide input into public policy decisions
  related to the railway sector in Canada
• Provide information for public, government and
  industry
• Coordinate rulemaking and regulatory affairs for
  industry
• Provide safety and operational assistance to
  membership

5
ABOUT THE RAC (contd)

• Moved from Montreal to Ottawa in late 2000
• Created policy and advocacy capacity
• Bolstered ongoing Safety and Operations capacity
• Working to create a more rail-friendly public
  policy environment

6
ABOUT THE RAC - CANADA

• The industry operates close to 50,000 kilometres
  of track and employs 37,000 peopleanother 50,000
  employed in supply industry in many communities
• 10 billion contribution to the economy
• Over 65 of Canadas goods moving by surface
  (ton-kms) depend on rail to reach their market
• 300 million tonnes of rail freight are originated
  every year equivalent to over 18 million
  truckloads

7
ABOUT THE RAC POLICY APPROACH

• As thevoice of the industry, deliver solid,
  substantial information to government
• Develop sound policy positions through systematic
  internal consultation

• Create effective delivery mechanisms (policy
  briefs, annual stats
• publication, etc.)

8
RAILWAYS AND POLICY CHANGE - GOALS

• Ongoing RAC Objective
• Ensure that public policy enables railways to
  remain an efficient, safe and competitive
  supplier of transportation services
• 20/20 Vision
• Looking to the future, the integrated, seamless
  transportation marketplace within NAFTA requires
  broader policy approaches

9
WHERE WE ARE

• For freight a deregulation success story
• Class 1s
• Rates are down, lowest in the world
• CN, CPR now best operating ratios in NA
• Labour productivity up substantially
• Freight subsidies have been eliminated ( 700M in
  1995)
• Lowest level of accidents/incidents in North
  America
• Short lines
• Completely new entrepreneurial focused sector
• Vital to regional economies, 25 of originated
  carloads
• Growing the business, competing directly with
  trucks
• But short of capital funds

10
WHERE WE ARE (contd)

• For passenger more efficient, reducing
  congestion and improving sustainability in the
  corridor and in urban areas
• Intercity passenger
• Business is increasing
• Operating subsidies down considerably
• Exciting new developments
• Commuter
• Considerable growth, new routes and operations
• Increased recognition of public benefits by
  decision makers
• Approaching 100 operating cost recovery

11
Up 18 since 1990
PASSENGER KILOMETRES
1,650
1,600
1,550
1,500
1,450
millions
1,400
1,350
1,300
1,250
1,200
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
12
LOWEST RATES IN THE WORLD...

• Canadian rail rates have declined 40, now the
  lowest in the world

Railroads passing on their efficiency gains as a
result of competition
13
Up 169 since 1990
LABOUR PRODUCTIVITY
CANADIAN RAIL INDUSTRY
1990-2002
Revenue tonne-km/employee (000)
169
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source RAC
14
NUMBER OF NEW SHORT LINE RAILWAYS IN CANADA
SINCE 1990
60
Originated Carloads
2002
50
Short lines
Class 1's
24.5
40
75.5
30
20
10
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source Transport Canada
The number of short lines in Canada is up 200
since 1996. They account for 24 of originated
traffic ...
15
WHERE WE ARE (Contd) ORIGINATED CARLOADS BY
COMMODITY GROUPING - 2002
Intermodal
18
Bulk35
Agriculture
Manufactured Miscellaneous
10
Coal
Intermodal
1
9
18
Food Products
1
Paper products.
Minerals
7
16
Fuel Chemicals
12
Forest Products
11
Metals
Machinery Auto
Merchandise47
8
7
Intermodal is the largest single business line
16
WHERE WE ARE (contd)
INTERMODAL UNITS ORIGINATED (000)
(containers trailers)
2,500
2,000
1,500
1,000
500
0
1995
1996
1997
1998
1999
2000
2001
2002
and the fastest growing Rail is just-in-time
17
10-YEAR TRENDS CROSSING/TRESPASSING FATALITIES
TOTAL
PER UNIT OF WORK
0.25
140
Trespassing Incidents
Trespassing Incidents
Crossing Collisions
120
Crossing Collisions
0.20
100
0.15
80
Number
Number
60
0.10
40
0.05
20
0.00
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Year
gtkm (gross tonne-kilometres)
Source Transportation Safety Board (TSB)
Source Railway Trends, Transportation Safety
Board (TSB)
Operation Lifesaver and Direction 2006, a joint
Government/Industry/publicpartnership has helped
reduced crossing/trespassing fatalities by 34
since 1994
18
10-YEAR TRENDS ACCIDENTS
PER UNIT OF WORK
TOTAL
1,400
2.80
1,300
2.60
gtkm (gross tonne-kilometres)
2.40
1,200
2.20
1,100
2.00
1,000
Number
Per billion gtkm
1.80
900
1.60
800
1.40
700
1.20
600
1.00
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Year
gtkm (gross tonne-kilometres)Source Railway
Trends, Transportation Safety Board (TSB)
Source Transportation Safety Board (TSB)
Accidents per unit of work on Canadian railways
are down 29 since 1994
19
CANADA A TRADE DEPENDENT NATION

• Over 40 of GDP comes from exports of goods and
  services. Highest in G-8. Rail moves half of
  goods.
• NAFTA volumes, now massive, were growing at 10
  per year until 2001. Most Canadian exports go to
  U.S.
• Ports of Vancouver, Montreal and Halifax key for
  international trade (vital to North American
  economy) in Canada

20
EXPORTS AND THE RAILWAY ROLE
Canadian GDP
Canadian Exports
41Exports
By Rail 51
21
CANADAA TRADE DEPENDENT NATION (contd.)

• Trade relationship needs to be nurtured and
  handled carefully
• Customers look at overall efficiency, cost and
  reliability of integrated supply chains
• Numerous Canadian industries are consolidating
  into a continental structure under NAFTA
  transportation is becoming globally and
  technologically seamless
• Canada is a convenient entry point for others
  looking to access the growing NAFTA marketplace

22
CANADA A TRADE DEPENDENT NATION (contd.)

• Canada is leading export market for 38 US states,
  and with NAFTA, a North American rail industry is
  emerging.
• 1.7 billion of goods traded daily with the
  U.S., or over 1M per minute efficient and
  cost-effective border is critical
• From 1992 to 2002, goods exports to the US rose
  from 72 to 85 of Canadian total
• Rail handles a significant share of surface
  traffic across the border Ontario Corridors
  handle 65 of all Canada/US trade by value (with
  80 of rail traffic handled through Ontario
  gateways)
• The competitiveness of ports and railways is
  highly linked
• Rail service is frequently the largest cost
  consideration for port customers in routing their
  traffic

23
PORTS AND RAIL AN INTEGRATED RELATIONSHIP

• Canadian industry depends on rail to get the
  product to market
• 39 of Canadas rail activity is associated with
  import or export movements through Canadas major
  ports
• Canadian ports and railways are in direct
  competition with U.S. to deliver goods in North
  America
• Rails availability, price and quality are of
  prime consideration when examining routing
  options
• The fortunes of a key port are tightly bound to
  those of the long-haul railways serving it
• Ocean 24 hour advance EDI manifest opportunity
  for early rail billings but need proper
  risk-based intervention

24
ECONOMIC CHALLENGES

• Railways face intense competition
• - Other Canadian railways
• - US carriers
• - Other modes
• - Source competition
• Risk of increased regulation (esp. Access)
• Financial stability is new
• Capacity and investment
• - Network Standard (286,000 Lbs)
• - More transloads/sidings
• - Government /Class 1 partners
• Market imbalance
• - Full-cost accounting for roads
• - User pay principle for all modes

25
PERCENTAGE OF CAPITAL SPENDING TO REVENUES
25
Railways (Average)
Integrated Oils
18
16
Cement
16
Oil and Gas Services
11
Transportation
10
Automotive
Chemicals
10
9
Industrial Products
9
Paper Products/Packaging
Steel
8
6
Forest Products
5
Metals
10
Weighted Group Average
0
5
10
15
20
25
30
Source Globe and Mail
Railways are the most capital intensive industry
26
SECURITY THE BORDER CHALLENGES

• Events of September 11th have underlined
  security and impact of U.S. response on Canada
• Economic slow-down was exacerbated
• Canadian exports to U.S. declined 7.8 Billion
  in 2001 most decline was by truck and air
• Careful control and processing of individuals
  crossing borders
• Need for new spending by governments (Federal
  Budgets and 30 Point Border Accord)

27
SECURITY THE BORDER CHALLENGES (contd.)

• Ongoing risk of tightening of US security posture
  at Canadian border
• Long term Canadian economic performance closely
  tied to border efficiency potential for
  disinvestment
• Bureaucratic reorganization and decision-making
  risks (e.g., DHS with CBP in U.S. and PSEP with
  CBS in Canada)
• Commensurate congestion, land use, gas
  consumption and emission concerns growing
• Continental integration of policies
• Business as Usual not sustainable recent AASHTO
  report concludes U.S. cant afford to build
  enough highways to meet demand must look to rail

28
FISCAL CHALLENGE

• Canadian railway taxes are much higher than taxes
  on U.S. Railways reducing Canadian
  competitiveness
• Higher taxes reduce competitiveness because of
• - Increased operating costs
• - Decreased earnings available for
  investment
• Government taxes three major inputs purchased by
  railways
• - Locomotive fuel and sales tax
• Property taxes
• Payroll taxes
• Railways face tax inequity pay taxes but assume
  all their own roadway costs (i.e. user pay)

29
Railways paid 644 million in taxes in 2002
TAX PAID BY CANADIAN RAILWAYS
2002
Total
644 million
Payroll tax
Locomotive fuel excise tax
156
168
Income tax
38
Property tax
143
Capital tax
customs duties
42
Other sales tax
97
Source RAC
30
OTHER CHALLENGES

• Population growth is significant
• Truck growing rapidly 61 by 2020
• Congestion is unsustainable in Toronto,
  Vancouver, etc
• Quality of life concerns growing land use,
  air,safety
• Infrastructure costs to government

31
OTHER CHALLENGES (contd)

• Projected growth between 1995-2020

32
SHORT LINE SECTOR TRENDS
CANADIAN SHORT LINES
TOTAL REVENUES
650
9.4
600
-5.3
-0.7
6.8
550
22.8
(millions)
500
450
400
1997
1998
1999
2000
2001
2002
Source RAC
Similarly, revenue has plateaued
33
CANADIAN SHORT LINE AVERAGE (RAC MEMBERS)
OPERATING RATIO
91.0
89.0
90.0
87.0
87.1
85.0
84.4
83.0
83.6
82.8
81.0
82.0
79.0
77.0
75.0
1997
1998
1999
2000
2001
2002
Source RAC
Operating ratios are creeping up
34
GOVERNMENTS AGENDA

• In Martin government announcements and Speech
  from the Throne, key themes relevant to surface
  transportation in Canada
• New deal for cities
• Building a 21st century economy
• U.S. Canada relations
• Strengthening social foundations
• Sustainable Growth and Energy-Efficient
  Transportation
• Minister Valeris 4 Pillars

35
GOVERNMENTS AGENGA

• These involve six relevant public policy
  criteria
• - Congestion
• - Emissions
• - Competitiveness
• - Cost to government
• - Land use
• - Safety

36
AGENDA HOW RAIL CAN HELP

• Congestion
• - 1 freight train up to 280 trucks
• - 1 passenger train up to 1400 cars (GO
  trains 48 lanes)
• Emissions
• - 5 times less GHG emissions per unit of work
• - Significantly lower on other emissions
  as well
• - Commuter trains generate 25 as many
  GHGs as urban autos/km
• Competitiveness
• Significant productivity gains which have been
  passed on to customers in lower rates
• Service levels increased considerably (new
  scheduled services)

37
AGENDA HOW RAIL CAN HELP (contd)

• Cost to Governments/Society
• Rail corridors are privately owned, built,
  maintained and financed
• User pay mini reliance on publicly funded
  highways
• Land use
• 1/3 of that of highways
• Several studies have shown that trucks cover only
  50 of their highway/environmental costs
• Safety
• Private, dedicated, secure corridors with own
  police service
• Safest mode of transportation

38
RAIL CAN DO MORE CLIMATE CHANGE
Transport GHG Emissions - 1990
Total 131.2 megatonnes
Aviation
10
Other
People
3
Road
Road
People
Freight
50
26
Rail freight
5
Marine
freight
6
Source Natural Resources Canada
39
RAIL CAN DO MORE CLIMATE CHANGE
Source Natural Resources Canada
40
RAIL CAN DO MORE INTERMODAL SOLUTIONS

• Railways have made major investments in
  infrastructure and intermodal systems to
  attract traffic
• New fuel efficient locomotives and innovative
  rolling stock (e.g. double stack container
  cars) and high throughput terminals
• Short line railways have attracted traffic
  for short hauls and as feeders to the
  greater rail network
• People also moving intermodally (car/rail,
  bus/rail)
• Existing rail capacity is an alternative to
  costly expansion of highways

41
RAIL CAN DO MORE INTERMODAL SOLUTIONS (contd)

• Reduces shipping and travel costs and cost of
  goods transfer
• Addresses public objectives for environment, fuel
  conservation, safetyand land use
• Encourages the most efficient transportation
  output through acombination of modes - incl.
  trucks, for example, that offer
• Just in time delivery
• Geared to smaller shipments
• Cost effective over short to medium distances
• Cooperative partnership with truckers who face
  driver issues and road congestion most
  effective mode over longer distance / rail also
  moving into shorter haul markets
• Some operations / partner changes required

42
RAIL SOLUTIONS BORDER INITIATIVES

• Electronic commerce
• Significant investment in information technology
• Automated customs transactions and pre-filing
  systems in place for the vast majority of rail
  traffic improved customer service
• What else can be done? Better alignment of
  customs policies needed, with equitable treatment
  across modes, including
• 1) Canada U.S. external border for uniform
  
• inspection and security clearance of
  containers
• 2) Efficient customs inspections of domestic
  shipments at in-land border (or away from border
  where possible)
• 3) Integrate systems to link Canadian and U.S.
  customs
• computer and data systems
• 4) Pre-qualify low risk customers and their
• commodities
• Working with AAR and various government
  organizations on security

43
RAIL SOLUTIONS BORDER INITIATIVES (contd.)

• New Declaration of Principles (DOP) with CBP to
  establish VACIS machines at 9 crossings
  pre-screening system gives 100 coverage
• Vast majority of domestic rail traffic includes
  BIG THREE auto companies, petro-chemicals, forest
  products and some other bulk most are C-TPAT
  companies with low risk cargo
• Targeting and examination of high-risk shipments
  will be performed at these key sites plan
  incorporates risk assessment and comprehensive
  supply chain security (CSI principles)
• Rail industry recently commended by U.S. agencies
  for being one of first to develop a detailed
  security management plan CN, CPR and others are
  C-TPAT and PIP registered

44
RAIL SOLUTIONS BORDER INITIATIVES (contd.)

• Consequences
• To implement these security measures, rail will
  have to spend millions of dollars
• Seeking support from Border Infrastructure Fund
  (other modes already supported)
• Advance EDI manifest with 2 hours prior notice
• New FDA Bioterrorism regulations on food (4
  hours)
• Explosive regulations are burdensome
• Bottom line enhanced security and trade go
  hand-in-hand, inland. Upon full implementation
  of protocols, rail will be most secure and
  reliable system for bulk and time-sensitive
  shipments

45
RAIL CAN DO MORE INFRASTRUCTURE

• In June 2002, RAC submitted a proposal for
  private/public partnering on specific strategic
  rail infrastructure (CSIF)
• Upgrading short lines to 286,000lb loadings
• 50/50 private/public
• Over 40 grade separation projects identified
• In 2003, RAC added a new component on
  intermodal/multi modal reloads and sidings (10
  year extension of federal fund top up of 3 B)

46
RAIL CAN DO MORE INNOVATION

• Attracting, training and retaining a skilled work
  force is critical
• Rail human resources study indicates retirement
  rate likely to double will necessitate increased
  training requirements/funding
• Through IRT, colleges will increase the number of
  rail-specific programs in targeted occupations
• However, other issues (non H.R.) also important
  as productivity growth in transportation (a key
  service sector) has multiplier effect on economy
• Rail productivity performance to date has been
  impressive which is a sign of innovation
  success, but more to do
• Tax policy, for example, needs to reward the
  investment and risk taking necessary to drive
  innovation

47
TAX POLICY (CCA Rates)
TAX DEPRECIATION OF MAJOR TRANSPORTATION
INVESTMENTS, 2002
UNDEPRECIATED PORTION AFTER...




4 Years
4 Years
8 Years
8 Years
20 Years
20 Years
4 Years
4 Years
8 Years
8 Years
20 Years
20 Years
60
60
60
60
57
57
57
50
50
50
50
40
40
40
40
30
30
30
31
31
30
31
31
30
30
30
20
20
20
20
17
17
17
10
10
10
10
4
4
4
4
2
2
2
2
0
0
0
0
0
0
0
0
0
CDN
CDN
CDN
CDN
CDN
CDN
CDN
CDN
CDN
CDN
CDN
CDN
U.S.
U.S.
U.S.
U.S.
CDN
CDN
CDN
CDN
CDN
CDN
CDN
U.S.
U.S.
U.S.
U.S.
CDN
CDN
trucks
trucks
rail
rail
rail
rail
rail
rail
rail
rail
rail
rail
rail
rail
trucks
trucks
trucks
trucks
rail
rail
rail
rail
rail
rail
rail
rail
trucks
trucks
marine
marine
The ability of rail to innovate is being reduced
by low CCA rates
48
RAIL CAN DO MORE SMART REGULATION

• TC emphasis on setting the right framework
  and leaving the running of business to industry
• Use safety systems, not a prescriptive
  approach (operations), that are performance
  based and allow carriers to exercise
  responsibility/ accountability
• Non-regulatory initiatives need to be
  encouraged (MOUs, joint studies, volunteer
  partnerships)
• Recent examples of new and successful
  approaches
• MOU security agreement with TC
• Proximity MOU with FCM
• Emissions MOU with EC
• Operation Lifesaver
• Dangerous goods process / clear language
• Radio spectrum management

49
CONCLUSION

• Deregulation is providing desired results for
  industry
• NAFTA integration and harmonization imperatives
  cant be ignored
• Short line challenges mean investment is a
  fundamental issue policy and regulatory
  environment for all carriers must provide
  business certainty

50
CONCLUSION (contd.)

• Intermodal is rail industrys fastest growing
  sector and key part of transportation future
• Bottom Line rail can help governments reduce
  public costs and address policy needs (including
  improved border efficiency, reduced congestion
  and meeting environmental goals)