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Column

Rail Merger Requires Ottawa's Immediate Attention

By John Clarke


Before there were planes to fly or the Wild West was won, the railroads were colonizing North America with their iron horses. The continent owes more to the railroads than to anything else for opening up its vast wealth in the 19th century and making North America the economic powerhouse it is today.

That being the case, you would think the railways' problems with corporate mergers in the 21st century would be of more than passing interest to the political masters in Ottawa.

Finance Minister Paul Martin had plenty to say in 1998 about the big banks' plans for consolidating themselves into global titans. Over his dead body was essentially what he said, if their mergers reduced competition or led to massive layoffs and branch closings.

Bank mergers were banned and the boards of the banks had to turn to other ways to make their billion dollar profits. When Air Canada took over Canadian Airlines International (CAI), Transport Minister David Collenette said price gouging and service cuts would be over his dead body. Competition had to be preserved in the airline industry. There'd be fines and maybe even jail sentences for anybody trying to put one too many over on the traveling public.

When it looked as if oil and gas prices were going to rise out of sight, the federal government ordered an independent review to make sure there was still honest competition among the energy companies.

Yet when Canadian National Railway (CN) and American railway Burlington Northern Santa Fe Corp. (BNSF) launched consolidation plans, Ottawa seemed to be strangely indifferent. Combined, the two railways will form one of the largest ground transportation systems on the continent.

It's expected to lead to a rush of other mergers that some analysts believe will eventually result in only two major networks serving the continent.

If that's the case, it will raise all sorts of questions about competition, how it will be preserved and how efficiencies are passed on in better services to shippers. The railways are pressing to have their plans reviewed without delay. But the US Surface Transportation Board (STB) wanted to take time out to catch its breath and set out new rules to guide it when those other merger proposals come along.

The whole industry has been rationalizing itself for the last 20 years. It needed to do so because there were too many little railroads that couldn't effectively service the changing regional economies in North America.

It's an industry without borders. The Canadian and US economies are so integrated that you can't change railway structures in one without affecting the other. Canadian forestry has a huge stake in efficient systems, but needs systems where shipping costs are truly competitive. When one free market option is removed, as in the CNBNSF merger, the forest industry, east and west, gets nervous.

For David Church, transportation director of the Canadian Pulp and Paper Association (CPPA) in Montreal, it's all a question of lower costs for shippers. "Mergers are likely to be set up in such a way that shippers will be captive to one railway and, unless you can truck, you don't have competitive options," he says. "When other mergers have taken place, with some exceptions, there has not been the trickledown effect. We have not seen the benefits from better service and productivity ." The Council of Forest Industries in BC says it's in the nature of monopolies to look for the highest profits by "rationalizing areas of low return ."

"Only through real competition can shippers be assured of a railroad system that will adequately address concerns about future capacity, configuration and infrastructure," it says. "Any step toward reduced competition is a step in the wrong direction ."

These are exactly the concerns the federal politicians talk about when it comes to banks and air travel and gas prices-and about which they're moved to take action. Other industries, especially forestry, are left to speculate about the attitudes of the political masters.

The Competition Bureau is watching the CNBNSF merger moves. The federal government is planning an overhaul of the Competition Act to give the bureau more teeth and open up the review process to more citizen participation.

Forest industry people are ready to agree the bureau has a good focus on this particular merger proposal, which CN president and chief executive officer Paul Tellier promises to pursue once the STB says it's ready to proceed.

But the STB can't go on reviewing proposals without having some kind of overall policy on the merger issue. The new rules it wants would just be a guide to an objective ordained by its review.

Presumably the Competition Bureau had as much focus on the banks' merger agenda and the Air Canada CAI affair. Yet Ottawa decided in those cases that it had to say something about the general questions of competition and service to reassure the public that its interests were being protected.

A different railway map is likely to emerge in North America over the next few years. How can competition be preserved and service improved among fewer companies?

That's important enough for any government to make its policy preferences known, especially when the major decisions are being made by a government body in the US.

It should be especially interested in protecting the forest industry. At $40 billion a year it is the largest net exporter in Canada. The auto industry has more flow going out, but it also has more flow coming back into Canada. Forestry provides 250,000 direct and 750,000 indirect jobs.

Transportation costs are a significant component in those jobs and exports, more in some parts of the country, a bit less in others closer to their markets.

In the US, Surface Transportation Board chair Linda J. Morgan has said government shouldn't intervene in free market processes without a very good reason for doing so.

Competition in shipping rates would seem to be a very good reason for the Ottawa political establishment to at least assure those million forest industry workers that their industry has its attention.


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