JANUARY 13, 1966
Turmoil In Transportation
AN ADDRESS BY Mr. R. A. Emerson,
PRESIDENT AND CHIEF OPERATING OFFICER CANADIAN PACIFIC RAILWAY COMPANY
CHAIRMAN The President,
Lt. Col. E. A. Royce, E.D.
Reverend Sir, distinguished guests, gentlemen--in 1871 the Province of British Columbia agreed to join Confederation--provided a transcontinental railway, linking eastern Canada and British Columbia, was begun within two years and completed within ten years. To make such a promise and to keep it were two quite different things and one disaster followed another with scandal and recrimination of every sort attending the early efforts to find a company to build the railway. By 1880 Sir John A. Macdonald was almost desperate and then George Stephen announced that his syndicate would build a railway for a cash subsidy of $26,500,000 and a land grant of 35,000,000 acres. Stephen was an industrialist born in Scotland with a record of successful railway operations in the United States; he was also at the time president of the Bank of Montreal. Although Macdonald did not know it at the moment, in Stephen he had found a man later described as "perhaps the greatest creative genius in the whole history of Canadian finance". In the following five years he would need all his genius!
Politics have not changed in the past 80 years and when, after much bickering, it was agreed that the railway would be built for a subsidy of $25,000,000 and a land grant of 25,000,000 acres, the whole arrangement was violently attacked by the Liberal opposition. The railway was described as a criminal absurdity which ought to be abandoned at once. It was pointless to build a railway through northern Ontario when the United States lines could be used to bridge the gap between the east and the prairies. After weeks of debate, the Bill was passed on February 1st, 1881, and Sir John A. Macdonald later stated that only Confederation gave him a greater sense of accomplishment.
However, while the Railway Bill was passed the road had still to be built. Times were not suited to the sale of railway shares and when in Christmas, 1883, the Northern Pacific Railway in the United States suddenly went bankrupt, the C.P.R. was in great trouble. Stephen was desperate, the Bank of Montreal had reached its limit and could advance nothing further. It was explained to Sir John A. Macdonald that the Bank was so heavily committed to unsecured advances to the railway there was a real danger of a bear raid on the bank stock itself. Finally, a letter by the Minister of Railways and Canals, supporting the railway's application resulted in the Bank making one more advance, although as it was disclosed much later a number of directors were opposed and predicted disaster-the loan was approved by the Bank's Board by the narrowest of margins. The Government again came to the rescue but a few months later George Stephen was forced to borrow £ 50,000 for the railway against his own resources while Sir John A. Macdonald was forced again to go to Parliament for further assistance for the C.P.R. In the spring of 1885 the situation was desperate-the Bank could advance no more money, the Government was reluctant to assist again and there were literally no funds for the payment of wages to the construction gangs. It was at this time that Stephen, with everything he possessed pledged in support of the railway, said to his friend, Donald Smith, "If the end comes, they must not find one dollar in our pockets."
No one could know that the future of the road was really being decided on the western prairies where Gabriel Dumont, the buffalo hunter, had fired the first shots in anger on 26th March, 1885. Superintendent Crozier, with his little band of mounted police and Prince Albert volunteers, were ambushed at Duck Lake and in a hopeless fight lost 25 % of their men in half an hour, withdrawing as best they could with their wounded left on the field. The news of the disaster put Big Bear and Poundmaker, with their warriors, on the warpath and, wildly exaggerated, produced glaring headlines in New York and London where the railway had appeared on the verge of a successful refinancing programme. From that moment, as Donald Creighton puts it, "The fate of the railway depended upon a race between its creditors and the marching feet of the militia soldiers in the west." Sir John A. Macdonald no doubt knew that the Chinese character for crisis has two parts: the first signifying danger and the second opportunity. The speed with which the untrained, badly equipped militia--they had three different types of rifles, none of which would use the ammunition of the other, and apart from two batteries of Royal Canadian Artillery, were without the support of regular troops-moved to the battlefield proved the necessity of the Railroad and undoubtedly prevented the most powerful Indians, the Blackfoot, from following Riel and Poundmaker. It could be said that the Canadian Pacific Railway had won the West for Canada and Canada would now ensure the future of the C.P.R. In a sense, the ultimate passing of the final Railway Bill on 20th July, 1885, which completely restored the financial position of the railroad with the great House of Baring in London acting as agent for the new 4% bonds, seemed almost incidental and the driving of the last spike at 9:22 on a cold Saturday morning in November at Craigellachie in the Rockies seemed an anticlimax. Of more significance was the absence of Sir John A. Macdonald-he could not be there for the trial of Louis Riel forced him to stay in Ottawa and the same month that the railway was finished Riel was hanged for treason. Nothing could have emphasized more the fact that Canada and the railway must stand or fall together. Those bands of steel linking some 15,000 people in British Columbia to some 3,000,000 Canadians in the East ensured the future of the nation we have today, stretching from the gray Atlantic coast to which our forefathers first ventured to the shining waters of the Pacific.
Stephen, Van Home, Smith and Sir John A. Macdonald, himself, without these men the Canadian Pacific Railway could never have been built and without the railway the West could never have been held for Canada. Over the years between, the C.P.R. has gone from strength to strength and its leadership today guarantees its future.
Our speaker is a railway man, whose grandfather, Bob Emerson, ran a wood-burning locomotive in the Canadian Pacific's early days at Winnipeg, his father spent his life with the C.P.R., retiring as agent at Bird's Hill, Manitoba, after a long career. His mother worked for the Company for twenty years as an assistant agent. He himself entered the service of the railway at the age of seventeen, when he spent his summer as a rodman at Kenora, Ontario. Apart from his studies at the University of Manitoba, later at Yale, which he attended on a Strathcona Memorial Fellowship in Transportation, he has spent his whole life with the railway moving through each step to his present eminent position as President of the Company and Chief Operating Officer. He holds a multitude of directorships, is a Governor of the Royal Victoria Hospital in Montreal and a Trustee of Bishop's University. I am sure that Donald Smith, George Stephen and, yes, old Sir John A Macdonald, himself, would be happy to have such a man guiding the destiny of the great Canadian Pacific Railway today.
On this occasion, our first meeting of 1966, I am honoured to present to you Mr. E. A. Emerson, a Canadian railway man in the finest tradition.
The Empire, that institution honoured in the name of your club, has contributed manifold and lasting benefits to mankind, too numerous to attempt to recount here. Not the least of these was the enormous impetus provided to world trade. This development was aptly and succinctly expressed by the saying, "Trade follows the flag."
Here in Canada we have special reasons for being aware of this sequence of events. The very discovery of the new world was an accident in the quest for a route which would provide Europe with direct access to the spices and mysteries of the Orient. Indeed, many explorers subsequent to Columbus sought to find a means to by-pass the barrier presented by the unexpected land mass of the Americas--the elusive north-west passage. It was not long, of course, before their attention focused on opportunities for trade in the newly discovered lands, and the quest for furs led to early exploration of what is now Canada.
In the course of subsequent history, the Empire has undergone tremendous change, and simultaneously, the fabric of trade has become far more intricate and closely woven. Of the many factors contributing to this result, perhaps none has had a more profound effect than transportation--the very hand-maiden of trade. The speed, efficiency and dependability of modern transportation is such that, to an extent never before thought possible, the resources of the whole world can be placed on all the world's doorsteps.
Canada has been particularly fortunate in sharing in the enormous development which has taken place in world trade. In 1962, the latest year for which figures are available, while Canada ranked 29th amongst the nations of the world in terms of population, it stood in 6th position in value of trade with other countries. The relationship between this standing and our high standard of living, so proudly vaunted upon frequent occasion, is not merely coincidental.
But if we take satisfaction from the fortunate situation in which we find ourselves, we would do well to also recognize its perils. For if modern means of transportation between nations provides ready access to the world's markets, they also bring pervasive competition in those markets. International competition imposes a stern and unremitting discipline. Canadian goods and services are accorded a favourable reception in world markets only to the extent that their price and quality, with all the characteristics which these terms imply, are attractive in comparison with goods and services available from other sources. We possess no unique skills, secret technology or monopoly access to materials on which we can maintain a preferential position in complacent indifference to what is going on elsewhere.
Our ability to compete, and particularly our costs in relation to those of other areas, are, therefore, matters of very real concern. Continuous improvement in the levels of our productive efficiency in comparison and competition with the growing achievements of other nations is the only firm foundation for our future development and prosperity. To attain this, we must rely upon our own resources, both human and material. Fortunately, they are not inconsiderable and if developed and employed in a responsible, disciplined manner it is within our means, as the reports of the Economic Council of Canada have indicated, to achieve the growth upon which our future prosperity depends and which is essential if we are to provide employment opportunities for the many thousands of young people who will join the working population each year.
The era in which we live is marked by growing pressures for allocation of funds for social and and related purposes--education, health, retirement income and welfare of all sorts--to say nothing of the accelerating demands of labour itself both for increased wages and for added fringe benefits.
If our economy was self-contained and if we were not subject to international competition, we might entertain the notion of indulging all these pressures providing we were willing to accept the massive redistribution of income involved and to countenance the consequences, both immediate and long-term, on thrift and saving. Canada is no such Shangri-La, however. The fact of the matter is that exports of goods and services comprise some 20% of our Gross National Product, and, when account is taken of secondary effects throughout the economy, their importance is even greater. In both the United States and Japan, by way of contrast, exports account for only about 5% of Gross National Product-less than one-quarter of the Canadian figure.
The vital importance of foreign trade to Canada is further emphasized by reference to our dependence on foreign capital. Currently, we draw on foreign sources, principally the United States, for about one billion dollars of new capital each year to make up the difference between our domestic savings and investment. It follows, therefore, that any public policy which discourages or impairs domestic capital formation or stimulates non-productive spending increases our dependence on foreign sources of funds. Recent experience has amply demonstrated, if proof were needed, the vulnerability of a position of undue reliance on foreign capital sources, subject as these are not only to the sensitivities of international money markets, but also to policy decisions of other governments, which are naturally taken in regard to their own particular circumstances and requirements. Moreover, it must always be recognized that foreign capital will only be forthcoming if there is in being or in prospect earnings which will provide compensation for its use commensurate with that obtainable elsewhere, having due regard for risk and convertibility. Save only in the short term, such earnings can only be generated by a favourable balance from-trade in goods and services. Hence the importance of foreign trade to Canada is critical for many reasons.
Just as trade is of crucial importance to our development, transportation is of crucial importance to trade. Here, I refer to internal transportation-within Canada's boundaries-as opposed to offshore transportation, beyond our borders-the connection of the latter with trade being obvious, whether performed by a Canadian or by a foreign carrier.
Some grasp of the relative significance of transportation in relation to the economy as a whole may be obtained from the results of a recent study in the United States which indicated that the total outlay for transportation in that country represented 20% of Gross National Product. This amazing figure included transportation of both people and goods, for pleasure as well as for commercial purposes, suburban as well as inter-urban, taking into account such elements as highway expenditures, purchases of motor vehicles and parts, fuel, etc. No similar study has been conducted in Canada. On a comparable basis, however, the provision of commercial transportation services in Canada accounts directly for more than 6% of our Gross National Product, or half as as much again as the corresponding 4% in the United States.
While the attainment of the highest possible efficiency in the production of domestic transportation service is desirable from the standpoint of assisting in the enjoyment of a higher standard of living, viewed in relationship to movements of commodities in international trade it is of critical importance. There are two particular reasons why this is especially so in the Canadian situation.
The first of these is geographic. Canada is a small nation, but a large country. Only a small part of the products of our mines and mills, of our forests and farms which find their way into foreign trade originate at our borders. The great bulk have to be moved, perhaps a thousand miles or more, to a point where they become accessible to foreign customers.
Bulk itself is the second reason. For a large part of our exports consist of relatively low valued, bulk commodities in relation to which transportation costs are highly significant. Our position is the direct antithesis to that of Switzerland, for example, a geographically small country specializing in the export of very high valued commodities.
Now there have been outstanding developments in transportation technology in the past 65 years. In 1900, the basic form of overland transportation was the wood-burning steam locomotive, capable of pulling a train one-tenth the weight of its freight trains in service today. Steam had only a short time before replaced the sail as the prime source of locomotion in water transportation. Contrast the present situation. Ocean freighters sail into the heart of the continent. Long distance trucks reach every part of the country. Freight trains cross the continent at the speed of yesterday's passenger trains. Access to virtually any part of the world can be secured within a day by jet aircraft. At the extreme, men have travelled at 17,500 miles per hour and circumnavigated the globe in just 90 minutes.
Impressive as these developments in transportation technology have been, they have not been matched by equivalent economic wisdom in the use of the transportation tools which have become available to us. The lag between actual and potential transportation performance has given rise to a situation which may well be described as "Turmoil in Transportation".
The importance of transportation in Canada has always been recognized, for, since Confederation, no fewer than seventeen Royal Commissions have been created to enquire into various aspects of transportation, usually the railways. The latest of these was the MacPherson Royal Commission, which was appointed in 1958, and had the final volume of its findings made public in 1962. The MacPherson Report is of particular interest at this time, not merely because it is the most recent, not only because in some respects it is the most comprehensive, but also because there are prospects that at long last, during the session commencing next week, Parliament may come to grips with implementation of its findings. Accordingly, the subject is one of current concern to all Canadians, especially those involved in one or more of the many facets of trade and transportation, and that includes most of us.
The MacPherson report is distinguishable from others which preceded it by the extent of attention given to basic considerations in the transportation field. In the four years which have elapsed since its release, these basic findings have not been seriously challenged.
The very cornerstone of the MacPherson Report was the finding which identified and defined the objective of National Transportation Policy. That objective was stated to be the movement of Canadian goods and people with minimum demands upon the human and material resources of the nation. You will readily perceive how this finding is completely consistent with our international trade requirements as well as with our desire to enhance our domestic standard of living. It is entirely compatible with the reports of the Economic Council. Indeed, just last fall the Chairman of that Council, Dr. Deutsch, stated that Canada must improve the efficiency of her transportation system to remain competitive in the world.
In its review of Canadian transportation, the MacPherson Commission noted the transformation which had occurred by which the monopoly position formerly held by the railways had changed to one of intense and pervasive competition from other forms of transport, by highway, air, pipeline and, through extension of the St. Lawrence Seaway, from the oldest form of domestic transportation, our inland waterways. With this observation, the next step taken by the Commission was to find that the most effective means of attaining the objective of national transportation policy, namely, the achievement of maximum efficiency, was to place reliance upon the forces of competition, rather than on regulation. Reliance upon competition is not only fully in keeping with our basic concepts of a free enterprise society, as opposed to one which is state-directed and controlled; it has been demonstrated time and time again as being vastly more effective.
The MacPherson Commission recognized that for competition to properly allocate use of the nation's transportation resources in the most efficient manner, the various modes of transportation had to be able to compete on an equitable basis in a commercial environment. To achieve this, it found that the railways should be relieved of burdens imposed on them by reasons of law or public policy. Specifically, this entailed that they should no longer be required to furnish free transportation by statute; that they should not be encouraged to remain in unprofitable passenger train operations, particularly over routes served by public highway; that they should be permitted to discontinue the operation of unprofitable branch lines, and that they should be compensated for the burden of being required to haul grain from points in Western Canada to export positions at rate levels set nearly seventy years ago.
As a corollary to the foregoing, the Commission also recommended that transportation agencies which use facilities provided at public expense should be required to pay user charges in full reimbursement of the cost of constructing, owning and maintaining such facilities. This step is essential in order that the charges made by each mode of transportation truly reflect the cost of the "human and material resources" consumed in the production of its service and therefore achieve effective allocation of their use.
Obviously this principle applies to carriers by waterway, highway and airway. While the Commission did not spell out its recommendations along these lines in detail, even brief consideration discloses that there are several aspects to the matter. The public cost of providing highways and waterways is not encompassed merely by the investment in their construction, outlays for their maintenance and disbursements for operating and for policing their use. What of the lands withdrawn from the tax rolls and placed in the public domain? Goods carried by these forms of transport are relieved of contributions to municipal tax revenues to which those carried by other modes are generally subject. Another and more subtle form of tax relief conceded to users of route facilities provided at public expense arises from the application of income tax. The earning of a return on equity investment in transportation route facilities carries with it the necessity of incurring an income tax obligation larger than the return itself. Since all other carriers either have no investment in route facilities or are not in a taxable position, the only way you can ship goods across Canada and simultaneously make such an income tax contribution to the coffers of the nation and the respective provinces is via Canadian Pacific! In passing I must urge that both from the standpoint of public duty and self interest you should feel impelled to use our services more! The one exception to the general proposition mentioned comprises the pipelines which carry oil and natural gas. Pipelines are the one form of transportation to which the MacPherson Commission did not devote attention since they neither labour under burdens imposed by public policy nor benefit from the use of facilities provided at public expense.
As between the two major railways, the MacPherson Commission pointed out that costs of capital investment for Canadian National should be reckoned on the same basis as that incurred by Canadian Pacific, and that to follow any different course would be to confer artificial and unfair advantages on the government-owned railway.
The balance of the MacPherson Report was devoted primarily to the retention of regulation of railway freight rates in those areas where competition might not exist, and to the mechanics of compensating the railways for the handling of western grain and of providing for the orderly abandonment of non-productive branch lines. One might wish that in formulating these particular recommendations the Commission had adhered more closely to its basic findings. One must hope that Parliament will be sufficiently wise to refrain from temptation to countenance further departures from the basic principles for the indulgence of special interests. It would be regrettable indeed if the opportunity now open to begin the task of putting our transportation house in order--of eliminating "Turmoil in Transportation" was missed. I say "to begin" because it must be recognized that the measures so far proposed do not represent full implementation of the Commission's findings and recommendations. The intervention of circumstances which have delayed action on the report over the now four years since it was produced is unfortunate. It may be, however, that once the first step is taken, subsequent ones will come more easily.
I recognize that some of the views I have expressed may be regarded as contentious, and that others, indeed some present here today, may hold differing opinions. This is particularly so in regard to competing modes and agencies of transportation. Quite frequently reference is made to the ancillary boons and benefits conferred upon the nation as a by-product of public investments in transportation facilities. It is suggested that somehow these are more than adequate recompense for the costs incurred. There is a very simple reply to such propositions. If the boons and benefits approach the magnitude claimed for them by their proponents, then there can be no difficulty in collecting the relatively small additional revenues from those on whom these advantages are conferred to fully reimburse the public treasury and avoid having special benefits conferred upon particular groups at the expense of taxpayers as a whole.
Let me recapitulate briefly. First I outlined the critical importance of international trade to the Canadian economy and the absolute necessity of our being competitive in world markets if we are to sustain growth and maintain the standard of living to which we have become accustomed. Next I described the role of efficient domestic transportation in making available to world markets the products of our country, which are frequently low value bulk commodities moved over long distances to our borders. Then followed a synopsis of the basic findings of the MacPherson Royal Commission on Transportation; the definition of the objective of National Transportation Policy being to accomplish the movement of people and goods with a minimum expenditure of our human and material resources; that to attain this objective, reliance should be placed on competition rather than regulation; and that for competition to effectively allocate the use of transportation resources, on the one hand the railways should be relieved of burdens imposed upon them, and on the other hand competing modes of transportation using facilities provided at public expense should be assessed user charges to fully recompense the public purse. Finally, I drew attention to the fact that we have now reached a juncture where the opportunity to pursue a more prudent course is open to us.
International competition is a stern taskmaster whose disciplines can only be ignored at our peril. At present our full transportation potential is not being realized. To reach this goal requires the discharge of their respective duties by the transportation industry, by labour and by government. The industry will have to sharpen its competitive efficiency with energetic zeal and initiative; labour must act in a responsible manner and assist in adapting to changing conditions. With government on the eve of making a beginning in implementing the recommendations of the MacPherson Royal Commission, let us hope that our Parliamentarians have the wisdom and the courage to deal with the matter objectively and constructively, putting principle before expediency. We must urge that they do so.
Thanks of this meeting were expressed by Mr. Sydney Hermant.