September 25, 2018

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Opinion

Time to think big picture on Churchill rail line

Omnitrax argues that the Hudson Bay Railway (HBR) is uneconomic to operate because the Canadian Wheat Board no longer directs wheat shipments through the Port of Churchill. If the owners cannot earn enough revenue to maintain the infrastructure in a safe operating condition, it makes no economic sense to fix a highly depreciated railway.

Three freight markets hold potential for the HBR and the Port of Churchill — grain, oil and containers — none of which is an easy win. Even with the wheat board’s traffic, the commercial viability of the HBR is doubtful, as a back-of-the-envelope cost analysis reveals.

The financial records of the HBR are unavailable, but some educated guesses can be made about its viability, based on Railway Association of Canada (RAC) data. The Canadian railways reinvest $1.5 billion annually to maintain 43,562 kilometres of rail track. This works out to $34,434 per km. Roughly half of this capital is used to maintain the track and roadway, while the rest goes to equipment, rolling stock, signals, etc.

The Canadian average almost certainly overstates the requirements of the HBR. The two large railways, CN and CP, account for much of the track, and most of it is maintained to a Class 5 standard. This is required for freight trains to operate at normal “track speed” and even higher, up to 128 km/h.

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Omnitrax argues that the Hudson Bay Railway (HBR) is uneconomic to operate because the Canadian Wheat Board no longer directs wheat shipments through the Port of Churchill. If the owners cannot earn enough revenue to maintain the infrastructure in a safe operating condition, it makes no economic sense to fix a highly depreciated railway.

Three freight markets hold potential for the HBR and the Port of Churchill — grain, oil and containers — none of which is an easy win. Even with the wheat board’s traffic, the commercial viability of the HBR is doubtful, as a back-of-the-envelope cost analysis reveals.

The financial records of the HBR are unavailable, but some educated guesses can be made about its viability, based on Railway Association of Canada (RAC) data. The Canadian railways reinvest $1.5 billion annually to maintain 43,562 kilometres of rail track. This works out to $34,434 per km. Roughly half of this capital is used to maintain the track and roadway, while the rest goes to equipment, rolling stock, signals, etc.

The Canadian average almost certainly overstates the requirements of the HBR. The two large railways, CN and CP, account for much of the track, and most of it is maintained to a Class 5 standard. This is required for freight trains to operate at normal "track speed" and even higher, up to 128 km/h.

The cost of maintaining a railway with Class 1 track (maximum speed 16 km/h) is probably one-third of the average (roughly $12,000 per km), and more in the permafrost sections of the line. Assuming the HBR operated as a going concern, recapitalizing 1,000 km of track would run about $12 million annually.

The difference between the railway’s revenues and operating costs provides the cash flow for reinvestment. The big railways’ ratio of costs to revenues is below 60 per cent, which creates a cashflow of 40 cents for every dollar earned. The five-year average operating ratio for shortline railways like the HBR is 86.5 per cent, which leaves much less cash for reinvestment.

Given system-wide freight rates of 3.15 cents per tonne-km and an 86.5 per cent operating ratio, each tonne carried by the HBR could provide 0.425 cents toward capital expenditures and other outlays, like shareholder dividends.

If each tonne were carried the full 1,000 km, it would contribute $4.25. The HBR would need to move 2.8-million tonnes of freight through the Port of Churchill to obtain $12 million to cover its reinvestment needs. But in its best year to date (1977), the HBR carried only 700,000 tonnes of grain. This is only one-quarter of what would be considered necessary for business continuity.

Churchill has a grain export terminal that could be reactivated if cargoes can be wrested from the Port of Thunder Bay. But the ownership of the terminals by the integrated grain companies and the excess capacity at Thunder Bay make grain traffic difficult, if not impossible, to divert. And even if the traffic could be secured to keep the Churchill terminal busy, 2.8 million tonnes is a lot of grain.

What about other cargo? Oil from the Bakken or the Alberta oilsands could be shipped by rail through Churchill. The route provides a shorter, downhill trip to the sea, and the volumes are available to make the HBR economically viable. Manitoba’s former NDP government killed this idea in the wake of the Lac-Mégantic tragedy and Keystone XL pipeline protests. The current Pallister government has yet to state its policy, but resistance by environmentalists to shipping oil through Churchill surely would be sizable.

Container shipments through the Port of Churchill could be an economic solution for the HBR. A weekly service by a single 10,000 TEU container ship would fill three trains per day on the HBR. Moreover, it could provide freight in both directions.

In 2017, the Chinese icebreaker Snow Dragon sailed the Northwest Passage in what is interpreted as its interest in developing a new container route. Capital could be attracted from the Chinese Belt and Road initiative to build a container port and upgrade the HBR. Chinese interests could also use their icebreakers to extend the season.

The activities of the Chinese would likely raise sovereignty concerns, but then again, if the Northwest Passage is going to open, Canada might as well embrace the change.

There appear to be only two viable choices for the HBR: find an economic use or abandon it. Moving oil or inviting the Chinese to create a container route have challenges, but the idea that this railway can be kept limping along with public Band-Aids is ridiculous.

As things stand, a more productive use of public funds would be to convert the rail bed into a gravel road.

For all the freight moving to Churchill, tractor-trailers would be sufficient and a road access would encourage tourism, too.

Barry Prentice is a professor of supply chain management at the University of Manitoba.

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