This bulletin summarizes the first in a series of reports on the performance of Canada’s transportation sector produced by The Conference Board of Canada’s Centre for Transportation Infrastructure. The report, entitled The Productivity Performance of Canada’s Transportation Sector: Market Forces and Governance Matter, attempts to achieve three objectives. First, it provides a framework for considering efficiency in transportation by defining what is meant by "productivity or productive efficiency" in the transportation sector. Second, it attempts to identify which transportation networks have achieved efficiency gains. Third, it analyzes the factors responsible for the noted improvements as a means of identifying policy approaches to enhance future performance.

Productivity

Productivity or productive efficiency means delivery of transportation services desired by end users through a combination of reduced costs and/or increased benefits to users and Canadian society at large. Although efficiency entails two economic concepts – productive efficiency, which refers to minimizing costs and maximizing benefits and allocative efficiency, which refers to making the right decisions in terms of the different transportation modes – the report focuses on productive efficiency. Future reports in the series will address the issue of allocative efficiency. More specifically, the report evaluates total factor productivity for each of the modes of transportation that it considers — rail freight, air, trucking and public transit. This involves a measurement of productivity using an index that combines all inputs used in the production process with specific weights given to each input.

Transportation Modes That Achieve Efficiency Gains

Among the report’s findings is that between 1981 and 2006, productivity grew by an average annual rate of 3.6 per cent per year in the rail freight sector, two per cent per year in the airline sector, and 1.8 per cent per year in the trucking sector (trucking data to 2003 only). In contrast, the public transit sector experienced a decline in productivity at an annual rate of 1.2 per cent during the 1986-2006 period. Also examined is the relationship between productivity levels of the various transportation sectors and the effect on end users. Productivity gains in rail, air and trucking have benefited end users, and resulted in reduced costs. The report states that between 1981 and 2006, average rail freight rates dropped by an average of 2.2 per cent annually, air fare rates dropped by about one per cent annually, and between 1981 and 2003, trucking rates dropped 1.4 per cent annually. By comparison, the productivity decline in the public transportation sector between 1986 and 2006 resulted in an annual increase in fares of approximately 1.7 per cent. The report concludes that from 1997 onwards the public transit sector increased its fares in order to offset declines in productivity, which resulted in services being more expensive for end users.

In addition, the report dedicates a chapter to the 2004-2006 period, which it describes as an exceptional period for the air, rail and trucking industries. As a result of the marked productivity gains from the mid-to-late 1990s to 2004, end users in these sectors generally benefited from lower costs. During this period the productivity gains continued but in the case of airlines and rail freight, the benefits were not shared with users through lower prices but went instead toward better operating results, which in turn led to greater investment and shareholder returns.

Factors That Led to Productivity Growth and Recommendations

The differing results yielded in the various Canadian transportation sectors are due to three main factors. First, in the air, rail, and trucking sectors, reforms were made to the governance and ownership structure. These reforms transformed organizations previously under direct state control into organizations with commercially oriented management, which operated at arms-length from government, were self-financed through user fees and had a clear mandate and an independent board of directors. Second, there has been deregulation of pricing in each of the air, rail and trucking sectors. Third, each of these sectors has benefitted from competition through the easing and removal of barriers to entry and exit. The report considers each of these factors to be instrumental to the growth in productivity.

Examining the history of the air, rail, and trucking sectors in the United States, where legislative reform in the early 1970s led to greater deregulation and resulted in massive productivity gains in each sector, the report indicates that the three sectors benefited from the productivity gains as a result of economic deregulation. The public transit sector, in contrast, experienced no major changes in economic regulation or price deregulation. As with U.S. public transit, public transit in Canada has not experienced significant government reform which has similarly led to poor productivity performance. However, the report notes that there have been certain organizational changes in the Canadian public transit sector, such as integrated regional planning agencies in three of the largest cities, which the report credits with slowing, but not stopping, the decline in productivity.

The report concludes by suggesting areas for improvement which could enhance productivity in public transit: competitive tendering of transit services, pricing and marketing, improvement in service delivery models and changes in governance and funding policies. With respect to competitive tendering, the report proposes comparing the cost effectiveness of the public transit systems with in-house operations to transit systems which are competitively tendered. Currently in Canada only three of the top 25 transit networks; Go Transit Rail, York Region’s Viva bus network, and Montréal’s suburban bus services, are competitively tendered. In terms of pricing, the report proposes innovative pricing models that are sensitive to peak and off peak usage and travelling distance. In addition, in terms of improving service delivery models, the report proposes that consideration be given to an alternative to the fixed-route/fixed schedule model of public transit systems that has been put in place since the post-war period and has been primarily oriented to city centres. Regarding changes in governance, the report proposes a more integrated regional planning approach that crosses local jurisdictional and modal boundaries resulting in an integrated approach to planning and operations. In terms of funding, the report proposes further research to identify potential sources of stable and long-term funding, including commercial revenue sources, which encourage effective long-term planning for both capital and operations; and to ensure that public transit systems compete on a level playing field with other modes.

Although public transit has been characterized by a poor productivity performance historically, the report concludes that productivity improvements in several European cities suggest that like improvements could be achieved within Canada. In fact, many smaller Canadian communities have already introduced competition in the tendering of transit services. Further research is warranted in order to identify other ways to improve productivity performance.

The Conference Board of Canada's report is publicly available at http://www.e-library.ca.