Thank you, Mr. Chairman.
I'm very pleased to be here with my colleague Paul Miller, from operations, to give you a little bit of our perspective, but also to answer, most importantly, your questions about this important issue.
A lot has been said over the last few years on the hopper car fleet and the maintenance cost issues, and actually the two issues are very much linked.
To give you a bit of context and history as to how we are where are today, a lot of the debate and discussions have been centred on the proposal by the Farmer Rail Car Coalition to take over the ownership of the cars on a go-forward basis. We understand where the Farmer Rail Car Coalition is coming from. There is a need to address, from a policy standpoint, the need to replace that fleet over the long term. Those cars are coming to the end of their useful life, and if we want to have a world-scale grain logistics system on a go-forward basis, we will need to replace those cars in the next several years. So we understand that this is a very significant and very important issue.
The Farmer Rail Car Coalition construct or approach to this problem is also very understandable. In a sense, what they're trying to do is to come forward with a proposal that would replace the cars over time without adding costs to the farmer. If I were a farmer or a grain stakeholder, I would want to have the same basic outcome at the end of the process.
There are, however, two problems with the approach that's been proposed. One is the efficiency of the system and the other one is the maintenance cost offset, or the so-called excess maintenance cost embedded in the revenue cap.
I'll come back to the efficiency problem in a little bit more detail at the end, but the important point is the following: we believe that adding another player to an already complex system would not promote efficiency in the grain-gathering system. What we need is a system that promotes efficiency so that ultimately we have the lowest possible cost and the best service for the grain system. To add another player to switch out cars to do maintenance outside of the rail network would not be productive and would require more cars over time, so we would not really be helping the situation. We are pleased with the government's decision to retain those cars in light of this efficiency reason.
The other issue is the maintenance cost offset. To put it bluntly, the idea from the FRCC was because we needed to pay a lease payment going forward to the FRCC as a railroad, and if we did not want to increase the cost to farmers, we needed an offset. The offset has been debated around the issue of excess maintenance costs. The idea was if you increase the lease but offset it by the excess maintenance cost, you would have a situation where net the cars could be transferred without added costs to the farmers.
The problem with this is that the maintenance cost is a bit of a technical and flawed construct. We believe at CN that the government 15 years ago moved away from a cost-based system. In actual fact, we are not paid to do switching, inspection, or car maintenance as activities. What we are paid for is to move the cars to destinations in the most efficient fashion with a rate that is fair to farmers and fair to the industry participants, railroads included.
The actual fact is the rate we get paid is under a framework of a revenue cap. That revenue cap has been decided by the government, adjusted recently downward, and overall is a very fair rate for farmers. Farmers in Canada pay the lowest grain rates in the world by far. They pay about 35% less on a tonne-mile basis than what farmers in the U.S., just south of the border, are paying to move their products to destinations. There are no questions that the government, in setting the revenue cap, has done something that is very fair to the farmers.
It's also reasonably fair for the railroads. While we do make slightly less money moving grain, we do make enough money to reinvest in the plant, reinvest in assets, and continue to offer good service for farmers on a long-term basis. So we do not believe that there is a maintenance cost issue.
I'd be happy to answer the questions that you have on this particular aspect, but we do believe that the issue the FRCC is putting forward of the long-term replacement of this fleet is one that has to be looked at very seriously.
As I said, those cars are coming to the end of their useful lives. Many of them are obsolete in terms of market demand. They are too small. It's not really economical to replace those cars, and it's not going to give us the best system we can have. We need to decide how we're going to replace those cars. The government has to take a policy stand.
Many years ago the government decided we should move toward a more deregulated framework for grain within the proper safeguards of a revenue cap, one that allows the railroads to foster efficiency to go for market pricing, one designed to get the highest level of efficiency. At the end of the day, the best promise for a good system is an efficient system. We don't need a win-lose proposal. Unfortunately, if we are trying to make a case that railroads have to be paid less because of a technical debate on maintenance, it's not fair for the railroads. It would be good for the farmers, but it's a win-lose situation.
More recently, by asking the government to step in and replace those cars, we created another losing party, the taxpayer of Canada. To replace those cars over the next five to ten years would cost taxpayers in the order of $1.5 billion, if the government has to pay for those cars. It has been decided that is not the best solution. There is a better plan. We can have the best system in the world, we can achieve efficiencies, and through efficiencies we can pay for a good part of the investment required to move toward a jumbo car fleet that will be the best car fleet in the world, in the best grain system in the world, at rates that are competitive, if not far better than what exists elsewhere.
The way to go about this, Mr. Chairman, is to have a win-win-win approach. The solution is right there in front of us. If we focus on efficiency, we can gain cycle times in the use of the hopper car fleet in western Canada, and the productivity derived from faster transit time and faster cycle time will allow us to invest in a jumbo car fleet that will allow us to have better capacity to meet the needs of farmers.
If we focus on productivity and efficiency, we will have more throughput capacity for farmers and better efficiencies, so we'll have lower costs over time. If they have revenue stability in terms of the revenue cap, productivity will allow the railroads to play their part and invest in those cars at no cost to farmers. That is a far better approach, one that is win-win-win. From our perspective, that's what I would encourage the committee to focus on.
Thank you, Mr. Chairman.