By Keith Norbury
In its first year of operation, the Great Sandhills Railway in Saskatchewan had a budget of about $2 million. A decade later, its annual budget is around $7 million.
“Of that $7 million, probably 85 to 90 per cent goes right back within 100 miles of the rail line,” said Perry Pellerin, the railway’s CEO. That economic injection includes buying fuel locally from Co-op and ballast from the municipalities along the 198-kilometre line, which extends from Swift Current, Sask., to just across the Alberta border in McNeill.
“Really anything we can buy locally, we try to do that,” Mr. Pellerin said in a phone interview. “And that’s good for the communities also. It employs people.”
That doesn’t mean it has been all smooth sailing for the railway, which began in 2009 when those towns and municipalities along the line got together with an independent grain terminal to purchase the line. Mr. Pellerin had been doing transportation work for the Great Sandhills Terminal and sensed that CP might be willing to sell the line. “They weren’t overly aggressively marketing the line,” he said. G3 Global Grain Group, a company created after the privatization of the Canadian Wheat Board, now owns the Great Sandhills Terminal and its 70 per cent stake in the railway. “We worked from day one trying to raise funds to make the purchase, and line up people to start working,” Mr. Pellerin said.
Among the industries the railway serves is Plains Midstream Canada’s Empress gas liquids plant in Alberta, about three kilometres from Burstall, Sask. At present, the railway loads cars from Plains Midstream, one of the plant’s co-owners, with products such as propane and butane. “They take it out of the pipeline there, and put it into rail cars,” Mr. Pellerin said. However, next fall, the railway expects to begin shipping gas products from a Pembina facility that is undergoing an $120 million expansion. “Pembina will start loading its own rack there, so to speak,” Mr. Pellerin said. When that expansion happens, Great Sandhills Railway will probably add ten new employees to its current contingent of 24, up from about six when it started. While that indicates a bright future for the railway, it’s still a struggle running one, he said.
“You gotta wear a lot of different hats and do a lot of different things on a short line,” Mr. Pellerin said. “It is tough, tough sledding.” One of his other hats is as President of the Western Canada Short Line Railway Association, whose members include 17 short line railways on the Prairies, most of them in Saskatchewan. “A lot, if not all short lines, are bought after the Class 1s have decided they don’t want to bother with them,” Mr. Pellerin said. During that process, little money is put toward upkeep of those lines. “So by time it does actually get sold, we’re getting something that’s in really rough shape.”
A similar story played out across Canada, and the U.S., in the last quarter century as Class 1 railways like Canadian National and Canadian Pacific sold off or leased secondary lines to local interests or entrepreneurs. Canada now has about 60 short line railways while the U.S. has about 500. “The short lines wind up being lifelines to these communities,” said Greg Gormick, a transportation analyst and policy advisor based in Oshawa, Ont. He cited the example of Genesee & Wyoming (G&W) Canada’s Huron Central Railway in northern Ontario between Sudbury and Sault Ste. Marie that serves a forest products mill and steel mill. “You’ve got several industries like that, that are dependent on the railway because of its ability to move goods in bulk at a reasonable price,” Mr. Gormick said in a phone interview. “And in turn, those communities are dependent upon those industries. They’re huge employers. So if the short line goes down, so does the industry and so do all those jobs and the community.”
G&W owns 120 shortline railroads, 114 in North America, with additional operations in Europe and Australia. Its North American railroads serve 41 states and four Canadian provinces and have over 13,000 track-miles. G&W Canada operates eight short line railways in Canada, said Michel Vincent, the company’s Vice-President, Sales and Marketing. Those railways offer a connection with Class 1 carriers for industries in places like Cape Breton, N.S., Temiscaming, Que., and Northern Ontario. G&W Canada also provides “a competitive option” for customers in urban areas, such as the Quebec-Montreal-Gatineau corridor, or as a “transborder” alternative connecting Quebec with the northeastern U.S.
“Shortlines offer a vital service to many remote Canadian businesses who would not be able to compete in the marketplace or worse, would simply not exist without this cost-effective transportation option,” Mr. Vincent said.
Like all enterprises, short line railways have their strengths and weaknesses. One strength, as noted by Mr. Vincent and others, is that short lines provide a first-mile or last-mile transportation solution for customers they know well. “We work with them and try to adapt our service to their needs as much as possible,” Mr. Vincent said. To gauge how well its railways are doing, G&W Canada hires an independent firm to conduct biennial customer satisfaction surveys in such areas as response time, rail service, and billing accuracy. The company is proud of its 80 per cent satisfaction level on its 2017 survey. However, we realize that we are as good as our last action so we are constantly looking to improve our processes and adding value to the service we perform,” Mr. Vincent said.
Helping iron ore mining companies reach offshore steel mills is among the activities of G&W Canada. Its railways also provide peripheral activities like storing rail cars and switching operations. “We access ports and, as such, have participated in large sophisticated import/export projects,” Mr. Vincent said. “We would love to be involved in Intermodal movements, but this is impossible without an alliance with a Class 1 partner.” For now that’s on his wish list.
Early in July it was announced that G&W would be acquired by Canada’s Brookfield Infrastructure and GIC, a Singapore-based global investment firm, in a transaction valued at approximately US$8.4 billion including debt, and would result in G&W becoming a privately held company.
Michael Cairns, a retired transportation analyst and immediate past President of the Canadian Transportation Forum, said short line railways have a reputation for being more attuned to local businesses and local industries. “It’s much more hands-on and even though they may not have a huge staff, they’re very conscious of what’s going on,” Mr. Cairns said. In contrast, Class 1 carriers couldn’t mount such marketing efforts because it would stretch their resources too thin. They tend to focus on the big customers, he said. “That’s why having a short line operated with the local knowledge and experience and being able to deal with the local people does work,” Mr. Cairns said. “It’s unquestionably a successful model.”
When he started in the industry a quarter century ago, nobody thought much about the short-line sector. “But it’s evolved into an important component of the overall freight industry,” Mr. Cairns said. Short lines have even proven beneficial for the class 1 railways, like CN and CP, that hived them off. “The two principal railways are quite happy to have the traffic delivered to them on these lesser lines,” Mr. Cairns said. A posting on the CPR website confirms that: “We proudly work with our short line connections so we can move your goods to almost any North American location, even beyond the reach of our own rail network.” The post contains links to dozens of short lines in Canada and the U.S. Mr. Gormick uttered a similar comment. He also added that because short lines benefit multiple parties, “everybody needs to be at that table to talk about the problems and to come up with solutions.”
Among the enduring problems of short line railways is having to operate on tight margins. Mr. Vincent said short line railways have operating costs of up to 90 per cent of revenues but also spend 12 per cent on maintenance. By comparison, the Class 1s spend far less on operating expenses, Mr. Cairns noted. Short lines have lean operations with few employees, which keeps costs in check. They typically operate at slow speeds, which means they can “make do with lesser quality track than the mainline carriers would tolerate.” However, should a catastrophe occur such as the washout of a bridge, a short line likely won’t have the capital budget to deal with it. “If something serious happens, they can be in difficulty,” Mr. Cairns said.
A stark example of that occurred in May 2017 when massive flooding washed out large sections of the Hudson’s Bay Railway (HBR) between Gillam and Churchill, Manitoba. It took over a year, a change of ownership, threats of court action, and a pledge of $117 million from the Canadian government before the line resumed freight service in November 2018 and passenger service shortly after that. A consortium of local and Indigenous groups called Arctic Gateway, backed by Saskatchewan grain company AGT Foods and Toronto’s Fairfax Financial Holdings, now owns the railway and the Port of Churchill.
Another recent tragic example of the challenges small railways in Canada confront was the Lac-Mégantic disaster of July 2013, in which exploding oil tanker cars killed 47 people in that Quebec town. The tragedy resulted in the bankruptcy of the U.S.-based Montreal, Maine and Atlantic Railway, which had acquired the former CP line in 2003. In 2014, New York-based Fortress Transportation & Infrastructure Investors LLC bought the assets of the bankrupt railway and established Central Maine & Quebec Railway, which in 2016 was named Regional Railroad of the Year by Railway Age magazine. Earlier this year, CEO Joe Adams told investors that it planned to sell the shortline.
Churchill, which lacks a permanent road connection with the rest of Canada, is a prime example of a community that depends on its railway. Mr. Gormick said that the resumed service is still encountering problems with delays, particularly on the passenger side. “I’m seeing trains cancelled,” Mr. Gormick said. “They’re still struggling. They need some help up there. And that’s not the short line’s fault. It’s just their limitation.”
Short lines have received some government help. This August, for example, the federal government announced that Great Sandhills would receive a multimillion dollar grant to upgrade its track. “This upgrade will help customers using the line to more efficiently move their goods to port for export, and also accommodate future growth in their operations. The frequency of trips on the line will increase to once daily from twice weekly, and blockage time on Canadian Pacific Railway’s busy mainline will also be reduced as a result of more reliable and improved operations,” said a news release from Transport Canada. Another recipient was 40 Mile Rail, which runs between Stirling and Foremost, Alta., said Allison Field, Director of Communications for the Western Canada Short Line Railway Association (WCSLRA), of which 40 Mile is a member. “They moved from basically nothing to moving windmills, moving oil products, moving grain,” Ms. Field said. “They’ve turned it into an absolute economic hub.” Nevertheless, she said the government money available for short lines is almost non-existent. The Saskatchewan government used to provide some assistance — less than $1 million annually, “next to nothing really” — to divide among the more than dozen short lines in that province, she said. But that was discontinued when a new government introduced austerity measures.
“We apply for everything,” Ms. Field said. “We apply for the Building Canada Fund. We apply, but we never get money, basically. This is the first time we’ve ever received significant funding.”
WCSLRA’s short lines range in length from about 20 miles to the 800 miles of the HBR, with an average of about 100 miles. Combined, they have about 1,600 miles of track and employ around 350 people. The railways carry cargos like grain, fertilizer, propane, diesel, frack sand, magnesium chloride, brine, asphalt, and liquified petroleum gas.
While most short lines are federally regulated, many are provincially regulated. That creates another set of challenges. “If the federal government comes down, as they have, with additional safety requirements, the short lines say, ‘Well, where are we going to get the money?’”, Mr. Gormick said. Those short lines can’t tap into federal funds because they’re not federally incorporated. And provincial governments take the attitude that funding railways is a federal responsibility, Mr. Gormick said. “So short line operators get caught between a rock and a hard place, to use an overused phrase,” he said.
Providing subsidies to short lines, which are, after all, private enterprises, can be a hard sell, Mr. Gormick and others acknowledge. That’s why he favours a system of tax credits similar to what has been implemented in the U.S. Since Congress first enacted the Short Line tax credit, or 45G, in 2005, it has allowed short lines to invest over $4 billion, noted a recent posting on the American Short Line and Regional Railway Association. A bill is now making its way through Congress to make the tax credit permanent.
When the Canada Transportation Act was first enacted in 1996, the country had only 12 short line railways, noted a 2016 federal government report on Canada’s transportation system titled Pathways: Connecting Canada’s Transportation System to the World. “Short line rail and trucking are consequently of critical and growing importance in serving shippers and smaller centres, but they will need special attention if they are to become vibrant and durable businesses and a critical piece of Canada’s rail system,” noted the report. The Railway Association of Canada reports that Canada’s short lines move $20.3 billion of freight per year, and called for more government funding “to ensure that Canada’s short line railways can support our country’s sustainable growth now and in the future.”
Mr. Gormick wishes that the conversion of less profitable secondary lines to locally run short line railways could have started sooner. Back in the 1980s, as he was researching a documentary for CBC Radio, he visited an abandoned railway just west of Saskatoon. “It was heartbreaking because the railway was just a furrow in the ground,” he said. “You could still see the continuous corridor with no rails or ties. And there were all these soon-to-be demolished grain elevators.” On a trip into town, he spoke with a shopkeeper who was going broke because farmers no longer had a reason to do their shopping there. The school and the post office had shut down. “That’s an extreme example of what happens if one of these modern day short lines goes down. It takes the community with it,” Mr. Gormick said. “I only wish that we had been doing this fifty years ago. There are so many branch lines that might have been saved.”