Competition Into Brazilian and North American Freight Rail Systems: A Comparative Regulatory Assessment

Abstract

Competition is the driving force of any economic system, as it creates a challenging environment for service suppliers to provide affordable and reliable services to customers. Rail systems are an important element of the logistic chain, as they provide a unique service category (generally transporting large volumes at low unit costs) to shippers that otherwise would not be serviced by other modes — the so called captive shippers. In this scenario, competition is essential to guarantee the required service levels (availability and reliability), followed by competitive rates, which ultimately may influence shippers’ business competitiveness, both regionally and globally. Brazil and some North American countries (Canada, Mexico and United States), have a common feature, i.e. continental territories allied with the economic exploitation of bulky activities (industrial, mineral and agricultural), and, hence, depend strongly on heavy haul rail systems. These countries have been performing a continuous effort on improving competition practices into their rail systems, which are translated into important, and sometimes controversial, regulatory measures. These initiatives require a tenuous equilibrium, as they are supposed to provide the required competitive service at affordable rates for shippers, as well as a sustainable (financial and operational) environment to rail carriers, to guarantee the required return on long term investments and avoid compromising medium and long term rail network efficiency. This challenging task for rail market stakeholders (rail carriers, shippers and regulators) is far from a consensus. Rail companies claim that, as a capital intensive sector, governmental regulatory intervention into the rail system may inhibit their ability to invest the required funds to provide and expand rail capacity, as well as the maintenance of the required safety levels. Shippers, on the other hand, state that rail systems operate within a strong market concentration (originally formatted or due to subsequent merges and acquisitions) that give some rail carriers a disproportionate market power, that resembles a monopoly, which ultimately leaves a significant contingent of the so called captive shippers with just one freight rail carrier option, sometimes subjected to excessive rates, and, in some special instances (into offer restricted rail markets, for example), are responsible for the unavailability of rail services into the required volumes. In this context, there is currently a controversial debate regarding the effectiveness of competitive regulatory remedies into freight rail systems. This debate includes both market oriented rail systems (Canadian and U.S.), as well as rail contractual granted ones (Brazilian and Mexican). In the formers, the systems are mostly owned and operated by the private sector, and inter and intra modal options may theoretically provide the required competition level, while in the latter, rail systems have been broken into separate pieces and granted to the private sector under a concession arrangement, followed by an exclusive right to serve their territories, with trackage rights provisions, to be exerted by third parties, under previously defined circumstances and subjected to contractual agreements among rail operators. In both systems, competitive regulatory actions may be desirable and effective, as far as they may address the technical-operational-economic boundary conditions of each particular rail system. This work is supposed to present, into a review format, sourced from an extensive research into available international technical literature, and gathered as a unique document, an overview of the Brazilian and North American freight rail competition scenario, followed by a technical and unbiased effectiveness’ assessment of current (existing) and proposed competitive regulatory freight rail initiatives into Brazil, Canada, Mexico and United States, highlighting their strengths and eventually their weaknesses.