Point 1: Choosing a route for anything in Canada, whether it is a railroad, highway or pipeline, is always a contentious issue. Politics usually trumps economics. The final route of the CPR was controversial with the key dilemma being whether to have a more expensive all Canadian route or a cheaper route that partly went through the United States.
In Central Canada, the rugged and rocky Canadian shield was an expensive geographic obstacle. Given the expense of building through the Canadian Shield, a number of proposals for the line from Ontario to the West had been made. Most of these proposals involved going through the United States and coming up through Minneapolis and Red River to Winnipeg. Another rather interesting proposal suggested a main trunk line from Winnipeg to Fort William, a ferry link to convey the rail cars across Lake Superior, and a connecting line at Sault Ste. Marie. The limitations of such a route during a Canadian winter are obvious.
In the West the debate was over a cheaper more southerly route that would take the railway through the arid Palliser's Triangle and a more expensive northerly course through Saskatchewan, Edmonton, the Yellowhead Pass, and then down to Kamloops and Port Moody. The discovery of the more southerly Roger's Pass eventually cemented the choice of the southern route despite concerns about the aridness of land in the southerly route while the more northerly route became the route of the Canadian National Railways.
Ultimately, the Canadian government chose an all-Canadian route, in spite of the expense of laying track around Lake Superior with the grounds for this decision being the political requirements of nation building. Given that the Western railway project was a nation-building exercise and a defensive action to secure the North-West Territory for Canada against American expansion, it made little sense to have the route go through the United States. As well, the all-Canadian CPR project was in Britain's imperial political and military interests; as Vernon Fowke wrote in The National Policy and the Wheat Economy: "It was also to be a link in an imperial chain, a vital part of the 'all red route' which was to bind together the various portions of the far-flung empire."
Point 2: Public private partnerships seem always seem to end up costing a lot more than was anticipated. Building infrastructure is a risky business. The CPR was a Canadian "mega-project" constructed by the government in conjunction with private interests. The slow performance of the Mackenzie government in railway construction during the 1870s was taken as evidence that the project was so capital intensive that public assistance was needed in the form of land and cash subsidies as well as various tax exemptions. As well, there was not a host of private investors lined up to build transcontinental railways in Canada without public assistance. Indeed, public assistance for railway building was common in most countries in the nineteenth century.
The general consensus amongst economic historians is that, in the absence of government assistance, the CPR would not have been built when it was but rather would have been postponed to a much later date when the much denser Western population needed to support rail traffic and generate an adeuate market return was present. At the same time, postponing construction risked the construction of north-south lines linking Canada into the American rail grid and eliminating any need for any Canadian transcontinental rail line at all. Thus a subsidy was needed but ultimately too much was paid.
The amount of Dominion government assistance
provided to the CPR was quite substantial since the Macdonald government, after
its re-election in 1878, had found no private bidders for the project. The Syndicate put together in 1880 to build the railway received the
following in return for completing a railway from Northern Ontario to the
Pacific by May of 1891.The terms seem to have been sufficient incentive to complete the project six years early.
· First the Dominion government was to provide a direct subsidy of $25 million in cash and 25 million acres of land.
· Second, sections of track already built by the government at its own expense were to be given to the CPR without charge. This provision referred to the sections of track built from Fort William to Selkirk and from Kamloops to Port Moody—700 miles of track costing approximately $38 million.
· Third, all materials required for the construction and operation of the CPR were to be exempted from taxation. As well, all imported construction materials were to be allowed into Canada duty-free. Moreover, CPR lands were not to be taxed for twenty years unless they were sold or occupied.
· Fourth, the government promised not to regulate freight rates until the CPR was earning a 10 per cent return on its capital.
· Fifth, the construction of any competing railway south of the CPR was prohibited for twenty years. This stipulation was known as the monopoly clause of the agreement.
According to Peter George’s classic study, the subsidies paid to the CPR in 1885 constant dollars exceeded the needed subsidy (based on estimates of the private rate of return for comparable projects) by amounts ranging from $61 million to $39.8 million to $34.1 million. George thus concluded that the value of the subsidies awarded to the CPR by the government of Canada were indeed excessive. He cautioned, however, that the value of the subsidies can be seen as excessive ex post and that a complete answer would also involve examining the value of the subsidy during the ex ante circumstances that governed the setting of the contract between the CPR and the Dominion government.
J.C. Herbert Emery and Kenneth McKenzie more recently argued that the ex post perspective, which values the size of the excess subsidy after the fact, ignores the high degree of risk associated with these projects at the time the decisions were being made. The ex post perspective, by not taking prior uncertainty into account, will almost always condemn government subsidization as inefficient. The transcontinental railway line should be viewed as an example of a "once-and-for-all" irreversible investment made under uncertainty. They conclude it is quite likely that the portion of the subsidy granted to the CPR that traditionally has been viewed as excessive may well have been required to compensate the company for foregoing its investment option. Thus subsidies that seem excessive in hindsight may have been justified based on the investor expectations of the time.
Point 3: Railways were important in the nineteenth century. They are still important now. The CPR and the subsequent transcontinental lines carried the life blood of the Canadian economy during the wheat boom era and beyond. For decades, they were the only way to effectively traverse the country with people and goods. It is amazing how closely railway cargo statistics still track the ebb and flow of the Canadian economy. The accompanying figure shows statistics for monthly railway car loadings for Canada from 1970 to 2013 and combines it with a LOWESS Smooth (with a 0.1 bandwidth). It is fascinating how despite the 20th century onset of roads and highways for bulk road transport as well as air transport of freight, railway freight since 1970 exhibits upward movement and its fluctuations mark recessionary periods quite distinctly. For example, there are pronounced slowdowns and/or downturns in tonnes of traffic for the 1973-1974 period, 1981-1982, 1990-1993, 2000-2001 and 2006-2009. Indeed, in several cases (the 1991-92 recession and the 2009 recession), one can argue that the rail cargo statistics may have been an important leading indicator forecasting the subsequent recession. As well, these railway statistics also show the recent divide in economic activity between eastern and western Canada. (Note that cargo loadings from Thunder Bay, Ontario, to the Pacific Coast are classified to the Western Division while loadings from Armstrong, Ontario, to the Atlantic Coast are classified to the Eastern Division). As Figure 2 shows, since 1999, freight traffic has been going up in Western Canada while it has remained essentially static in the east. This figure also shows a rebound in activity in the west after 2009 but not in the east.
Railways are indeed a fitting topic for the 2013 edition of Canada Day. Issues like choosing a route, whether or not to provide a public subsidy and how much of a subsidy to provide have a lot of parallels to the infrastructure networks of the present day whether they are pipelines, highways, public transit or electricity grids. Have a great holiday.
Berton, Pierre (1971) The Last Spike. McClelland and Stewart.
Emery, J.C.H. and K.J. McKenzie. "Damned if you do, damned if you don't: an option value approach to evaluating the subsidy of the CPR mainline." Canadian Journal of Economics 29:2 (1996): 255-270.
Fowke, V.C. The National Policy and the Wheat Economy. Toronto: University of Toronto Press, 1971.
George, P.J. A Benefit-Cost Analysis of the Canadian Pacific Railway. Ph.D. Thesis, University of Toronto, 1967.
George, P.J. "Rates of Return in Railway Investment and Implications for Government Subsidization of the Canadian Pacific Railway: Some Preliminary Results." Canadian Journal of Economics 1:4 (1968): 740-762.
George, P.J. "Rates of Return and Government Subsidization of the Canadian Pacific Railway: some further comments." Canadian Journal of Economics 8: (1975): 591-600.
Statistics Canada: Railway Car LoadingsD5324, v74869, v783501; v783644; Canada; Total traffic carried; Tonnes.