in union is strength

Index:

• Introduction
• The "industry" proposal for a system of rewards and penalties
• Problems with the industry model
• Who is responsible for system failure and to what extent?
• Inter-relatedness of the system
• Railways will not sign contracts which they probably cannot fulfill
• Who will hold the railways accountable?
• Structural rigidity
• Farmers pay penalties: companies pocket rewards
• Farmers lose on the marketing side as well
• Problems with the industry model: conclusion
• The NFU's proposed system of performance rewards and penalties
• The Central Coordinator: information gathering and coordination role
• The Central Coordinator: monitoring performance and enforcing rewards and penalties
• Structure and funding of the Central Coordinator
• The rate cap
• The CWB's role
• The NFU's proposed system of performance rewards and penalties: conclusion
• Conclusion and recommendations

Farmers like the idea that railways and grain companies should be paid more when they do a good job and less when they do a poor one. The NFU agrees with CN, CP, and many grain companies which have argued that an effective system of rewards and penalties could increase overall system efficiency and reduce costs. This brief will examine the rewards and penalties system proposed by various industry players (hereafter referred to as the "industry model") and evaluate its strengths and weaknesses. This brief will also recommend a system of rewards and penalties which we hope to demonstrate is superior.

The "industry" proposal for a system of rewards and penalties

Canadian Pacific Railway Company provides a concise and representative overview of the industry model:

...CPR wants a system of clear roles and responsibilities negotiated in commercial agreements.

In a commercial environment each participant would enter into two-party enforceable agreements.For example, the grain company and the CWB would enter into an agreement to meet the CWB sales program in a timely and cost efficient way. The grain company and the producer would enter into an agreement on the delivery of grain into the elevator when required. The railways and the grain company would negotiate an agreement for the efficient movement of grain from elevator to end point.[italics and bold in original]

These agreements would have:

- clear roles and responsibilities;
- negotiated performance levels;
- penalties or rewards dependent upon level of performance versus expectation;
- negotiated levels of risk.

With the above agreements in place, each party would be more certain of the risk they would assume and what recourse they would have if performance was not up to standard.

For example, the railways would negotiate with the grain companies for placement of empty and movement of loaded cars to end destination. CPR would be held accountable if cars were not moved into position on time for unloading on the basis of negotiation.

In a simplified commercial system, the CWB could concentrate on marketing. It could withdraw from its function in the centrally controlled car allocation policy group and its role in inland transportation.

This would be a recognition that inland transportation should be in the hands of those who have made the investments in the physical assets and who perform physical services.

While accountability would increase, so would efficiency. The owners of assets would strive to improve the utility of their assets, while lowering costs and improving efficiency.

Competition based on these efficient movements would increase the opportunity for innovation and aggressive market share gain programs.

CPR goes on to state that the efficiencies and lower costs for farmers potentially available under its scheme of contractual rewards and penalties could only be realized after the removal of the freight-rate cap. CPR argues that "price signals" will lead producers and railways to "the lowest-cost route." They go on to state that: "In a regulated price system, it is impossible to do this."

To summarize, the salient points of the industry model are:

• The CWB would be relegated to port buying;
  
• Freight rates and branchline abandonment would be deregulated;
  
• Grain companies and the railways would fill CWB orders for grain through a series of contracts;
  
• These contracts would be bilateral and confidential; and
  
• These contracts would include a schedule of binding rewards and penalties.

The NFU agrees that clear performance standards backed up by rewards and penalties could help move Canada's grain transportation system toward higher levels of efficiency and lower cost. However, for the reasons outlined below, we feel that the industry model is unworkable: unnecessarily complex, expensive, inefficient, and unenforceable. It is based on a number of false or tenuous assumptions and outright falsehoods.

Problems with the industry model

10,000 contracts

The industry model would require a huge number of bilateral, confidential contracts. If the CWB was relegated to port buying, as the industry model proposes, it would need to offer a large number of tenders throughout the year. Given the wide variety of types, classes, grades, protein levels, etc., of CWB wheats and barleys, CWB tenders and the resulting contracts with grain companies to deliver those grains, could range into the hundreds. Each CWB contract with a grain company would result in one or more contracts between that grain company and a railway. As well, the grain companies would have to contract with farmers for delivery into country elevators. In addition to these CWB-initiated contracts, there would be the numerous contracts between various participants to cover non-CWB grains, oilseeds, and specialty crops.

The number of contracts required annually could range into the thousands-perhaps 10,000 or more. As will become clear, below, monitoring and enforcing these contracts will be very difficult.

Who is responsible for system failure and to what extent?

The industry model proposes four or more inter-related contractual steps to move grain from the granary to a waiting ship. This is an extremely rigid and fragile system. If bad weather, plugged elevators, road bans, or truck shortages prevent farmers from delivering grain on time, the elevators will fail to load the necessary cars on time, the railways will fail to deliver the proper grain on time, etc. This "cascade failure" would trigger a large number of claims and counterclaims against contracts.

Note that in this scenario, the farmers would not only be "liable" for the penalties contained within their contracts with the grain companies, it is likely that the penalties incurred all through the system would be passed onto farmers.

Note also that farmers' failure to deliver could be, at least partially, caused by plugged elevators. In this case, technically, farmers would have to pay a penalty to the grain company for failing to deliver on time. However, the farmers can argue that it is the grain companies' lack of space that made delivery impossible. This lack of space, in turn, may have been caused by railway non-performance, lack of hopper cars, or simply an abnormally-large crop.

It would often be extremely unclear who was responsible for any failure to meet the terms of any single, confidential, bilateral contract. Since farmers and other system participants would not be privy to the contracts between other parties, the performance requirements contained in those contracts, or the level of performance actually delivered, it would be extremely hard to determine who set in motion any given chain reaction of system failures and resulting contractual penalties.

Inter-relatedness of the system

Note that in the preceding example, a failure in one place-part of one contract or movement-can spill over and affect subsequent contracts and movements. If the railways fall behind early in the year, all shipping plans would have to be moved back and no one would be able to meet contractual commitments. This would require either widespread renegotiation or widespread breaches of contracts.

Note that contracts are often enforced through suites. A system slowdown in one or more sectors may trigger numerous suites. The ambiguity of who is at fault for any given failure, noted above, would make these suits complex, expensive, and, possibly, inconclusive. While the railways complain about the "bureaucracy" within the current system and call it "restrictive," it is hard to imagine any system more bureaucratic or counter-productive than hundreds of lawyers prosecuting and defending thousands of breach-of-contract cases in the courts.

One need only look to the winter of 1996-97 to determine how a bilateral system of rewards and penalties would work. As the transportation system began to fail (for whatever reason), grain soon backed up on farms, in country elevators, in hopper cars, and at port-not to mention the dozens of ships backed up waiting for grain. Imagine the CWB suing the various grain companies for breaching dozens or hundreds of supply contracts. Imagine, in turn, those grain companies, suing the railways. Imagine, in the end, all of these accumulated legal bills and penalties-in addition to demurrage costs and lost sales-being passed back to farmers (more on farmers' costs below).

Under the industry model of bilateral, confidential contracts, once the system begins to fall behind, all bets are off. Performance requirements would cease to be binding and, given the uncertainty and possible acrimony, it is unlikely that participants would sign further contracts if they contained performance requirements. Further, the bilateral, confidential nature of the contracts makes it very hard for the system to cooperate and compromise to resolve its collective problems and return quickly to normal performance.

Railways will not sign contracts which they probably cannot fulfill

The preceding paragraphs assume-as the CN and CP contend-that railways will sign contracts that bind them to challenging performance standards. There is an implicit assumption that railways will sign binding contracts containing financial performance penalties which may end up costing the railways money. CP makes this assumption explicit when it states:

CPR is willing to be held accountable for doing what it says it will do. But this means ... operating on a commercial basis driven by markets and sales activities.

To the contrary: there is little incentive for the railways to agree to any but the laxest performance standards. United Grain Growers (UGG)-in its Phase One submission to this Grain Transportation Review-concurs that lack of competition between railways makes it impossible for other system participants to negotiate, impose, or enforce strict performance requirements on railways. That brief states:

... the parties of any contract must be able to negotiate from equal positions of strength. This is certainly not the case now. Railways have the upper hand. In recent months, the railways have unilaterally imposed several new measures to penalize grain companies. These new accountability measures have not been reciprocated. For example, railways will often demand that we load cars within tight time frames (resulting in 16-hour days for our workers in some cases) or face stiff penalties, and yet the railways bear no responsibility if they fail to spot empties on time or fail to pick up loaded cars until 2 or 3 days later.

... accountability must cut both ways. At present, the railways are imposing all sorts of penalties on grain companies, but are not being held accountable for any of their performance lapses.

Saskatchewan Wheat Pool also raises concerns about the ability of system players to negotiate meaningful performance requirements on railways. While supporting "contractually based commercial relationships between parties," they state that such a system:

is predicated on the existence of competition that both keeps the shipper costs of moving grain under control and the railways accountable.

Grain companies recognize the market power of Canada's two railways and the lack of competition between them. In light of this recognition, the grain companies join with the NFU in questioning whether anyone could persuade the railways to sign contracts with binding and challenging performance requirements. Instead, it is likely that the railways would commit to only the most unambitious performance requirements knowing that farmers and grain companies have no alternatives but to accept whatever terms the railways dictate.

Who will hold the railways accountable?

If railways were, somehow, persuaded or coerced to sign contracts with challenging performance requirements and if the railways often failed to meet those requirements, someone would have to enforce those contracts and collect those penalties. Under the industry model, that "someone" would be the grain companies.

In Canada, grain companies have stated that they cannot currently hold the railways accountable nor do they think that they could do so within the proposed industry model of rewards and penalties. One need look no further than the U.S. contractual system for affirmation that grain companies cannot effectively penalize railways.

In the U.S., a significant portion of the grain car fleet is allocated through a bid system. To take Burlington Northern for example, grain companies put in bids for Certificates of Transportation (COTs). These COTs guarantee cars to grain companies at a certain place and within a certain time window and contain penalties for railway non-performance. In conversations with U.S. farm leaders, the NFU has discovered that despite the contractual nature of COTs and despite the clearly defined penalties, the railways often fail to meet their commitments. This non-performance, however, rarely results in the payment of penalties. Instead the railways offer the grain companies the following deal: in return for waiving the penalties, the railway will deliver cars within a week or two. The implicit threat by the railways is: if you don't waive the penalties, you will wait a very long time for cars. The lack of competition between U.S. carriers at many points and the resulting market power makes it almost impossible for shippers to extract penalties even if they are able to negotiate them.

It is likely that the same situation would occur in Canada. Elevator companies, captive to Canada's powerful railway duopoly, would be hesitant to regularly sue those companies. As UGG points out above, at present, the railways are imposing all sorts of penalties on grain companies, but are not being held accountable for any of their performance lapses. Clearly, even under the current, somewhat-regulated system, grain companies are unable or unwilling to hold railways to minimal service levels. The situation will be substantially worse if the CWB is removed from transportation coordination, the rate cap is terminated, and transportation system is further deregulated.

As a final example of the grain companies' unwillingness or inability to hold railways accountable, we raise the CWB CTA case. When grain movement slowed dramatically in 1996-97, it was the CWB, and not grain companies, which brought a level of service complaint against the railways. Further, despite being asked, none of Canada's grain companies agreed to stand with the CWB in bringing this case before the CTA. The private grain companies have a very poor record of protecting farmers' interests against the railways.

As we will demonstrate below, under the industry model, there would be very little incentive for grain and railway companies to "beat each other up" in court trying to collect penalties. For these companies, individual and collective revenues and profits would be maximized by raising unregulated freight rates and elevator tariffs to profitable levels; minimizing service to cut costs; and pocketing large profits at the expense of farmers. There is little evidence that grain companies' profits would be increased by harassing reluctant railways and there is little evidence that they could extract penalties if they tried.

CN, CP, and other corporate proponents of the industry model repeat often and loudly that such a system will bring accountability. "Accountability" has become a mantra for these corporations. They are implicitly propagating the myth that grain companies can hold railways accountable and that farmers can hold grain and rail companies accountable. The industry trumpets accountability as a fundamental good and the key ingredient in a lower-cost, more efficient handling and transportation system, yet their model would fail utterly to deliver accountability.

Structural rigidity

Implicit in the above criticisms is the point that the industry model of 10,000 contracts is both rigid and fragile. It is an attempt to rigidly describe performance within a fluid and changeable system. It is an attempt to linearly define performance within a circular system with numerous feed-back channels where a failure in one place cascades outward to affect performance in other places

Weather can affect the railways' ability to move grain and other commodities. Weather affects the size of the crop and, thus, the stress on the system as it attempts to move it. Weather also affects farmers' ability to move that crop to market. Market changes create unpredicted and fleeting opportunities for international sales. World-wide economic upheaval can lead to canceled or delayed sales. Customers' ships can be early or delayed. These and other variables necessitate a grain handling and transportation system which is flexible, sturdy, responsive, and resilient. Codifying each delivery, load, transit-time, and unload does not give that flexibility, responsiveness, or resiliency.

Further, as noted above, if the system were put under severe stress-as it was in 1996-97 or as it would be during a strike or a prairie-wide bumper crop-the industry model would quickly break. The parties-all holding stacks of broken contracts and without a neutral system coordinator such as the CWB-would then find it difficult to negotiate the compromises needed to extricate themselves, and farmers, from a system failure.

However, the problem of structural rigidity and fragility along with many of the others listed above, could be mitigated by making system contracts "looser"-by adding clauses which void performance requirements in case of inclement weather, by allowing large and generous performance windows, and by measuring average instead of specific performance, by setting low performance requirements or low penalties. And we expect that this is exactly what will happen. Of course, in doing this, grain companies, railways, and farmers would lose all of the purported benefits of the industry model: clear roles and responsibilities; negotiated performance levels; penalties or rewards dependent upon level of performance versus expectation; negotiated levels of risk."

Farmers pay penalties: companies pocket rewards

In a bilateral, confidential, contractual system of rewards and penalties, the grain and railway companies are likely to pocket the rewards and pass the penalties back to farmers, in the form of higher freight rates or elevator tariffs. Almost all costs within the Canadian grading, handling, and transportation system are currently passed back to farmers-there is little likelihood that railways or grain companies would treat performance penalties differently. To the contrary, in a deregulated system, with no cap on freight rates or grain handling charges, if the potential for penalties existed, it is likely that the grain and elevator companies would preemptively raise rates to cover those projected costs.

When farmers market canola and other non-CWB crops, they pay a "risk basis" which covers the grain companies' financial risks arising from price changes in the open market. This "risk basis" for canola has been estimated at $9 per tonne-a substantial cost to farmers. If grain companies charge farmers in advance for potential losses due to commodity-market fluctuations, why should we assume that grain and rail companies will act differently when faced with potential losses due to contractual penalties for non-performance. Under the industry model, it is likely that grain and railway companies, when bidding to move or supply grain, would build a "risk basis" into their bids to cover the cost risks of non-performance. This "risk basis" would become part of the CWB's cost of sourcing grain, be taken out of the CWB pool accounts, and ultimately be taken from farmers pockets.

There is considerable doubt that farmers will be able to force powerful grain and elevator companies to absorb monetary penalties. If grain companies cannot hold railways accountable, how can farmers railways or grain companies accountable ?

Thus, the industry model fails farmers in two ways and puts them into a double-bind:

1. It is unlikely that grain companies or farmers will be successful in collecting penalties from railways;
   
2. However, if grain or railway companies were effectively penalized, freight rates and elevator tariffs would increase, costing farmers money.

The ease with which the railways and elevator companies forced farmers to shoulder the full $65 million cost of the 1996-97 transportation debacle demonstrates how adept these companies are at passing costs back to farmers.

In the industry model, contracts are bilateral, confidential, and extremely numerous. With thousands of confidential contracts, what is the mechanism that ensures that farmers receive the benefit of rewards? How could farmers even know what rewards the various players received? The various players would not even know this about each other.

Conversely, what is the mechanism that ensures that railways and/or grain companies will not simply preemptively raise rates and tariffs to cover their risk of incurring penalties? Again, given the confidentiality of the contracts and the industry model's proposal that freight rates be deregulated, no one would even have any idea of the extent of penalties paid by system participants.

To add obscurity to this already clouded system of "accountability," note that grain companies will contract with railways to move grain. The combined elevator and railway charges will be passed to the CWB as a bid on a tender. All will be confidential. Farmers' freight rates will be combined with elevation charges, risk basis, and profits and built into secret tenders. Farmers will have no idea what their freight rates are. Nor will they know from one load to the next what rates to expect. This lack of transparency may have a detrimental effect on accountability.

Clearly, given the complexity and confidentiality of the industry model of rewards and penalties, there is no way to prevent penalties from being passed to farmers. Penalties that can simply be passed on to farmers are not penalties. Without penalties, accountability is elusive.

Farmers lose on the marketing side as well

As pointed out in our previous brief, in order to maximize the aggregate value of Canadian wheat and barley sales, the CWB must sell and move the majority of the wheat and barley crop in the October-March period when buyers around the world are making their major purchases. Thus, the CWB must ship a disproportionate share of the Canadian wheat and barley crop during that period. This necessity conflicts with the objectives of grain and rail companies which prefer to fully utilize their assets consistently throughout the year and, thus, would prefer an even flow of grain in each of the twelve months.

Within the industry model, grain and rail companies would be free to charge higher rates within this October-March period thereby either:

• capturing for themselves some of the premiums that currently accrue to farmers; or
  
• forcing grain movement to other months, leveling volumes over throughout the year, and, thus, reducing the companies' costs by reducing the amount of equipment needed to handle peak loads.

Clearly, the CWB and other marketers would face unpredictable, variable, and opportunistic pricing by railways and grain companies. This behavior would interfere with Canada's ability to serve its customers and marketers' ability to maximize sales revenues. It would, in short, cost farmers a great deal of money. Moreover, it would cost the Canadian economy a great deal of money and, thereby, adversely affect all Canadians.

Fair and reasonable returns for all system participants, including farmers, is a public good. Fair and transparent treatment of all system participants is a public good. The industry model destroys transparency, transfers money from farmers to rail and grain companies, and undermines fairness by giving already powerful corporations increased power at the expense of farmers.

Problems with the industry model: conclusion

The industry model of bilateral, confidential contracts; rewards and penalties; deregulated freight rates and branchline abandonment; and the expulsion of the CWB from transportation activities is unworkable, ineffective, and costly. Moreover, many farmers suspect that the railways and grain companies that propose this model know that this is the case. These companies are not interested in a system where each stands over the other with a stick in an effort to drive prices down and service up. Rather, these companies are interested in a deregulated system without a strong farmers' voice where the companies can maximize collective and individual profit, minimize risk, and externalize costs to farmers, taxpayers and other system participants.

Rail and grain companies are profit-maximizing corporations. The proposed industry model is an attempt to achieve that end regardless of the effect that may have on farmers, our ability to serve our customers and compete internationally, or the Canadian economy.

To paraphrase Tommy Douglas: We should not be surprised when cats propose rules which are good for cats.

The NFU's proposed system of performance rewards and penalties

Bilateral, confidential, commercial contracts containing rewards and penalties are unlikely to either hold railways and grain companies accountable or to ensure smooth, timely, lowest-cost movement of grain. However, there is another option. A transparent, multilateral system of well-defined rewards and penalties would probably achieve the desired ends, but only if they were enforced by a Central Coordinator (backed by legislation) and implemented within a capped-rate system. Such a system would include performance requirements for all parties, specified penalties for failing to meet those requirements, and specified rewards for exceeding them. This system of rewards and penalties would be transparent, effective, predictable, and would not rely on railway or grain companies for implementation or enforcement.

The NFU proposes a system of rewards and penalties based on the following principles:

• Performance requirements for all parties would be defined and transparent;
  
• A Central Coordinator would monitor performance and enforce rewards and penalties;
  
• The information-collection and distribution function of the Central Coordinator would enhance overall system performance;
  
• Performance requirements would rise slowly over time;
  
• Freight rates and elevator tariffs would be capped so that penalties cannot be passed back to farmers;
  
• The CWB would maintain its role in transportation.

The Central Coordinator: information gathering and coordination role

The industry model of confidential, bilateral contracts fragments and conceals information. This would have a negative effect on system performance and coordination. In contrast, the NFU's model includes a Central Coordinator which would gather up-to-the-minute information from all participants, analyze and interpret that information, and make it available to all.

Possibly more than any other change, centralized information would greatly enhance system performance. Grain companies would know, day to day, how each railway was performing. The system could be used to predict when given elevators might receive cars and when loaded cars would arrive at terminals. Farmers could monitor elevator space availability and when rail cars were due to arrive at elevators and make appropriate delivery plans. The CWB, grain companies, and railways would know how much and what type of grain was in each elevator and in each region. Coordination is key to system performance and reliability. While the secretive industry model would inhibit coordination; centralized collection and distribution of detailed and complete information would maximize coordination and, hence, performance and efficiency.

At the same time that centralized communication facilitates faster and more predictable movement, it makes possible analysis which can lead to greater efficiency and lower costs. By using sophisticated computer analysis to understand the system in detail, cost-saving opportunities will become evident. Currently, the system is deficient in key data. For instance, data on car turnaround times in six years old. Current, detailed data essential to performance measurement which, in turn, is essential to accountability and performance improvement. Rail and grain companies claim to be pursuing efficiency yet the industry model fragments and conceals the information needed to measure and improve efficiency. A Central Coordinator would provide the data critical to improving the system.

The Central Coordinator would assemble detailed information on every aspect of grain movement from farmers' deliveries to ships' departures. Once a few years of such data was assembled, patterns in performance, bottlenecks, and weak links in the system would become visible.

Industries around the world are moving to control systems which try to identify weak links or "critical control points" in systems and then monitor those points closely to maximize system performance and reliability. The food-processing industry is implementing one such system to identify and prevent physical, chemical, and microbial hazards such as salmonella poisoning resulting from contaminated hamburger. The system is called HACCP (pronounced HASS-UP for: Hazard Analysis Critical Control Point). HACCP is designed to prevent problems before they occur and to correct deviations as soon as they are detected.

HACCP's seven principles are:

1. Analyze hazards;
   
2. Identify critical control points;
   
3. Establish preventative measures with critical limits for each control point;
   
4. Establish procedures to monitor the control points;
   
5. Establish corrective actions;
   
6. Establish record keeping procedures;
   
7. Establish systems for monitoring and verifying HACCP system.

A HACCP-type system would greatly enhance the reliability and predictability of the Canadian grain handling and transportation system. Where the industry model is rigid and fragile, a HACCP-style control structure would be durable and adaptable. Further, and most critically, such a system is pro-active: it works daily to identify problems and prevent or correct failures. The industry model of confidential contracts, rewards, and penalties is merely reactive and, as pointed out above, may actually inhibit co-operative reaction. While it can be argued that the industry model is punitive and therefore preventive; because it lacks systemic coordination and cooperation, the scope for any one system participant to act to prevent or mitigate system failure is extremely limited.

A Central Coordinator, centralized information collection, and a HACCP-like monitoring and prevention system would help participants spot system slowdowns which could lead to 1996-97-style failures. This would allow grain and rail companies to act quickly to avert calamity. Such a system would increase the durability of the system, decrease costs to farmers and all participants, strengthen our marketing ability, and give Canadian agriculture, agri-food, and transportation industries an edge in the increasingly-competitive world market.

The Central Coordinator: monitoring performance and enforcing rewards and penalties

Within the NFU model, a Central Coordinator would set performance level requirements for all system participants. Initially, those levels would be set based on average past performance. Over time, several factors would combine to increase system performance:

• System participants will try to improve performance in order to garner financial rewards;
  
• The utilization of centralized information will increase coordination, predictability, and performance; and
  
• The prevention of system failures will improve measured performance averages by eliminating "disaster" years.

Over time, as system performance increased, the Central Coordinator, could increase required performance levels. The Coordinator would not, however, increase performance requirements at the same rate that long-term average performance was increasing. To do so would nullify the system participants' incentive to increase performance. The benefits of performance improvements could be shared in a manner similar to the way efficiency gains were shared by railways, grain companies and producers in the past. For example, if system performance increased by 4%, participant performance requirements could be increased by 2% and the participants allowed to collect performance rewards for the other 2%. There is no question, however, that such adjustments would have to be made within a rate-capped system. Where the current capped rate system adjusts rates for inflation and efficiency gains, the NFU model would adjust rates for inflation, efficiency gains, and performance.

Such a system would need to attempt to ensure that increased costs to farmers needed to pay performance rewards were offset by the decreased costs and other performance benefits resulting from that increased performance. Greater coordination, the avoidance of 1996-97-type disasters, more efficient use of assets, the premiums received from more reliably serving customers: all these would decrease system costs and increase farmers' incomes. This would offset some increase in farmers' costs resulting from the need to pay the railways' performance rewards. Seen another way: real and substantial improvements in system performance would have financial benefits to farmers. Farmers are willing to fairly share these benefits with other system participants in the form of performance rewards.

In addition, industry participants would, in all probability, have to pay some penalties. These penalties would offset some of farmers' costs of paying rewards. It may be the case that, in a given year, one railway would have to pay net penalties while the other received net rewards. The payor of penalties would work hard to alleviate such a situation because it would put it at a competitive disadvantage to the one reaping monetary rewards. While this in not competition, it does introduce some competitive behavior into the system.

In addition to serving as a strong incentive for increased performance, centrally monitoring and enforcing rewards and penalties would solve two problems with the industry model:

• how do you get powerful railways and grain companies to agree to performance standards which they stand some chance of failing to meet; and
  
• how do grain companies enforce penalties against railways when the companies are captive shippers to those railways.

A centrally-coordinated system would solve these two problems by imposing challenging yet realistic performance standards on all players and by using legislative power to collect those penalties and dispense the rewards. The industry model relies solely on the industry to set performance levels and collect penalties/distribute rewards. As pointed out by several grain companies, an imbalance of market power would seem to indicate that an industry-run system is impossible. Thus, if one wishes to capture the undeniable benefits of an effective system of rewards and penalties, a centrally-administered system seems the only alternative.

Some technical questions remain:

1. how will monetary reward and penalty rates (as distinct from performance levels) be set; and
   
2. how will they be administered?

To the first question the answer is negotiation. Rewards and penalties should be as low as possible but as high as necessary to ensure compliance with performance requirements. All participants would need to sit down and identify reasonable levels of rewards and penalties. While each will want to minimize penalties rates to themselves and maximize reward levels, there is every likelihood that system participant could collectively negotiate a schedule of rewards and penalties. If they could not, mediation and/or arbitration could be used. Reward and penalty rates should, initially, be set at relatively low levels. The Central Coordinator could then determine if these incentives/disincentives were substantial enough to encourage increased performance.

As to how rewards and penalties would be administered, the NFU envisions an expanded costing review/efficiency gain-sharing mechanism. If both freight rates and elevator tariffs were regulated, regular costing reviews would be necessary to increase those rates and tariffs to take inflation into account and to decrease them to fairly apportion the benefits of efficiency gains. Rewards and penalties could be part of this process. The net rewards and penalties earned by any system participant could be factored into these adjustments and the freight rate or elevator tariff for that company could be increased/decreased for the coming year. This would add stability and predictability to the system and it would ensure that penalties were not passed back to farmers.

A Centrally-Coordinated system of performance requirements, rewards, and penalties need be no more complicated that the current freight-rate setting system. Until recently elevator tariffs were regulated and can be again. Railways in the past have submitted to costing reviews and are currently rate-regulated. The NFU model would merely add small rate and tariff adjustments based on performance.

The benefits of increased performance, efficiency, and accountability are undeniable and worth hundreds-of-millions of dollars to farmers. Performance levels enforced by rewards and penalties can deliver those benefits to farmers. This cannot occur, however, under the industry model. Thus, system participants are sincere in their wishes to increase performance, efficiency, and accountability, They must look seriously at the alternative proposed in these pages.

Structure and funding of the Central Coordinator

The Central Coordinator would be a joint government, industry, and producer agency. It would have a legislative mandate to monitor performance, impose penalties, disburse rewards, gather and disseminate information, and generally take actions to move the Canadian grain handling and transportation system toward higher efficiency and lower costs. The Central Coordinator would, where possible, attempt to implement negotiated levels of performance, rewards, and penalties rather than imposing arbitrary performance requirements on participants. However, the Central Coordinator would need the power to set and impose performance requirements when negotiations failed.

Central Coordination would not replace or impede industry cooperation; it would facilitate and enhance it. The Car Allocation Policy Group (CAPG) has proven that within a clear framework the CWB, rail and grain companies, and farmers can negotiate targets, monitor performance, and work together for the greater good of the system.

A CAPG-like committee could be integrated into the Central Coordinator structure to negotiate car allocation. The Central Coordinator would help implement the allocation plan, monitor car utilization performance, and enforce performance rewards and penalties. Similarly, a CAPG-like body would negotiate performance requirements and reward and penalty levels. It is critical that farmers participate in a meaningful and equal manner in all of these negotiations. Farmers, as the ultimate payors in the system, must participate in the decision-making process. Farmers are not currently recognized in the CTA legislation and, thus, have few avenues through which to influence the design or management of the system. If rail and grain companies are sincere in their wish to lower system costs and increase efficiency, then equal and formalized farmer participation is essential.

As for the costs of a Central Coordinator, these could be split between farmers and government. The CWB costs $45 million annually to run. It is likely that a Central Coordination agency for western Canadian grain handling and transportation system would cost much less-perhaps only $5 or $10 million annually. Even if a Central Coordinator cost $45 million, this is less than 2% of the current grain handling and transportation system cost. If a Central Coordinator decreased system costs by just 2%, it would pay for itself.

Seen another way, the lack of a costing review since 1992 is currently costing farmers approximately $144 million annually. Even if farmers had to pay the full cost of a Central Coordinator, and even if it cost $45 million, the resumption of costing reviews combined with the creation of a Central Coordinator would still yield net savings to producers of over $100 million annually.

For farmers, the question is not "Can we afford a Central Coordinator?" Given the debacle of 1996-97, rising costs, indifferent performance, and the lack of competition between railways, the question for many farmers is: "Can we afford the current system?"

The rate cap

Operating within the industry model, grain and rail companies would have a strong economic incentive to pocket rewards and pass penalties onto farmers. Given that the contracts which impose those penalties and grant those rewards are secret, there is little chance that such behavior could be avoided. As pointed out earlier, penalties that can be passed to farmers are ineffective and without effective penalties there is no accountability.

The NFU model solves this problem in two ways:

1. It centrally administers transparent rewards and penalties;
   
2. It operates within a capped-rate system wherein both grain and rail companies can be made to absorb penalties and pass on a portion of rewards.

The NFU model would retain a rate cap with an expanded efficiency gain-sharing mechanism. Indeed, it seems that caps for both freight rates and elevator tariffs are essential for any system of rewards and penalties to be fair and effective.

The CWB's role

Within a Centrally-Coordinated system of rewards and penalties, the CWB would continue its current role. The CWB would call grain into the elevator system to facilitate the fulfillment of its sales contracts. It would also participate in car allocation as it does now. It would, in short, maintain its grain sourcing and transportation functions which are so important to its marketing role.

The CWB would have added roles under a Centrally-Coordinated system. First, as a neutral party, it would facilitate negotiations of rewards and penalties. Second, the vast CWB expertise in transportation issues would suggest that it would make valuable contributions in terms of interpreting system data, analyzing performance and performance-limiting factors, and suggesting future directions for system improvement.

The CWB would itself be subject to rewards and penalties. The CWB's performance in forecasting its car requirements, forecasting ship arrival, calling grain efficiently into elevators, etc., would be subject to rewards and penalties.

Finally, the CWB would continue to play its vital role as farmers' advocate within the handling and transportation system.

The NFU's proposed system of performance rewards and penalties: conclusion

While the preceding does not provide details on every aspect of a Centrally-Coordinated system, it does provide substantially more detail than the proponents of the industry model have put forward. The creation of a Centrally-Coordinated system would be a cooperative effort between grain and rail companies, government, farmers, and the CWB. The details of any such system would result only after consultation and negotiation. Nevertheless, the NFU model of a system of transparent performance requirements backed by rewards and penalties and administered by a Central Coordinator provides a blueprint for a Canadian grain handling and transportation system which:

• provides fair and adequate financial returns to all participants;
  
• balances the market power of farmers, grain, companies, and the railways;
  
• collects and disseminates information in order to increase coordination and performance;
  
• effectively stimulates increased efficiency and performance;
  
• controls costs; and
  
• prevents system breakdowns.

Farmers are desperate for changes to the grain transportation and handling system which increases performance and reliability and at the same time protects farmers' interests and limits their costs. An effective system of performance monitoring and incentives to increased performance combined with regulated rates and tariffs would accomplish these goals.

The NFU recommends that the final report of Justice Estey's Grain Handling and Transportation Review include provisions for the following:

1. Transparent performance requirements for all handling and transportation system participants;
   
   
2. Negotiated rewards and penalty rates to back up these requirements;
   
   
3. A Central Coordinator to monitor performance, help set performance requirements, collect penalties, disburse rewards, and share system information to promote and enable increased system efficiency;
   
   
4. A critical control and breakdown avoidance system similar to HACCP but tailored to the needs of the handling and transportation system which would use continuous self-examination to anticipate stresses and adapt to maximize efficiency and reliability;
   
   
5. Caps on freight rates and elevator tariffs in order to ensure that rewards and penalties are effective;
   
   
6. A strong role for the CWB in sourcing and transporting grain; and
   
   
7. Effective producer participation at all levels of system design, implementation, and management.