supply chain professional

THE SUSTAINABLE FUTURE OF CHURCHILL RAIL AND PORT FACILITIES: RE-BORN OR RELAPSE?

PREPARED BY

KOI YU ADOLF NG AND YUFENG LIN

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THE SUSTAINABLE FUTURE OF CHURCHILL RAIL AND PORT FACILITIES: RE-BORN OR RELAPSE?

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1. Background

Since its establishment in 1929, the Hudson Bay Railway (HBRY) served as the only land access that connected the Town of Churchill from southern Canada. For more than a century, the railway had served the Port of Churchill as was the gateway to northern Manitoba (MB) and to the Town of Churchill and nearby northern communities in Canada (Exhibit A). Historically it was operated and managed by the Canadian National Railway (CNR) until 1997 when OmniTrax, an American private company, took over its ownership, operation, and management. Meanwhile, OmniTrax took over the port of Churchill from Transport Canada. In this case, the railway operation included technical and commercial activities, as well as maintenance. In August 2016, the port of Churchill and all connected freight railway service were shut down by OmniTrax, not long after the end of the Canada Wheat Board (CWB)’s monopoly on wheat purchase in western Canada, which consequently allowed wheat farmers to sell their harvest to whatever company they wanted, instead of going through CWB. On May 23, 2017, OmniTrax announced that because of severe floods, rail service between Amery and Churchill would close indefinitely. Throughout 2017 and the first half of 2018, it was uncertain when the rail tracks would be repaired due to a disagreement over which entity took responsibility. Losing its only rail (land) access has influenced the tourism industry, imposing huge economic consequence on the Town of Churchill's rather fragile economy.

Despite the town’s strategic importance that also hosted Canada’s only Arctic deep-water port, the railway was never financially sustainable. After the privatization of CNR in 1995, the federal government allowed CNR to sell the Churchill railway to OmniTrax in 1997 without requesting the new owner to uphold the statutory common carrier’s obligation to move duly loaded cars to their destination. At the same time, the federal government upgraded Churchill’s port facilities before OmniTrax took over.

As mentioned, catastrophe occurred to Churchill when the CWB’s monopoly on wheat purchase was cancelled in 2011. The CWB served all of western Canada by strategically utilizing the country’s geographical resources. However, its single-desk selling authority was ended. Grain grown in the Hudson Bay route catch basin was predominantly marketed at vessel volumes through the Port of Churchill by the CWB. The end of CWB alleviated congestion to the west coast by lowering handling and transportation costs to farmers. Anticipating Churchill would be in trouble without the CWB’s orderly marketing powers, where the government invested private grain companies with a five-year, $9.20 per tonne freight subsidy to help OmniTrax and camouflage the consequence from dismissing the CWB. Once the subsidy ended, grain companies gave up using Churchill as the port for export, as private companies cannot be expected to act beyond their own self-interest.

Taking the Churchill Railway back from a foreign cooperation is widely-supported but, like the other replacement of ownership in the transportation industry in North America, they serve only as a staging ground upon which the mechanisms of cooperation are deployed. The operation of the rail made apparent the contestations between operating cooperation’s interest and regional development. Local communities, especially indigenous ones, expressed frustration at the way how OmniTrax operated the rail, notably: 1) it did not take proper actions to maintain the railway’s safety and quality and 2) it did not make serious attempts to sustain job opportunities for local/surrounding communities.

2. Influences of Rail (Land Access) Disruption to Churchill

The flood that took place in May 2017 washed out more than 100 parts of the rail tracks. In this case, OmniTrax, declined to repair the rail tracks. Hundreds of remote northern communities along the railway line were thus left isolated. An illustrate example can be found at the grocery prices at the local Northern Store (the only major supermarket in the Town of Churchill) (Exhibit B). Even with a ‘northern allowance’ to compensate the community for the extremely high prices, the costs of grocery kept growing. On the other hand, fuel has lost a viable, economic transportation option that resulted in increasing price and unstable supply. For instance, in June 2017, the average price of gasoline in Winnipeg pay is $1.17 per liter. The price in the Churchill’s only gas station soared to $2.17 per liter.

The town of about 900 people had lost 93 full-time jobs (more than 10% of the total population) one year after the closure of the port of Churchill. The subsequent closure of the HBRY resulted in the spinoff effects on the tourism and the transshipment industry. Laid-off Churchill workers either took up other jobs, left the community for work elsewhere or remain unemployed. Without an adjacent community, residents either left their family in Churchill or moved south altogether. Meanwhile, Churchill heavily relied on tourism, including the summer season when Beluga whales show up along the Churchill River and, of course, the polar bear season, which started from mid-October until late November. Hotels and tour companies got numerous cancellations, with the price of travel now out of reach for many visitors: regardless of the commuting cost to Winnipeg, plane tickets from Winnipeg to Churchill could cost as much as CAD 1,400 per round trip. Independent travelers were expected to fill the gaps between the busy seasons or even the hours between tour groups, but they were much more sensitive to the fluctuation of commuting cost than family or tour traveler. The fact was that the suspended rail service had led to a sharp decrease in independent tourists in 2017. Residents of the Town of Churchill were frustrated about the disagreements and conflicts between the government and OmniTrax, leaving them without no train and abandoned. Also, the uncertainty of the railway being repaired in the future was growing among the community.

The dominos have fallen: the railway needs probably two-decades maintenance, Churchill is suffering economic losses, and northern communities are cut off from essential services. Canada has lost a third of its railway track miles in the last three decades. Abandonment may generate more profit for CNR, but their increased profit should not be regarded as an improvement in the overall efficiency of national transportation system; therefore, abandonment of railway lines cannot be merely a rail company’s decision without people being compensated somehow. Also, governments have been far too lax in upholding people’s interest in this matter.

3. The Future of Churchill

A key benefit of developing such infrastructure is the benefit the northern communities of Canada are likely to receive. Unlike the Russian side which has quite a high population, it is not the case for Canada. The increased activities in the Northwest Passage will, therefore, open the northern communities up and make movement of goods easier. Due to the nature of the Canadian Arctic, communities are mostly accessible by (expensive) air. The existence of a railway, a port, and an airport makes the Town of Churchill, located along the Hudson Bay, strategically very important to the opening of northern Canada and the Arctic region. Such critical infrastructures can be so important that a damage or non-function of any create a huge impact in the community. Knowing how important the Arctic and for that matter, the Northwest Passage (NWP) is likely to become, the Canadian government has stepped up work in this region.

The port of Churchill, which is hitherto the only deep-water port in Canadian Arctic, is very strategic to successful shipping business in the future should the NWP begins to experience traffic increase. Port infrastructure is, however, still not acutely developed to cope with a potential increase in business. This has been due mainly to less shipping activity and the high cost involved in operating such a facility. Currently, there is little incentive to continue to ship items through the port of Churchill, as alternatives like via the ports of Vancouver (BC), Prince Rupert (BC), and Montreal (QC) offer cheaper and more efficient services to overseas markets (e.g., East Asia, Europe). However, looking ahead, the Churchill Township and its infrastructure can potentially play a key role in global shipping and supply chains. At the same time, Churchill is key to delivering goods to the Canadian northern communities. Thus, the non-functioning of the port of Churchill would create a complicated life for the populace. Should NWP reach an operational level similar to that of the Northern Sea Route (in northern Russia), the movement of goods to Churchill and other northern communities are very likely to substantially speed up. Also, it is highly likely to generate numerous job opportunities for the local population.

Finally, people would be much more willing to move to the community to work knowing they are assured of supplies. The cost of living is very high in these areas, and so this discourages people from taking up employment. An improved and fast means of delivering cargoes means that employees are assured of food and other essentials. The uncertainty about food and travel would be laid to rest. Tourism would improve tremendously. Like many other Arctic towns and communities, accessibility in terms of cruise ships would improve the tourist potential of these places. Many people nowadays want to know how the Arctic looks and the natural fauna and flora in this region, but the difficulty in traveling through ice has prevented such voyages. The ice melt, therefore, presents an unprecedented opportunity for tourism in the Arctic areas.

4. The Big Deal and Challenges Ahead

Despite such, there were some good news in August 2018: a deal has been reached between OmniTrax and a Canadian consortium (hereinafter called ‘the Consortium’) (see Glossary of Terms) to purchase and repair the damaged rail line that is, hitherto, the only land link for the Town of Churchill and nearby northern communities. In an official statement, the Town of Churchill announced that the Consortium consists of northern communities, Toronto-based Fairfax and AGT Foods. HBRY has said the rail line has been losing money for years and the necessary repairs would cost tens of millions of dollars (CAD). The Honourable Brian Pallister, MLA, Premier of the Province of MB, Canada, emphasized that the deal is an extremely positive one for the residents of the Town of Churchill and the MB Province will undertake financial arrangements so as to ensure a propane re-supply for the upcoming winter. Indeed, the ‘re-born’ of these facilities can be pivotal in transforming MB from being a ‘landlocked’ province that relies on US/North American trade to become a ‘maritime’ province that can export MB (and adjacent Canadian provinces, e.g., SK, AB) products and resources to major markets around the world.

Also, the Consortium that has purchased the rail tracks and the port of Churchill’s facilities is considering employing a new transportation infrastructure operating company to repair, operate, and manage such facilities (through a 10-year concession agreement) (see Glossary of Terms). However, being such an operator is far from easy. Although the tensions between the private sector and regional development as outlined above may be somewhat simplified, the oppositions can be irreconcilable. People believed further investment in Churchill Railway might be merited, particularly because of the potential Arctic shipping. Simultaneously, despite the progress of railway repair, environment, social and economic issues also need to be addressed. All in all, the new operator must find a solution so as to operate and manage the facilities in a way that can merge/integrate the ambivalent, and potentially, conflicting, demands of the port/Town of Churchill. The objectives are to reap the benefits of the development of Arctic shipping (thus integrating the Arctic into global supply chains) and to ensure that the rail and port facilities will directly benefit the economic and social well-being of the Town of Churchill and nearby northern communities. In other words, to ensure that the new operation is sustainable, we might need to consider developing some kind of hybrid business and management model that would allow the rail and port facilities to form part of an efficient ‘operational’ system of global supply chains while also ensuring that they are part of a ‘regional’ system that poses direct benefits to local/surrounding regions. Needless to say, as a profit-making business, the operator needs to ensure that the business model would be financially sound in both short- and long-terms, while it also needs to possess environmental awareness, where the Arctic can be highly sensitive to even the slightest pollution.

5. Your Task: Develop a ‘Commentary Piece’

In a group of 4 students, assume that you are a group of supply chain consultants that would like to write a Commentary Piece (an ‘op-ed’) for the issue. The Commentary Piece that should be good enough to publish in a major newspaper as an opinion/editorial piece (e.g., Winnipeg Free Press), including:

· Your general vision to the Churchill port and rail facilities, including market opportunities and challenges (e.g., what types of products and/or passengers that the rail and/or port can realistically handle, and why?)

· How Churchill should be developed so that it will facilitate shipping in the Arctic, benefit global supply chains, and help transforming Manitoba’s provincial economy?

· How such development of Churchill can directly benefit the economic and social well-being to the Town of Churchill and nearby northern communities in Canada?

The commentary piece should be about 600 words (+/- 100 words). It should be written It must be prepared in English and written in a style that is interesting to the public and should be opinionated (i.e., in an opinion format). While you should use the case to learn and educate yourself, the commentary piece could be somewhat independent from the case, making some policy recommendations to policymakers in Manitoba and/or Ottawa. The following links consist of some suggestions on how to write a good commentary piece:

· styleguide.duke.edu/toolkits/writing-media/how-to-write-an-op-ed-article/

· www.nytimes.com/2013/10/14/opinion/op-ed-and-you.html

· www.inims.illinois.edu/images/MemberResources/TenStepsWritingOpEd.pdf

Academic dishonesty, including plagiarism, is a very serious academic offence and will NOT be tolerated. Please refer to the course outline for policies on academic dishonesty.

Exhibit A: Export cargoes passing through the Port of Churchill, 2000-2015

Remarks: Operations in the port of Churchill was suspended since August 2016.

Sources: Churchill Gateway Development Corporation, Canadian Grain Commission, Hudson Bay Railway.

Exhibit B: The Prices of Selected Grocery Items between Northern Store (Churchill, MB) and Superstore (Winnipeg, MB), October 2017

Item	Quantity	Price in Northern Store Churchill, MB (Pc)	Price in Superstore, Winnipeg, MB (Pw)	Ratio (Pc/Pw)
Grocery
Tropicana Orange Juice	2.63 L	14.29	4.97	287.53%
Danone Activia Yogurt	650.00 g	6.09	3.87	157.36%
Beatrice Milk	4.00 L	10.89	4.59	237.25%
Beatrice Milk	2 .00 L	5.95	3.2	185.94%
Lays Potato Chips	255.00 g	5.85	2.47	236.84%
Wonder Bread White	570.00 g	5.25	2.48	211.69%
Produces
Apples gala bag	3.00 lb	4.99	3.49	142.98%
Broccoli (iceless)	1.00 pc	10.79	2.97	363.30%
Blade Steak (boneless)	1.00 kg	25.79	13.48	191.32%
Houseware
Tide liquid high eff orjg	1.47L	15.89	5	317.80%

Remarks: All prices are expressed in Canadian Dollars (CAD). L – litre, g – gram, lb – pound, pc -piece, kg – kilogram.

Sources: Yufeng Lin during his visit to Churchill in October 2017.

Glossary of Terms

Consortium

A consortium is a group made up of two or more individuals, companies or governments that work together towards achieving a chosen objective. Entities participating in a consortium will pool resources but otherwise are only responsible to the group in respect to the obligations that are set out in the consortium’s agreement. Therefore, every entity that is under the consortium remains independent with regard to their normal business operations and has no say over another member’s operations that are not related to the consortium.

(Source: Investopedia.com)

Concession Agreement

A concession agreement is a negotiated contract between a company and a government that gives the company the right to operate a specific business within the government’s jurisdiction, subject to certain conditions. Concession agreements may also refer to agreements between the owner of a facility and the concession owners or concessionaires that grant the latter exclusive rights to operate a specific business in the facility under specified conditions.

(Source: Investopedia.com)

Hitherto

up to this time; until now: a fact hitherto unknown. to here.

(Source: Dictionary.com)

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© 2020, Koi Yu Adolf Ng and Yufeng Lin

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