Efﬁciency, proﬁtability and welfare gains from the Canadian National
Railway privatization☆
Anthony E. Boardman a,
⁎, Claude Laurin b
, Mark A. Moore c
, Aidan R. Vining c
a
Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC, Canada V6T 1Z2
b
HEC Montréal, 3000 Chemin de la Côte-Ste-Catherine, Montréal, Québec, Canada H3T 2A7
c
Beedie School of Business, Simon Fraser University, 500 Granville Street, Vancouver, BC, Canada V6C 1W6
a b s t r a c ta r t i c l e i n f o
Article history:
Received 19 June 2012
Received in revised form 21 November 2012
Accepted 22 November 2012
Available online xxxx
Keywords:
Privatization
Canadian National Railway
Operational performance
Social welfare
This article describes and analyzes the privatization of Canadian National Railway (CN), a large railroad
privatization. First, it reviews the theory and evidence concerning railroad privatizations. Second, it presents
a brief history of CN and the regulatory environment prior to and after CN's privatization. Third, it uses data
from 1990 to 2011 to compare CN's post-privatization operating performance with its pre-privatization
performance. Fourth, it uses cost–beneﬁt analysis to estimate the social welfare gains from the privatization
and the distribution of those gains. The overall results demonstrate that CN performed substantially better
following privatization, both from an operational perspective and from a broader social welfare perspective.
We ﬁnd statistically signiﬁcant increases over the long term (16 years following privatization) in sales, capital
investment, assets, proﬁt, proﬁtability, productivity, dividends and corporate taxes paid. There was little
change in the capital structure of CN and a signiﬁcant decrease in employment. Using Canadian Paciﬁc
Railway as a basis for the counterfactual, we estimate that CN's privatization generated social welfare gains
of approximately $25 billion in 2011 Canadian dollars. The Canadian government received almost half of
these gains, while CN's shareholders (most of whom were non-Canadian) captured the rest.
© 2012 Elsevier Ltd. All rights reserved.
1. Introduction
The privatization of Canadian National Railway (CN) in 1995 was
by far the largest transportation privatization in Canadian history.
Alongside the privatizations of the Japanese National Railways and
of the British Rail, the CN privatization represents one of the largest
transportation privatizations globally. Both the Japanese and British
railroad privatizations have been controversial, especially in the
British Rail case (Mathieu, 2003; McCartney & Stittle, 2008; Smith,
2006; Yvrande-Billon & Ménard, 2005). As we discuss later, the evidence
on the performance outcomes of the railroad privatizations is
mixed, although freight privatization appears to have done better than
other privatized railroad businesses, including passenger services.
The privatization of CN differs from the Japanese and British
railroad privatizations in a number of important ways. First, the CN
privatization primarily involved freight transport rather than passenger
travel, which is the case in both Japan and Britain. Second, the CN
privatization consisted of a one-time share issue sale of an integrated
business (including track and rolling stock) and the maintenance of
an existing organization, while the British and Japanese privatizations
involved either separation of infrastructure and rolling stock (vertical
separation) or geographic disintegration (horizontal separation). Third,
the topographical footprint and conditions of the CN system are quite
different to the other two systems. Fourth, both before and after privatization,
CN faced a direct competitor over much of its network,
which was not the case in Japan or Britain.
Our main purpose is to determine whether the privatization of
CN was beneﬁcial. We take two approaches. First, we use data from
1990 to 2011 to compare CN's post-privatization operating performance
with its pre-privatization operating performance. We examine
changes in output, capital expenditures, assets, employment, proﬁt,
productivity, proﬁtability, capital structure, dividends and corporate
taxes. The ﬁndings are important from a business strategy perspective,
a shareholder perspective and a government perspective. Second, we
use data from the 1981–2008 period to estimate the change in social
welfare from the CN privatization and the distribution of these beneﬁts
and costs between the Canadian government and (Canadian and
non-Canadian) shareholders of CN. We use cost–beneﬁt analysis
(CBA) to conduct this assessment. A key feature of this CBA is that
we use cost data from Canadian Paciﬁc Railway (CP), a direct competitor
of CN, to compute the counterfactual, that is, what would have
happened in the absence of privatization. These ﬁndings are most
directly relevant for the government of Canada and policy analysts interested
in the welfare consequences of privatization in general and,
Research in Transportation Business & Management xxx (2012) xxx–xxx
☆ The authors would like to thank Leo Fankhänel and Robert Boardman for research
assistance.
⁎ Corresponding author. Tel.: +1 604 822 8484; fax: +1 604 822 8477.
E-mail addresses: Anthony.Boardman@sauder.ubc.ca (A.E. Boardman), claude.
laurin@hec.ca (C. Laurin), markm@sfu.ca (M.A. Moore), vining@sfu.ca (A.R. Vining).
RTBM-00070; No of Pages 12
2210-5395/$ – see front matter © 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.rtbm.2012.11.011
Contents lists available at SciVerse ScienceDirect
Research in Transportation Business & Management
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
more speciﬁcally, of railroad privatization. It also offers lessons to other
governments considering railroad privatization or institutional reform.
In sum, we ﬁnd that the privatization of CN was beneﬁcial to
shareholders, to the government of Canada and to the overall welfare
of Canadians. The most important results can be summarized as
follows. In the short run (which we consider to be the 5-year period
following privatization), proﬁt (net income), proﬁtability (return on
assets and return on sales), and productivity (measured by sales
per employee and net income per employee) increased signiﬁcantly
relative to the (5-year) pre-privatization period, employment experienced
a statistically signiﬁcant drop and there was no statistically
signiﬁcant change in sales revenue, capital investment, assets, capital
structure, dividends or corporate taxes. In the long run (which we
consider to be the 16-year period following privatization), there
were statistically signiﬁcant increases in sales, capital investment,
assets, proﬁt, proﬁtability (return on assets and return on sales),
and productivity (sales per employee and net income per employee).
There were also statistically signiﬁcant increases in dividends and
corporate taxes, demonstrating that the most signiﬁcant stakeholders
in the privatization – government and shareholders – beneﬁted from
the privatization. Capital structure (debt-to-assets) did not change
substantially. There was, however, a signiﬁcant reduction in employment,
although we argue that employees were not adversely affected.
Turning to the welfare results, CN's privatization generated social
welfare gains of almost $25 billion in 2011 Canadian dollars (which
we use hereafter unless explicitly stated otherwise). The Canadian
government received almost half of these gains, while CN shareholders
(over half of whom were non-Canadian) captured the rest.
The article is organized as follows. Section 2 brieﬂy reviews the
theory about privatization and summarizes the academic evidence
concerning the outcomes of previous railroad privatizations in Japan,
Britain, Australia, New Zealand and Chile. Section 3 presents a brief
history of CN and of the regulation of Canadian railroads prior to privatization.
It also describes some key events following privatization.
Section 4 analyzes both the short-run and the long-run operational
performance impacts of privatization. Section 5 presents our estimate
of the overall welfare change attributable to the privatization of CN by
using cost–beneﬁt analysis, and of the distribution of these changes
among different stakeholders. Section 6 summarizes the main results
and identiﬁes some of the factors that led to CN's success. It also offers
lessons for private sector and government management, and includes
some suggestions for future research.
2. Theory and evidence about railroad privatizations
The weight of the empirical evidence is that privatization of
businesses in reasonably competitive markets increases ﬁrm competitiveness,
improves productivity and generates positive welfare
gains (Boardman, Laurin, & Vining, 2002; Boardman & Vining, 1989;
Boubakri & Cosset, 1998; Megginson & Netter, 2001; Shirley & Walsh,
2001). However, the long-haul Canadian railroad industry has been
and is effectively duopolistic. While the direct overlap of CN's and CP's
networks has been estimated at between 25% and 50%, the effective
competitive overlap, given feed-in complementors that have options,
is considerably larger (McNish, Jang, & Silcoff, 2012). Unfortunately,
the theory and evidence concerning the impact of privatization in
highly oligopolistic or duopolistic markets is not resolved (Chirwa,
2004; De Fraja, 1991; Willner & Parker, 2007).
Both Canada and the United States have been unusual in enjoying a
fairly high degree of direct competition in rail freight. The Secretariat
of the OECD has noted: “competition in-the-market between
vertically-integrated rail companies …requires the existence of at
least two separate rail infrastructures capable of providing substitute
rail services …this is the predominant form of competition in rail
freight services in North America” (OECD Secretariat, 2006, 71). Furthermore,
the Secretariat argues: “experience shows, at least in
North America, that this approach has been able to deliver a degree
of competition with relatively little regulatory intervention” (OECD
Secretariat, 2006, 71). Evidence suggests that the presence of more
than one railroad competitor reduces tariffs anywhere between 3%
and 25% (Gomez-Ibanez, 2010; Grimm & Winston, 2000; Karikari,
Brown, & Nadji, 2006; Winston, Maheshri, & Dennis, 2011). Furthermore,
both CN and CP faced increasing inter-modal competition from
trucking and shipping. In an important article, Caves and Christensen
(1980) refer to Canadian railroads as operating in a competitive environment.
Although the Canadian railroad industry was a duopoly
on the long haul freight routes, this collective evidence suggests that
it was “reasonably competitive” and, consequently, one might expect
that the privatization of CN would lead to efﬁciency improvements
and welfare gains.
The evidence on previous rail privatizations has been mixed.
Only in Japan is the evidence clearly positive: privatization increased
efﬁciency and proﬁtability, especially for freight rail (Mizutani,
1999; Mizutani & Nakamura, 1996, 1997; Thompson, 2003). The
privatization also improved safety (Evans, 2010; East Japan Railway
Company Management Planning Department, 2008) and travel
times (East Japan Railway Company Management Planning Department,
2008).
In Britain, the evidence is much less positive. The restructuring
and privatization of British Rail (BR) took place during 1993–1996,
when John Major's conservative government was in power. Thompson
(2003, 347) argues that it “has been the most contentious of all railway
system restructuring efforts”. There was signiﬁcant political and economic
opposition to BR's privatization and signiﬁcant disagreement as
to how it should be privatized. Eventually, BR was fully privatized and
resulted in over 100 different private ﬁrms. Many of these privatizations,
including that of the Railtrack, which owned all of the track
and the stations, were carried out rapidly (some would argue hastily)
towards the end of Major's term.
Pollitt and Smith (2002) found evidence of signiﬁcant operating
cost savings in the ﬁrst few years following privatization. Furthermore,
Cowie (2009) found productivity gains in passenger rail on
the order of 3–4% per annum over the ﬁrst 4 years of privatization.
In addition, there was substantial growth in passenger and freight
trafﬁc. However, there have been many criticisms of this privatization,
including accusations of lower quality service (perceived
reduced punctuality and overcrowding), a worse price-to-quality
ratio and safety concerns (Mathieu, 2003), even though the evidence
suggests that safety actually improved (Evans, 2007; Thompson,
2003). Following a huge cost escalation for the upgrade to the West
Coast Main Line and the Hatﬁeld derailment in 2000, the government
decided to place Railtrack into administration and eventually
replaced it with Network Rail, a not-for-proﬁt company, owned by
its members (Crompton & Jupe, 2007). Subsequently, annual industry
cash costs rose by 47% and unit costs rose by 40%. Smith (2006)
argues that this cost increase was largely due to an “excessive” concern
with safety.
Under the provisions of the Railways Act 1993, BR freight was split
into seven companies, each of which was separately offered for private
sale. In the end, however, ﬁve were sold to a single purchaser, English,
Welsh and Scottish Railway (EWS), controlled by Wisconsin Central.
Following privatization, freight trafﬁc grew 42% between 1994 and
2000 (Mathieu, 2003; Thompson, 2003). However, operators have
only been marginally proﬁtable (Fowkes & Nash, 2004). Furthermore,
despite mandating open access to freight companies, which was an important
feature of the British restructuring, there has been very little
new entry into the rail freight business (Cowie, 2010).
In Australia there has also been extensive privatization of parts of
the railroad system. Here, the record appears mixed. Williams, Greig,
and Wallis (2005) note that the privatization of freight railroads has
allowed consolidation across state boundaries and argue that, as a
result, the industry is markedly stronger than in the past, although
2 A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
governments remain the funders of last resort. They also maintain
that long-distance passenger privatization appears to have been successful
and consider the urban and rural passenger rail concessions
a “qualiﬁed success”.
New Zealand Rail Limited (later re-named Tranz Rail) was
privatized as a single integrated entity. In this case, the privatization
appears to have been a failure on most dimensions (Clark, 2010;
Wilson, 2010). New Zealand Rail was purchased in 1993 by a consortium
of ﬁnanciers and Wisconsin Central who jointly put up about
one-third of the money and ﬁnanced the rest by debt. In 1994, New
Zealand Rail sold its stake in Clear Communications and, the next
year, it made a capital repayment to the consortium members of
$100 million (current Australian dollars), only slightly less than the
initial amount of cash they had invested. In 1996, Tranz Rail issued
new shares to the public, equivalent to 25% of the company, and it
was listed on the New Zealand stock exchange. Despite signiﬁcant
investments in freight operations, the required volumes did not materialize
and Tranz Rail lost money. In 2000, a new Board replaced
the former management team and sold off many of the non-core
assets. However, Tranz Rail continued to perform poorly and the
stock price dropped. In 2003, Toll Holdings made a takeover offer
for the company and, eventually, Toll became the operator and the
government acquired the rail network. The company was renamed
Toll NZ and its ﬁnancial situation continued to worsen. In 2008 it
was re-nationalized by the federal government. Although the Tranz
Rail privatization was a failure on most dimensions, it was highly
proﬁtable for the initial consortium investors.
In Chile, railroad reforms resulted in the privatization of the entire
Northern Railroad (sold to FERRONOR) and a state-owned Southern
Railroad (EFE), which owned and maintained the track and carried
passengers, but allowed private freight concessionaires (FEPASA and
TRANSAP) to use the track (Soto, 2010). FERRONOR acquired the
Northern Railroad in a competitive bid in 1995. It operated as an
unregulated monopoly, concentrating on more proﬁtable segments
and eliminating others. From 1997 to 2000, freight volumes almost
quintupled, revenues tripled, labor productivity tripled and proﬁtability
increased (see Soto, 2010, 16). On the Southern Railroad, FEPASA's
freight volumes, revenues and productivity did not increase immediately
following privatization, but did increase markedly after a decade
of private ownership (see Soto, 2010, 18). Volumes rose partially
due to the fact that prices were about 40% lower than prior to privatization
(Thompson, Budin, & Estache, 2001), but despite this, profitability
remained low. At this time, it is hard to reach a deﬁnitive
conclusion on rail privatization in Chile, although the results appear
positive in terms of freight.
This review demonstrates that railroad privatization has been
conducted quite differently in different countries. Also, the outcomes
have been very different, ranging from clearly beneﬁcial to disastrous.
In general, it appears that the evidence for freight privatization is
considerably better than for the privatization of other railroad businesses,
including passenger services. Apart from that result, given the
relatively small number of railroad privatizations, and the diversity of
situations and outcomes, it is difﬁcult to generalize about the key
success factors. However, the following factors appear to affect the
efﬁciency and welfare outcomes of railroad privatizations: (1) how
the privatization process was conducted, most importantly whether
through a share issue or direct sale; (2) the regulatory framework
following privatization; (3) whether the railroad was privatized as an
integrated network or whether there was separation of ‘wheel and
rail’; (4) the market structure following privatization: the degree of direct
competition, as well as the openness of the market and barriers to
entry; (5) the price/quality characteristics of substitutes (especially
road and sea); (6) the geography of the terrain over which the railroad
operates, and economies of scale and density; (7) the degree and nature
of technological change; (8) government policy following privatization,
especially the extent of any government failures. Moreover, a myriad of
relatively random, but politically salient, factors can affect whether or
not the privatization is sustained (especially by governments elected
subsequent to the privatizing government). For example, a single
train crash that kills 10 people has greater political saliency than 10
road crashes that each kills one person.
Our primary purposes are to consider whether the privatization
of CN has improved operating performance or social welfare. The
net effect of the interplay of all the above factors over time in any
particular privatization is impossible to predict ex ante. The answer
lies in the empirical pudding.
3. Overview of CN and the Canadian freight rail
regulatory environment
CN was formed as a government-owned corporation through the
amalgamation of several ﬁnancially troubled, privately owned railroads
between 1917 and 1923. Since then, CN and CP have dominated
railroad freight services in Canada. During much of the period of
public ownership, CN was in various forms of ﬁnancial stress. It is
very difﬁcult to determine the size of direct federal assistance to CN.
Over the period 1927–1991, direct subsidy payments to the Canadian
railroad sector amounted to almost $12 billion (1995 Canadian
dollars), although over half of this amount was to subsidize passenger
services (Bonsor, 1995). Much of the “subsidy” to CN was by way of
recapitalizations: the Canadian government swapped CN's debt for
equity or recapitalized it in 1937, 1952 and 1978.
With the ﬁnal recapitalization in 1978, the government imposed a
hard budget constraint and mandated that CN should pay a 20% dividend
on any proﬁts earned. After 1978, CN appears to have operated
more efﬁciently. Between 1978 and 1989, it was proﬁtable in 9 out of
the 11 years and remitted $237 million (current Canadian dollars) to
the federal government (Bruce, 1997, 15).
In the early 1970s CN was highly diversiﬁed. However, over time, it
has focused more on railroad freight transportation. Around 1977, Air
Canada was spun off as a separate Crown Corporation (state-owned
enterprise), CN's passenger services subsidiary became another separate
Crown Corporation, later called Via Rail Canada, and CN Marine,
which operated ferries in Atlantic Canada, also became a separate
Crown Corporation. CN sold CN Route (a trucking business) to private
investors in 1986. CNCP Telecommunications and a chain of hotels
were sold to CP in 1988, along with telecommunications divisions in
the Northwest Territories and Newfoundland. CN also owned oil and
gas assets, non-rail real estate, and a subsidiary that manufactured
transport equipment. Most of these businesses were divested prior
to privatization, and the manufacturing subsidiary was ﬁnally sold in
1996 (Canadian National Railway Company, 1995, 1996).
The 1967 National Transportation Act signiﬁcantly reduced the
scope of rate regulation over both CN and CP, with the exception of
grain transportation. But, Timur and Ponack (2002, 538) note that
the 1967 Act still “emphasized cooperation between CN and CP and
…the two companies exchanged cost information and set common
freight rates.” In 1983, the Western Grain Transportation Act shifted
the burden of the so-called Crow Nest Pass rates for grain (essentially
price controls) from the railroads to direct government subsidies
(Heaver & Waters, 2004). In 1987, the National Transportation Act
(NTA) allowed shippers located on only one of the railroads' lines
greater access to the other's line, allowed conﬁdential negotiation of
rates, encouraged reliance on market forces and arbitration rather
than on the regulation of most non-grain rates, and it allowed both
railroads somewhat greater freedom to abandon uneconomic branch
lines. The 1996 Canada Transport Act extended the 1987 NTA provisions
and allowed both railroads to eliminate low-density lines,
resulting in the formation of more independent short-line railroads.
More importantly, the 1987 National Transportation Act initiated
a transition from the era of tacit collusion to one of more direct
intra-modal competition (Bonsor, 1995; Timur & Ponack, 2002).
3A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
And, as mentioned above, both CN and CP faced increasing intermodal
competition from trucking and shipping.
Paul Tellier was appointed CEO of CN in 1992 with the mandate to
make CN more proﬁtable and efﬁcient prior to an ultimate privatization.
Tellier began to run CN on a more commercial basis (Canadian
National Railway Company, 1995; Bruce, 1997). The Canadian federal
government privatized a number of Crown corporations between 1985
and 1997. Boardman and Vining (2012) provide a comprehensive
discussion of the aggregate effects of these privatizations. The main
reasons for the federal privatizations were the desire for more revenue
or to reduce subsidies in the face of large deﬁcits and government debts,
and because it was consistent with the conservative government's
ideological preferences (Boardman, Laurin, & Vining, 2003). Unlike
many railroad privatizations in other countries, CN was privatized in
its entirety and the infrastructure was not separated from operations.
All of the large Canadian privatizations, including the CN privatization,
were carried out through ﬁxed-price share issue privatizations (SIPs).
These ﬁrms were in at least somewhat competitive industries and were
expected to improve their efﬁciency under private ownership. CN was
privatized in November 1995 in one tranche, with proceeds amounting
to just over $2 billion in current Canadian dollars. Only the privatization
of Petro-Canada in 1991 raised more money for the Canadian government
(about $9 billion in aggregate in current Canadian dollars).
One issue of interest is whether the government left “money on
the table.” Laurin, Boardman, and Vining (2004) found that CN was
underpriced by about 25%. Based on a sample of 104 SIPs across 25
countries, they also found that SIP underpricing averaged 15.2% in
other developed countries, but only 6.3% in Canada. This comparison
suggests that the Canadian government did leave signiﬁcant money
on the table with CN's privatization, unlike its other SIPs.
Since its privatization, CN has made a number of important acquisitions
that have substantially expanded its North American network.
Most signiﬁcantly, it increased its presence in the U.S. with the acquisition
of the Illinois Central Railroad in 1998 for $2.4 billion (current
U.S. dollars). After this acquisition, Hunter Harrison of Illinois Central
became CEO of CN. CN later acquired Wisconsin Central for $1.2 billion
(current U.S. dollars) in 2001, Great Lakes Transportation for
$380 million (current U.S. dollars) in 2003 and BC Rail for
$1 billion (current Canadian dollars) in 2003. When CN acquired
Wisconsin Central it also acquired interests in EWS Railways in the
UK, Tranz Rail in New Zealand, and TasRail in Tasmania. CN quickly
sold off these holdings.
As of 2012, the increased efﬁciency of CN has had an impact on the
management and ownership of CP. In 2012, private equity shareholders
of CP (most importantly, Pershing Square) won a proxy battle
to have CP hire CN's retired CEO, Hunter Harrison, to run CP (Deveau,
2012; McNish et al., 2012).
4. Operational performance changes at CN
This section adopts the methods used by D'Souza and Megginson
(1999), Boardman et al. (2002) and others to examine the impacts
of the privatization on operational performance. One key difference
is that this research uses data for a much longer period of time —
from 5 years prior to privatization to 16 years post-privatization.
The main results are presented in Table 1. Data are drawn from the
annual reports, as reported by Compustat. All ﬁnancial data are
converted to real (inﬂation adjusted) 2011 Canadian dollars using
the Canadian Consumer Price Index — All Items (CPI).
Given that Table 1 contains the raw data for each variable, one can
clearly see how each performance measure has changed over time.
Table 1 also contains the average value of each performance variable
during the 5-year period prior to privatization (denoted Pre-Priv),
during the short-run (5-year) period after privatization (denoted SR
post-priv) and during the long-run (16-year) period after privatization
(denoted LR post-priv). It also compares the average value of
each variable during the 5-year (SR) post-privatization period and
during the 16-year (LR) post-privatization period to the average
value in the pre-privatization period (denoted SR post–pre and LR
post–pre, respectively). Finally, we present the Mann-Whitney U statistic
(also known as the Wilcoxon rank-sum test), which tests whether
the post-privatization observations come from the same distribution
as the pre-privatization observations.
In the following sub-sections we discuss changes in four major
operational performance categories: overview (sales, capital investment,
assets and employment); proﬁt, proﬁtability and productivity
(net income, return on assets, return on sales, sales per employee
and net income per employee); capital structure (debt-to-assets
ratio); and payments to stakeholders (dividends and corporate taxes
paid). In total, these measures provide a comprehensive picture of
the effects of privatization on operational performance.
4.1. Overview
CN's assets, measured in real 2011 Canadian dollars, were about
$10 billion in the years prior to privatization. They fell by more than
10% in the year of privatization, but soon rose rapidly. Assets increased
by almost $14 billion from 1997 to 2001, due partly to the Illinois Central
(1998) and Wisconsin Central (2001) acquisitions. Since 2001, assets
have continued to increase, albeit at a slower rate. By 2011, assets
were over 150% higher than during the 5-year pre-privatization period.
As shown in Table 1, the increase in assets from the 5 years prior to privatization
versus the 16 years after privatization was statistically significant
at the 1% level.
CN's real sales did not increase as much as real assets during the
post-privatization period. Like assets, they were relatively ﬂat prior to
privatization. Following privatization they decreased slightly. They
picked up in 1998 and then grew slowly through 2008. In 2011, real
sales were approximately 50% higher than during the 5-year preprivatization
period. Similar to assets, sales were not signiﬁcantly
higher in the 5-year post privatization period than in the 5-year preprivatization
period but they were signiﬁcantly higher in the 16-year
post-privatization period than in the pre-privatization period.
Employment at CN was declining prior to privatization and continued
to decline during the ﬁrst 3 years following privatization. By
1998, employment had been reduced by 1/3 compared to the average
of the 3 years prior to privatization. Thereafter, employment levels
remained stable until 2011. The decrease in employment following
privatization was statistically signiﬁcant for both the 5-year and
16-year post-privatization periods.
4.2. Proﬁt, proﬁtability and productivity
CN experienced losses (negative net income) in most years immediately
prior to privatization. It took a major write-down (of over
$1 billion in constant dollars) in 1992, the year Paul Tellier was
appointed CEO and lost over $1 billion in 1995, the year of privatization.
Following privatization, CN's net income (NI) was always positive
and increased consistently, reaching over $2 billion in 2006 and
2007 (in both real and nominal terms). Proﬁts fell slightly in 2008
and 2009 during the recession, but in 2011 proﬁts reverted to their
2007 level. The differences in NI between both the 5-year and
16-year post-privatization periods, relative to the pre-privatization
period, were both statistically signiﬁcant.
In the 5-year post-privatization period, CN's return on assets (ROA)
averaged 3.6% and its return on sales (ROS) averaged 8.2%, which were
substantially better than prior to privatization. Thereafter, ROA increased
slightly while ROS continued to increase substantially. This
long, consistent increase in proﬁtability is particularly impressive
compared to other Canadian SIPs, where proﬁtability gains were usually
achieved in the ﬁrst 3 years and did not increase thereafter
(Boardman & Vining, 2012). Both ROA and ROS showed statistically
4 A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
signiﬁcant increases following privatization in both the shorter and
longer post-privatization periods.
Although both sales and employment dropped in the ﬁrst 5 years
following privatization, employment dropped relatively more, which
resulted in an increase in labor productivity following privatization,
measured in terms of real sales per employee. Thereafter, productivity
continued to increase. Prior to privatization, CN's sales per employee
were about $180,000 (in real dollars). From 2005 to 2011, they were
about $380,000 per employee. The increases in sales per employee
were statistically signiﬁcant in both the 5-year post-privatization
period and the 16-year post-privatization period relative to the preprivatization
period. Productivity, measured by NI per employee, experienced
similar statistically signiﬁcant increases. These results are
consistent with Laurin and Bozec (2001) who found signiﬁcant improvements
in CN's total factor productivity following privatization.
4.3. Capital structure
Following privatization, we would expect that debt relative to assets
would decrease for two reasons. First, CN now had direct access
to capital markets and should have found it easier to raise equity.
Second, the removal of government ownership would, in theory, increase
the cost of debt. This assumes, however, that CN actually paid
interest on its government debt, which it may not have done. In the
longer run, the debt-to-assets ratio might increase as proﬁtability increases,
risk is reduced and lenders become more willing to lend to CN.
In fact, however, the most noticeable change in CN's capital structure
occurred prior to privatization when the debt-to-assets ratio increased
from about 50% (in 1990) to 66% (in 1993 and 1994). As expected, the
debt-to-assets ratio did decrease following privatization, although the
change from the 5-year pre-privatization period to the 5-year postprivatization
period was not statistically signiﬁcant. Thereafter the
debt-to-assets ratio has changed little, although it has been slightly
lower in recent years.
4.4. Dividends and corporate taxes paid
For three of the years during the 5-year pre-privatization period, and
in the year of privatization, CN paid no dividend. It commenced paying
dividends in the ﬁrst year after privatization and has increased (in
nominal dollars) the dividends paid in each subsequent year except
2002 when they dropped very slightly. In 2011, it paid dividends of
$585 million. The difference in dividends between the long-run
post-privatization period and the pre-privatization period was statistically
signiﬁcant (at the 0.10 level), but not between the short-run
post-privatization period and the pre-privatization period.
Similarly, in the pre-privatization period, CN paid virtually no
taxes. In fact, in some of these years, and the year of privatization,
it received a tax rebate. In contrast, in the ﬁrst 3 years following
privatization, CN paid taxes of $151 million per year on average (in
real dollars). The taxes paid have trended higher over time, although
they have varied considerably from year-to-year. In 2011, for example,
CN paid taxes of $889 million, but less than half this amount in 2009.
The difference in taxes paid between the long-run post-privatization
period and the pre-privatization period was statistically signiﬁcant
(at the 0.01 level), but not between the short-run post-privatization
period and the pre-privatization period.
4.5. Conclusion on operational performance changes resulting from
privatization
Our analysis shows that privatization has resulted in improved performance
by CN, using a broad range of operational performance measures.
The statistically signiﬁcant growth in sales, NI, proﬁtability as
Table 1
CN's pre-privatization and post-privatization operating performance, 1990–2011.
Year Sales
(millions)
Capital
expenditures
(millions)
Assets
(millions)
Employment Net
income
(millions)
Return on
assets (%)
Return
on sales
(%)
Sales per
employee
(thousands)
Net income
per employee
(thousands)
Debt to
assets
(%)
Dividends
(millions)
Corporate
taxes
(millions)
1990 6236 500 10,749 37,000 12 0.11 0.19 169 0 49.55 86 −3
1991 5827 346 10,085 35,300 −21 −0.20 −0.35 165 −1 49.30 0 −5
1992 5783 477 10,065 33,500 −1435 −14.26 −24.81 173 −43 64.67 111 −18
1993 5889 614 9953 33,000 −111 −1.11 −1.88 178 −3 66.06 0 18
1994 6476 803 10,925 30,770 343 3.14 5.29 210 11 65.98 0 17
1995 5609 446 8483 26,951 −1485 −17.51 −26.48 208 −55 62.79 0 −25
1996 5609 669 8411 24,060 192 2.28 3.41 233 8 61.83 92 15
1997 5772 765 9384 22,800 535 5.70 9.26 253 23 51.70 103 431
1998 5442 649 14,267 21,510 143 1.00 2.63 253 7 60.50 130 8
1999 6790 812 19,046 23,490 777 4.08 11.44 289 33 62.69 172 476
2000 6845 763 19,099 22,460 970 5.08 14.18 305 43 62.50 201 556
2001 6929 782 23,034 22,670 891 3.87 12.86 306 39 66.14 228 481
2002 7326 685 22,690 23,190 685 3.02 9.35 316 30 64.98 222 321
2003 6863 680 20,003 21,490 856 4.28 12.47 319 40 62.22 223 394
2004 7499 1228 22,069 22,470 1485 6.73 19.81 334 66 61.88 254 723
2005 8113 1322 24,863 21,540 1744 7.01 21.49 377 81 58.32 308 875
2006 8480 1426 26,380 21,810 2294 8.69 27.05 389 105 59.07 374 706
2007 8492 1491 25,227 22,700 2321 9.20 27.33 374 102 56.62 449 589
2008 8913 1496 28,078 22,230 1991 7.09 22.34 401 90 60.48 458 683
2009 7721 1469 26,386 21,500 1943 7.36 25.17 359 90 55.38 497 427
2010 8539 1632 25,942 22,300 2165 8.35 25.36 383 97 55.23 518 795
2011 9028 1625 26,026 23,200 2457 9.44 27.22 389 106 58.96 585 889
Pre-priv 6042 548 10,356 33,914 −242 −2.46 −4.31 179 −7 59.11 39 2
SR post-priv 6092 732 14,041 22,864 523 3.63 8.18 267 23 59.85 140 297
LR post-priv 7398 1093 21,306 22,464 1341 6 17 330 60 59.91 301 523
SR post–pre 49 184 3686 −11,050 766 6.09 12.50 88 30 0.74 100 295
SR Mann–Whitney U 10 4 10 0a
2b
2b
2b
0a
2b
10 5 4
LR post–pre 1355 546 10,951 −11,450 1583 8.29 21.27 151 67 0.80 261 521
LR Mann–Whitney U 15b
7a
10b
0a
2a
3a
2a
0a
2a
36 16c
4a
The ﬁgures for 1995 are in italics because CN was privatized in this year and these data are not included in the statistical analyses.
a
Statistically signiﬁcant at the 0.01 level of signiﬁcance for a two-sided alternative.
b
Statistically signiﬁcant at the 0.05 level of signiﬁcance for a two-sided alternative.
c
Statistically signiﬁcant at the 0.10 level of signiﬁcance for a two-sided alternative.
5A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
measured by ROA and ROS, and productivity as measured by the
sales per employee ratio and the NI to employee ratio, convincingly
demonstrate that CN's operating performance improved in the
post-privatization period.
Some of these results were affected by CN's acquisitions in the U.S. and
Canada. Certainly, assets, sales and employees were affected by the acquisitions.
Improvements in proﬁtability and productivity might also be
partially due to these acquisitions if there were economies of scale or
economies of density. However, we would argue that these improvements
should be treated as beneﬁts from privatization because, without
privatization, it is very unlikely that the acquisitions would have occurred.
Our results also show that CN's privatization has provided signiﬁcant
beneﬁts for the major stakeholders. The increase in proﬁts generated
liquidity that CN distributed to shareholders as increases in dividends
and to the Canadian government as increases in taxes paid. The next
section directly examines the social welfare impacts of CN's privatization.
5. A social welfare (CBA) assessment of the CN privatization
This section presents a CBA of CN (Domah & Pollitt, 2001; Florio,
2004; Galal, Jones, Tandon, & Vogelsang, 1994; Jones, Tandon, &
Vogelsang, 1990; Pollitt & Smith, 2002). The methodology is similar
to that employed in Boardman, Laurin, Moore, and Vining (2009),
although some assumptions differ slightly. Also, our data extend ﬁve
more years to 2008. It is important to note that these data pertain
to Canadian freight operations, not to CN (or CP) as a whole. For
some years, we applied a smoothing procedure for unusually high
restructuring and miscellaneous costs (Boardman et al., 2009, 64). Our
ﬁnancial estimates are converted to present values (PV) as of 1995,
the year of privatization, but are expressed in 2011 Canadian dollars.
An important advantage of this CBA vis-à-vis most other privatization
CBAs is that we use data from CP, a private sector company
operating in the same industry and in the same country, to control
for contemporaneous industry-wide changes and other external
factors. The use of such a closely-related external benchmark is, as far
as we can ascertain, unique. It leads to a more accurate counterfactual
and considerably strengthens the credibility of the estimated beneﬁts.
From a normative perspective, the most appropriate measure of
the social “value” of privatization is the net change in social welfare,
which can be written as:
ΔW ¼ Vp–Vg þ λg Z−Tg
 
−λp Z þ Tp
 
ð1Þ
where, W is the social welfare, Vp is the value to society of CN after
privatization, Vg is the value to society of CN under continued government
ownership and Z is the proceeds received by the government. Tg
and Tp denote the transaction costs that government and private sector
actors incur, respectively, and λg and λp are shadow multipliers
(weights) on government revenue and private funds, respectively.
Later, we set these multipliers equal to unity. All variables in Eq. (1)
are measured in terms of their PVs.
Although aggregate social welfare is the most relevant criterion by
which we assess privatization, from a public policy perspective it is
also informative to consider the distribution of beneﬁts and costs
among consumers, shareholders, government, and employees. For
this purpose, we use the fact that the change in social welfare can
be written (Boardman, Greenberg, Vining, & Weimer, 2011):
ΔW ¼ λcΔCS þ λpΔPS þ λgΔGS þ λeΔES ð2Þ
where, ΔCS is the change in consumer surplus (CS), ΔPS is the change in
producer surplus (PS, economic proﬁts or rents, after tax), ΔGS is the
change in the government surplus (GS, government revenues minus expenditures),
ΔES is the change in the employee surplus (ES), and λc and
λe are shadow multipliers for CS and ES, respectively. Later, these multipliers
are set equal to unity.
5.1. Change in consumer surplus
Any change in CS is largely determined by the magnitude of
changes in prices and quantities following privatization. As mentioned
above, the 1987 National Transportation Act marked a transition
from an era of tacit collusion or parallelism to one of more direct
intra-modal competition (Bonsor, 1995; Timur & Ponack, 2002). At
the same time, both CN and CP faced increasing inter-modal competition
from trucking and shipping. They responded to these pressures by
reducing the track they owned and operated. In 1981, CN owned about
twice as much track as CP and, as shown in Fig. 1, it operated about 32%
more track than CP. Between 1982 and 1997, both CN and CP reduced
the amount of track they operated in Canada by 27–28%. In 1998,
CN reduced the amount of track it operated by more than CP, thereby
reducing the gap between the two ﬁrms; this gap remained fairly constant
until 2005. In 2005 and subsequent years, however, CN increased
the amount of operational track, while CP continued to reduce track in
each of these years, thereby increasing the gap again.
These competitive pressures resulted in falling real prices in
Canada (measured by dividing real Canadian sales revenue by the
number of revenue tonne-kilometres of Canadian freight) from
1986 to 2004, as shown in Fig. 2.1
During this period, real prices at
CN and CP fell by almost 50%. The downward trend was slightly faster
in the 1986–1991 period, prior to Paul Tellier's appointment, than
subsequently. Due in part to these falling prices, both CN and CP
were markedly less proﬁtable than their U.S. counterparts (Waters,
1997). Fig. 2 also shows that, with the exception of 1982, CN and CP
charged very similar prices in Canada.
As real prices fell, output (in revenue tonne-kilometres of Canadian
freight) increased at CN and CP, despite the reduction in tracks
operated. As shown in Fig. 3, both ﬁrms experienced growth in
freight volumes from 1981 until 2008 that was in excess of 50%.
Fig. 3 also shows that throughout this period, CN's and CP's Canadian
freight volumes grew at similar rates and these rates did
not change signiﬁcantly following privatization. Since the amount
of track operated fell at both ﬁrms, the track usage of both improved
considerably.
Given that CN and CP charged similar prices, and the output at
both companies increased at similar rates, the market shares of both
ﬁrms (measured in terms of total Canadian freight revenues) have
remained very stable, as shown in Fig. 4.
As shown in Fig. 2, real prices fell following privatization and,
although they were trending upwards during the 2005–2008 period,
they were still lower in 2008 than prior to privatization. Also, as
shown in Fig. 3, output increased following privatization. Consequently,
railroad consumers were better off and enjoyed higher levels
of CS following privatization than before privatization. However, we
do not attribute this increase in CS to the CN privatization per se.
Prices started to fall in 1986 and, in our view, would probably have
continued to fall in the absence of privatization. Florio (2004) reaches
the same conclusion concerning the long-term trends in prices
following UK privatizations. Our evidence on pricing, output and market
share suggests that the gains in CS that actually materialized
post-privatization would have occurred in the absence of privatization.
Although there may have been some improvements in CN's
service quality and safety, we cannot measure them and therefore,
we do not attribute any change in CS to privatization.
1
A revenue tonne-kilometres means that 1 tonne of revenue-generating freight is
transported 1 km. One tonne, also called a metric tonne, equals 1000 kilograms, which
is about 2204.5 pounds. On average over the most recent ﬁve years, freight generated
about 94% of the total Canadian revenues of both ﬁrms; passengers generated less than
1%. Other Canadian revenue sources included government subsidies (1.5%), compensation
for services rendered to Via Rail (1%) and other miscellaneous revenues (3%)
(Statistics Canada, 2003–2008).
6 A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
5.2. Change in employee surplus
Conceptually, any change in ES should include changes in producer
surplus (rents) gained (or lost) by either employees or by others, such
as consultants and investment bankers. Unions often argue that increased
proﬁts following privatization mostly come at the expense of
lower employee salaries. If so, such effects would raise PS and lower
ES. Furthermore, laid-off employees might not ﬁnd jobs that pay as
well, they may experience periods of unemployment before ﬁnding another
job or they may incur transaction costs in ﬁnding a new job. Each
of these factors would lower ES, especially during periods of negative or
low economic growth.
Fig. 5 shows Canadian employment at both CN and CP over time.
In 1982, employment at CN was 66% higher than at CP, while in
2008 it was only 22% higher. This might suggest a loss of ES at CN.
However, CN actually reduced employment at a slower rate following
privatization (5.4% per annum during the 1995–2002 period) than
before it (6.6% per annum during the 1984–1994 period). Furthermore,
CP increased the rate at which it reduced employment from
4.2% per annum during the 1984–1994 period to 5.3% per annum
during the 1995–2002 period. Consequently, we conclude that the
reduction in employment at CN would have occurred even in the
absence of privatization.
We also examined real wages. In 1982, (real) wages at CN were
slightly lower than (real) wages at CP, but the difference increased
during the pre-privatization period. By 1995, wages at CN were
slightly higher than at CP and they remained so until 2003. Thus,
there is no evidence that CN employees experienced pay reductions
due to the privatization. Overall, therefore, we conclude that there
was no change in ES due to privatization.
5.3. Change in welfare, assuming zero CS and ES
Under the assumptions that CS and ES equal zero and λp =λg =1
then, from Eq. (2), the change in welfare equals the sum of the
changes in PS and GS. This change in welfare can also be written:
ΔW ¼ Πp
96þ
−Πg
96þ
−Tp−Tg: ð3Þ
That is, the change in welfare equals the PV of proﬁts following
privatization, denoted Πp
96+
(i.e., we treat 1995 as a transition year
and compute the proﬁts for 1996 and subsequent years), minus the
proﬁts that would have been earned under continued government
ownership for the same years, denoted Πg
96+
, minus private sector
and government transaction costs. Note that because of the assumption
that λp =λg =1, the amount paid for the company at privatization,
Z, is a transfer from shareholders to the government.
Now consider the ﬁrst two terms in Eq. (3). Economic proﬁts
equal revenues minus costs. Earlier we argued that prices and output
were not affected by privatization and, therefore, sales revenues
were not affected either. Thus, the difference in proﬁts can be
measured by the difference in costs. More speciﬁcally, suppose Cp
CN
denotes the PV of CN's costs under privatization, that is, from 1996
and onwards:
C
CN
P ¼ ∑
t
ATCCN
t
1 þ sð Þt Q
CN
t ð4Þ
where, ATCt
CN
and Qt
CN
are CN's actual real average total unit costs
(ATC) and actual output levels in year t, respectively, and s is the
social discount rate. Further suppose Cg
CN
denotes the PV of what
these costs would have been with continued government ownership.
Now, the change in welfare due to privatization is given by:
ΔW ¼ Cg
CN
−Cp
CN
−Tp−Tg: ð5Þ
We use CP's actual costs to estimate the counterfactual; speciﬁcally,
the PV of what CN's costs would have been if it had not been privatized,
Cg
CN
. Fig. 6 shows that CN's and CP's real ATCs fell more or less continuously
from 1981 until 2004. From 1981 to 1987, CN's real ATC was
higher than CP's ATC, but was falling slightly faster. Thereafter, for the
7 years prior to privatization, 1988–1994 inclusive, CN's ATCs were on
average 6.1% higher than CP's ATCs, and this difference remained fairly
constant from year to year. Based on this evidence, we conclude that if
CN had remained government owned, its real ATCs would have been
6.1% higher than CP's ATCs.
Consequently, we construct a series of annual, counterfactual real
ATCs for CN by inﬂating CP's actual real ATCs by 6.1%. We then multiply
these ATCs by CN's actual annual outputs to arrive at CN's counterfactual
total annual costs. Finally, we discounted these amounts
at the social discount rate to obtain our estimate of the PV of CN's
Fig. 1. CN and CP Canadian track operated (kilometres).
7A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
total costs if it had not been privatized, denoted as ^Cg
CN
:
^Cg
CN
¼ ∑
t
1:061ATCCP
t
1 þ sð Þt Q
CN
t : ð6Þ
From Eq. (5), our estimate of the PV of the change in welfare due
to privatization (ignoring transaction costs) is given by:
^Cg
CN
− C
CN
p ¼ ∑
t
1:061ATCCP
t − ATCCN
t
 
1 þ sð Þt Q
CN
t : ð7Þ
It is important to note that this estimate of the change in welfare
relies on the differences between CN's and CP's actual ATCs. By taking
these differences, any industry-wide or economy-wide factor that
might affect or bias CN's ATC, in effect, cancels out. Thus, using data
from CP to compute our counterfactual provides a superior estimate
of the welfare gains from privatization.
Our data extend to only 2008. Therefore, we estimate Eq. (7) by
using actual annual data for 1996–2008 and then estimate separately
the PV of the cost savings attributable to privatization from 2009
onwards. By using a real SDR of 3.5% (Boardman, Moore, & Vining,
2010; Moore, Boardman, Vining, Weimer, & Greenberg, 2004), we
estimate that the PV (in 1995) of the cost savings due to privatization
for the 1996–2008 period amounted to just under $8 billion (in 2011
dollars). From 2009 onwards, we assume that the real annual cost
savings will equal the average of the estimated real annual cost
savings for the 2004–2008 period, which were just under $1 billion
per year (in 2011 dollars). Dividing this amount by the SDR implies
that the value of this perpetuity as of 2008 is about $26.5 billion.
Finally, we discount this amount back to 1995, resulting in a PV of
just under $17 billion for the savings from 2009 onwards. Adding
these two amounts provides an estimate of the cost savings due to
privatization of $24.7 billion (in 2011 dollars).
To calculate the change in welfare, we must subtract transaction
costs. Private sector transaction costs, Tp, were relatively small and
can be ignored. It is reasonable to assume that the only non-trivial
transaction costs that government incurred, Tg, were the costs of
organizing the sale. These costs amounted to about $116 million in
2011 Canadian dollars, which are calculated by multiplying $1.0125
(the per share amount paid to the underwriters for the shares they
Fig. 3. CN and CP freight output in Canada (millions of revenue tonne-kilometres).
Fig. 2. CN and CP freight prices per revenue tonne-kilometres in Canada (2011$).
8 A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
sold) by the 83.8 million shares sold (Bruce, 1997, 149) and then
converting to 2011 dollars. Including these transaction costs, gives
an estimate of the welfare gain from privatization of $24.6 billion
(2011 dollars).
As discussed above, Paul Tellier started to make efﬁciency improvements
at CN immediately after his appointment. Thus, there
is some merit to the notion that the PV of the cost savings during
the commercialization period (1993–1995) prior to actual privatization
should also be included as a component beneﬁt of privatization.
In fact, however, the PV of these cost savings amounts to only
$52 million (in 2011 dollars) and can, therefore, be ignored.
5.4. Change in government surplus
The change in government surplus, ΔGS, equals the proceeds from
privatization, Z, plus personal taxes paid at the personal rate of tax, tp,
on the underpricing, U, that is tpU, corporate taxes paid at the corporate
rate of tax, tc, on CN's subsequent proﬁts Πp
96+
, that is tcΠp
96+
,
less the foregone proﬁts if CN had not been privatized, Πg
96+
, and
government transaction costs, Tg:
ΔGS ¼ Z þ tpU þ tcΠp
95þ
−Πg
95þ
−Tg: ð8Þ
Z equals the proceeds actually received by government, based on
the issue price. While underpricing reduces this amount relative to
what it could have been, this reduction is a transfer: it increases PS
and reduces GS.
For convenience we rewrite Eq. (8) as:
ΔGS ¼ Z þ tpU þ tc Πp
96þ
−Πg
96þ
 
– 1−tcð Þ Πg
96þ
 
−Tg: ð9Þ
Here, tc(Πp
96+
−Πg
96+
) represents the change in corporate taxes due
to privatization, assuming that the government would pay corporate
taxes at the same rate as the private sector, and (1−tc)(Πg
96+
) represents
the after-tax proﬁts under continued government ownership,
Fig. 5. CN and CP rail employment in Canada.
Fig. 4. CN and CP market shares in freight in Canada.
9A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
again assuming that the government would pay corporate taxes at the
same rate as the private sector.
Using the procedure described in Boardman et al. (2009), we
estimate that the sale price, Z, was just over $3 billion (in 2011
dollars) and that the government tax receipts on the underpricing,
tpU, amounted to $110 million (in 2011 dollars). To obtain the corporate
tax revenues on the incremental proﬁts following privatization,
tc(Πp
96+
−Πg
96+
), we multiply each year's real discounted, estimated
cost savings due to privatization by the prevailing, combined federal–
provincial corporate tax rate reported by CN and sum them. This yields
a PV of $10,077 million (in 2011 dollars).
We do not have a direct estimate of the after-tax proﬁt if CN had not
been privatized, (1−tc)(Πg
96+
). However, the before-tax proﬁts under
continued government ownership, Πg
96+
, are likely to have ranged
between zero and the PV of the expected future proﬁts under private
ownership at the time of privatization, denoted Πp
e
. We further note
that the sale price, Z, should equal the PV of the expected after-tax
future proﬁts under private ownership, less any underpricing:
Z ¼ 1−tcð ÞΠ
e
p−U: ð10Þ
Consequently, under the assumption that Πg
96+
=Πp
e
, Eq. (10) implies
(1−tc)Πg
96+
equals Z+U, the actual sale price of $3038 million
plus the underpricing, $459 million, which amounts to $3497 million
(in 2011 dollars). The average of this extreme amount and $0 yields
an estimate of the after-tax proﬁt under continued government ownership
of $1748 million.
Consequently, the estimated change in GS is about $11.4 billion (in
2011dollars) as shown in Table 2. The receipt from the sale is not the
largest component of ΔGS; by far the largest beneﬁt to government
comes about as a result of increased tax receipts on increased proﬁts.
5.5. Change in producer surplus
Assuming, as we have argued above, that privatization had no
effect on the surplus of shippers (consumers) or employees (ΔCS=
ΔES=0) and assuming, as we have above, that λp =λg, then the
gains to shareholders, ΔPS, can be derived from Eq. (2) by subtracting
the gain in government surplus from the total welfare gain. Given our
estimate of ΔW equal to $24,580 million and our estimate of ΔGS
equal to $11,361 million, we estimate ΔPS equals $13,219 million
(in 2011 dollars).
The change in producer surplus, ΔPS, is the PV of the net beneﬁts
to shareholders discounted at the SDR. It equals the PV of the after-tax
proﬁts following privatization, denoted (1−tc)Πp
96+
, less the amount
paid for the shares, private-sector transaction costs, and capital gains
taxes paid at the personal rate of tax tp on the underpricing, U:
ΔPS ¼ 1−tcð ÞΠp
96þ
−Z−Tp−tpU: ð11Þ
If we subtract the sale price of $3038 million and the personal
taxes on underpricing of $110 million from our estimate of the gain
in producer surplus, we obtain an estimate of the increase in
after-tax proﬁts of $16,367 million, as shown in Table 2. As we
discussed above, the expected after-tax increase in proﬁts equals
$3497 million. Consequently, we estimate that the unexpected increase
in after-tax proﬁts was $12,870 million, which is also shown
in Table 2. Clearly, it paid shareholders to buy and hold their shares
until after these increases were capitalized into the share price.
5.6. Distribution of the welfare effects
Table 2 shows how the beneﬁts were distributed among Canadians
and non-Canadians. Canadians, of course, received all of the ΔGS. The
Table 2
Summary of the welfare gains from the privatization of CN and their distributiona
.
Total Canadians Rest of the world
Government surplus
Proceeds from sale 3038 3038
Taxes on underpricing 110 110
Increased corporate taxes 10,077 10,077
Total revenues 13,225 13,225
Less
Foregone govt proﬁts after tax 1748 1748
Transaction costs 116 116
Net government surplus 11,361 11,361
Producer surplus
Expected after-tax proﬁts 3497 2098 1399
Unexpected after-tax proﬁts 12,870 5792 7079
Total after-tax proﬁts 16,367 7890 8477
Less
Taxes on underpricing 110 83 28
Sale price 3038 1823 1215
Transaction costs 0 0 0
Net producer surplus 13,219 5984 7235
Total increase in welfare 24,580 17,345 7235
a
All ﬁgures are in millions of 2011 real Canadian dollars.
Fig. 6. CN and CP average total costs per revenue tonne-kilometre (2011$).
10 A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
distribution of ΔPS is based on the assumption that Canadians held
about 60% of the shares when they were ﬁrst listed (Bruce, 1997).
Therefore, Canadians received 60% of the expected after-tax proﬁts,
amounting to just over $2098 million, but paid tax of $83 million on
that gain and, of course, paid for their initial shares at the offering
which was $1823 million. This amounted to $192 million. Soon after
the stock was listed some Canadians sold their shares. About a decade
after privatization, Canadians owned about 55% of CN (Boardman et
al., 2009). Those who held on received their share of the unexpected
after-tax proﬁts, which amounted to $5792 million, resulting in a
total beneﬁt to Canadian shareholders of $5984 million.
5.7. Concluding comments on the welfare effects
One can never be certain that a state-owned operator would not have
achieved the same cost reductions as the privatized CN. Nonetheless, we
think this is unlikely. Our analysis makes conservative assumptions
concerning the counterfactual. First, while CN had closed the cost gap
with CP prior to privatization, the difference had not been eliminated
and had remained stable (at about 6%) over the 7 years immediately
prior to privatization (for an even more conservative counterfactual,
see Boardman et al., 2009). Second, by using data from CP we are able
to control for Canadian industry-wide effects. As we mention above,
the use of a very close competitor for such purposes is unique. Most importantly,
if there were economies of scale effects, as Pollitt and Smith
(2002) argued in the UK, they would likely affect both CN and CP similarly.
Because we take differences, these effects would cancel out.
We know of no other factor apart from privatization that would
explain why CN's unit costs decreased relative to CP's unit costs
after privatization. The effect of the U.S. acquisitions (such as Illinois
Central) would be minor because our welfare analysis is restricted
to Canadian freight operations, both before and after the takeover.
Furthermore, even if these acquisitions did have a beneﬁcial effect,
it would be appropriate to include this effect because these acquisitions
were unlikely to have occurred without privatization.
There are many other reasons to presume that our estimates of
the welfare beneﬁts are conservative. Most importantly, we assumed
that price decreases and quantity increases were not attributable to
privatization. Thus, we do not include any CS beneﬁt to shippers or
other customers. Furthermore, ΔPS should also include any changes
in the proﬁts of CN's competitors and suppliers as well as the change
in CN's proﬁts in its other (non-Canadian freight) businesses. We very
conservatively assume these additional effects are zero even though
CP achieved some efﬁciency gains following CN's privatization and
there may well have been spillover beneﬁts to other parts of CN.
Similarly, we have not included any longer-term, dynamic beneﬁts of
the privatization. Since privatization, CN has initiated or participated
in numerous railroad supply chain initiatives (Miller, 2010) that have
transformed the North American transportation network and have
beneﬁtted shippers as reduced time-costs (Boyd, 2011; Rodrigue,
2008; Starling, 2011). These beneﬁts are probably substantial, but
they are very difﬁcult to measure and cannot be attributed entirely to
CN's privatization.
It is particularly important to point out that we have assumed that
λg =1. Boardman et al. (2011) and other cost–beneﬁt analysts suggest
that λg =1 plus the marginal excess tax burden (METB). Based
on a survey of relevant research, Boardman et al. (2011) suggest
that the METB is about 0.23, that is, it costs society about $1.23 to
raise $1 in taxes. Multiplying our estimated increase in GS by 1.23 implies
that ΔGS equals $16,259 million and our estimate of the increase
in social welfare would increase concomitantly to $27,620 million.
6. Conclusion: the aggregate impact of privatization
Our main ﬁndings are that the privatization of CN improved sales,
efﬁciency, proﬁtability and social welfare. The total social welfare
gains amounted to approximately $24.5 billion 2011 Canadian dollars.
The increase in government surplus was about $11 billion, and the
increase in producer surplus was about $13 billion with just under
half of this amount going to Canadian citizens.
The considerable size of these estimates demonstrates the potential
value of a well-conducted privatization. Factors that contributed
to the success in CN's case include the following. First, CN was well
prepared for privatization and the privatization was not rushed.
Non-core businesses were divested over a number of years prior
to privatization. A few years before privatization, a new CEO was
appointed with a mandate to improve efﬁciency and proﬁtability in
preparation for an eventual sale. Second, CN focused almost exclusively
on freight, and provided no passenger services (although VIA
Rail Canada and the Rocky Mountaineer provide some passenger services
over parts of the network). Third, it was privatized as a vertically
integrated company without separation of ‘wheels and rail’, thereby
reducing transaction costs. Fourth, it was privatized through a
share-issue privatization, rather than as a direct sale privatization.
This ensured that CN was listed on the stock exchange and that
ownership was not concentrated in a few hands. (In theory, this aspect
could have been either advantageous or disadvantageous.) Fifth, there
was a direct competitor. Sixth, there was some inter-modal competition
from trucking and shipping, although these alternative modes
were not as close substitutes as in many other countries, given the
long-haul distances in Canada.
This privatization offers some lessons for private sector and
government management. This case study shows that company
management can matter a great deal. While CN's average total costs
were about 6% higher than CP's ATC prior to privatization, they
were about 13% lower than CP's 5 years after privatization and
thereafter. Tellier and Harrison took CN from underperforming relative
to CP to outperforming it. According to Thompson (2003, 331)
CN “is currently considered perhaps the best managed railroad in
North America.” Management focused clearly on the core business
and eliminated non-core assets, such as Wisconsin Central's holdings
in a number of smaller railroads.
Government managers carefully prepared CN for privatization, as
we discussed above. Most importantly, they did not rush the privatization
process. Tellier had 3 years to prepare CN for privatization.
Another important lesson is that vertical disintegration (unbundling)
may not be necessary for successful privatization when there is at least
one other vertically integrated competitor. Indeed, Pittman (2005)
argues vertically separated freight railroads tend towards bilateral
monopoly, which has signiﬁcant costs and only limited beneﬁts. The
Canadian experience suggests that having a vertically integrated
duopoly is often a superior arrangement. Of course, these lessons pertain
to freight privatization and may not apply to passenger privatization.
A single, detailed study such as this one, in conjunction with
other research ﬁndings, should provide some guidance to government
policy makers in helping improve railroad privatization
outcomes. There are some areas where additional research would
provide further guidance. First, the performance and welfare effects
of existing privatizations should be tracked over longer time periods
(a large percentage of our estimated welfare gains are due to the
assumed perpetual beneﬁts that arise beyond the end of our data
period). Second, it would be helpful if the welfare impacts of rail
privatization could be further disaggregated by markets. This kind
of analysis would shed light on the extent to which any measured
gains from privatization ﬂow from the presence of inter-modal or
intra-modal competition. It may be that those routes on which CN
faced no effective competition did not produce the same cost savings
as on those where it had to compete directly against CP or where
trucking or shipping were close substitutes. Third, more systematic
evidence is needed to determine the conditions under which share
issue privatization is superior to direct private sale. Along the same
lines, more research is needed to substantiate our tentative conclusion
11A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011
that freight rail privatizations have been more successful than passenger
rail privatizations. Finally, in order to control as much as possible
for confounding effects, performance and welfare analyses of privatizations
should compare actual post-privatization results to those
that would have occurred in an explicit counterfactual situation of
continued government ownership. Simple before-and-after comparisons
cannot truly conﬁrm that a privatization produced better results
than state ownership.
It is now widely accepted that privatization improves performance
in competitive markets in developed countries. But there
have been a number of reservations and caveats around this broadly
positive conclusion. Do these improvements persist over time? Can
these improvements occur in more oligopolistic markets? Although
based on a single case study, this analysis suggests a positive answer
to both questions.
References
Boardman, A. E., Greenberg, G. H., Vining, A. R., & Weimer, D. L. (Eds.). (2011). Cost–
beneﬁt analysis: Concepts and practice (4th edition). Upper Saddle River, NJ:
Prentice Hall.
Boardman, A. E., Laurin, C., Moore, M. A., & Vining, A. R. (2009). A cost–beneﬁt analysis of
the privatization of Canadian National Railway. Canadian Public Policy, 35(1), 59–83.
Boardman, A. E., Laurin, C., & Vining, A. R. (2002). Privatization in Canada: Operating
and stock market performance with international comparisons. Canadian Journal
of Administrative Sciences, 19(2), 137–154.
Boardman, A. E., Laurin, C., & Vining, A. R. (2003). Privatization in North America. In D.
Parker, & D. Saal (Eds.), International handbook on privatization (pp. 129–160).
Cheltenham, UK: Edward Elgar (Chapter 7).
Boardman, A. E., Moore, M. A., & Vining, A. R. (2010). The social discount rate for
Canada based on future consumption. Canadian Public Policy, 36(3), 325–343.
Boardman, A. E., & Vining, A. R. (1989). Ownership and performance in competitive
environments: A comparison of the performance of private, mixed, and state-owned
enterprises. Journal of Law and Economics, 32(1), 1–33.
Boardman, A. E., & Vining, A. R. (2012). A review and assessment of privatization in
Canada. School of Public Policy. University of Calgary: SPP Research Papers, 5,(4).
(pp. 1–28).
Bonsor, N. (1995). Competition, regulation and efﬁciency in the Canadian railway
and highway industries. In F. Paldi (Ed.), Essays in Canadian surface transportation.
Vancouver: Fraser Institute.
Boubakri, N., & Cosset, J. -C. (1998). The ﬁnancial and operating performance of newly
privatized ﬁrms: Evidence from developing countries. Journal of Finance, 53(3),
1081–1110.
Boyd, J. D. (June 20). BNSF under Buffett. The Journal of Commerce, 10–13.
Bruce, H. (1997). The pig that ﬂew: The battle to privatize Canadian National. Vancouver:
Douglas and McIntyre.
Canadian National Railway Company (1990–2011). Annual reports.
Caves, D., & Christensen, L. (1980). The relative efﬁciency of public and private ﬁrms in
a competitive environment: The case of Canadian railroads. Journal of Political
Economy, 88(50), 958–976.
Chirwa, E. W. (2004). Industry and ﬁrm effects of privatization in Malawian oligopolistic
manufacturing. Journal of Industrial Economics, 52(2), 277–290.
Clark, R. (2010). Full circle: Rail industry privatisation in New Zealand, and a new
theory of its fundamental conceptual weakness. ETC. Conference Proceedings.
Cowie, J. (2009). The British passenger rail privatization. Journal of Transport Economics
and Policy, 43(1), 85–104.
Cowie, J. (2010). Productivity and performance in the British rail freight industry since
privatisation. 12th WCTR, Lisbon, Portugal.
Crompton, G., & Jupe, R. (2007). Network rail — Forward or backward? Not-for-proﬁt in
British transport. Business History, 49(6), 908–928.
D'Souza, J., & Megginson, W. L. (1999). The ﬁnancial and operating performance of
privatized ﬁrms during the 1990s. Journal of Finance, 54(4), 1397–1438.
De Fraja, G. (1991). Efﬁciency and privatisation in imperfectly competitive industries.
Journal of Industrial Economics, 39(3), 311–321.
Deveau, S. 2012. Corporate culture shift underway in Canada after CP Rail proxy ﬁght.
Financial Post, May 11.
Domah, P., & Pollitt, M. G. (2001). The restructuring and privatisation of electricity distribution
and supply business in England and Wales: A social cost–beneﬁt analysis.
Fiscal Studies, 22(1), 107–146.
Evans, A. (2007). Rail safety and rail privatisation in Britain. Accident Analysis and
Prevention, 39(3), 510–523.
Evans, A. W. (2010). Rail safety and rail privatisation in Japan. Accident Analysis and
Prevention, 42(4), 1296–1301.
Florio, M. (2004). The great divestiture: Evaluating the welfare impact of the British
privatizations, 1979–1997. Cambridge, MA: MIT Press.
Fowkes, A., & Nash, C. (2004). Rail privatisation in Britain — Lessons for the rail freight
industry. ECMT Round Table 125, European integration of rail freight.
Galal, A., Jones, L., Tandon, P., & Vogelsang, I. (1994). Welfare consequences of selling
public enterprises: An empirical analysis. Oxford: Oxford University Press.
Gomez-Ibanez, J. (2010). The simple analytics of open access with illustrations from
railroads. Annual meeting of the Australian Competition and Consumer Commission,
Surfer's Paradise, Queensland, July 29.
Grimm, C., & Winston, C. (2000). Competition in the deregulated railroad industry:
Sources, effects and policy issues. In S. Peltzman, & C. Winston (Eds.), Deregulation
of network industries: What's next?. Washington, DC: Brookings.
Heaver, T., & Waters, W. (2004). Canadian transport policy. In K. Button, & D. Hensher
(Eds.), Transport strategy, policy and institutions. Oxford: Pergammon Press.
Jones, L., Tandon, P., & Vogelsang, I. (1990). Selling public enterprises: A cost–beneﬁt
methodology. Cambridge, MA: MIT Press.
East Japan Railway Company Management Planning Department (2008). 20 years of JR
East — Making a fresh start to shape the future. Japan Railway and Transport Review,
49, 18–24.
Karikari, J., Brown, J., & Nadji, M. (2006). The Union Paciﬁc/Southern Paciﬁc Railroads
merger: Effect of trackage rights on rates. Journal of Regulatory Economics, 22(3),
271–285.
Laurin, C., Boardman, A. E., & Vining, A. R. (2004). Government underpricing of shareissue
privatizations. Annals of Public and Cooperative Economics, 75(3), 399–429.
Laurin, C., & Bozec, Y. (2001). Privatization and productivity improvements: The case
of Canadian National (CN). Transportation Research (Part E), 37(5), 355–374.
Mathieu, G. (2003). The reform of UK railways — Privatization and its results. Japan
Railway and Transport Review, 34, 16–31.
McCartney, S., & Stittle, J. (2008). ‘Taken for a ride’: The privatization of the UK rolling
stock industry. Public Money and Management, 28(2), 93–100.
McNish, J., Jang, B., & Silcoff, S. (2012). Collision course. Report on business, globe and
mail, Saturday, January 14, B1. (pp. B6–B7).
Megginson, W. L., & Netter, J. M. (2001). From state to market: A survey of empirical
studies on privatization. Journal of Economic Literature, 39(2), 403–452.
Miller, L. (2010). CN's productivity pipeline. Railway Age, 211(11), 12–16.
Mizutani, F. (1999). An assessment of the Japan railway companies since privatization:
Performance, local rail service and debts. Transport Reviews, 19(2), 117–139.
Mizutani, F., & Nakamura, K. (1996). Effects of Japan National Railways' privatization
on labour productivity. Papers in Regional Science, 75(2), 177–199.
Mizutani, F., & Nakamura, K. (1997). Privatization of the Japan National Railway:
Overview of performance changes. International Journal of Transport Economics,
24(1), 75–99.
Moore, M. A., Boardman, A. E., Vining, A. R., Weimer, D. L., & Greenberg, D. H. (2004).
‘Just give me a number!’ Practical values for the social discount rate. Journal of Policy
Analysis and Management, 23(4), 789–812.
Pittman, R. (2005). Structural separation to create competition? The case of freight
railways. Review of Network Economics, 4(3), 181–196.
Pollitt, M. G., & Smith, A. S. G. (2002). The restructuring and privatisation of British Rail:
Was it really that bad? Fiscal Studies, 23(4), 463–502.
Rodrigue, J. -P. (2008). The thruport concept and transmodal rail freight distribution in
North America. Journal of Transport Geography, 16(4), 233–246.
Secretariat, O. E. C. D. (2006). Structural reform in the rail industry. OECD Journal of
Competition Law and Policy, 8(2), 69–79.
Shirley, M. M., & Walsh, P. M. (2001). Public vs. private ownership: The current state of
the debate. Washington, DC: The World Bank policy research working paper, No. 2420.
Smith, A. (2006). Are British railways costing too much: Perspectives based on TFP
comparisons with British Rail 1963–2002. Journal of Transport Economics and
Policy, 40(1), 1–44.
Soto, R. (2010). End of the line: Railroads in Chile. Working paper 391. Instituto de
Economia, Pontiﬁcia Universidad Catolica de Chile available at http://www.economia.
puc.cl/docs/dt_391.pdf, accessed 16 Oct 2012
Starling, D. L. (2011). Intermodal's explosive growth. Railway Age, 212(9), 57–58.
Statistics Canada (1983–2010). Rail in Canada, 1981–2008. Catalogue # 52-216-X.
Ottawa: Minister of Industry.
Thompson, L. (2003). Changing railway structure and ownership: Is anything working?
Transport Reviews, 23(3), 311–355.
Thompson, L., Budin, K., & Estache, A. (2001). Private investment in railways: Experience
from South and North America, Africa and New Zealand. PTRC Conference, Cambridge.
Timur, A. T., & Ponack, A. (2002). Labor relations and technological change at Canadian
Paciﬁc Railway. Journal of Labor Research, 23(4), 535–557.
Waters, W. (1997). Changes in structure and performance in the North American
rail industry. In J. Jones, & A. Stewart (Eds.), The new environment in freight rail.
Kingston, ON: Queen's University School of Policy Studies.
Williams, R., Greig, D., & Wallis, I. (2005). Results of railway privatization in Australia and
New Zealand. Washington, D.C.: The World Bank.
Willner, J., & Parker, D. (2007). The performance of public and private enterprise under
conditions of active and passive ownership and competition and monopoly. Journal
of Economics, 90(3), 221–253.
Wilson, J. (2010). Short history of post-privatization in New Zealand. New Zealand Treasury
1982752v1. Available at: http://www.comu.govt.nz/resources/pdfs/mixed-ownershipmodel/mom-shppnz-wilson-dec10.pdf
(accessed 15 October 2011)
Winston, C., Maheshri, V., & Dennis, S. (2011). Long-run effects of mergers: The case of
U.S. western railroads. Journal of Law and Economics, 54(2), 275–304.
Yvrande-Billon, A., & Ménard, C. (2005). Institutional constraints and organizational
changes: The case of the British rail reform. Journal of Economic Behavior & Organization,
56(4), 675–699.
12 A.E. Boardman et al. / Research in Transportation Business & Management xxx (2012) xxx–xxx
Please cite this article as: Boardman, A.E., et al., Efﬁciency, proﬁtability and welfare gains from the Canadian National Railway privatization,
Research in Transportation Business & Management (2012), http://dx.doi.org/10.1016/j.rtbm.2012.11.011