2 TRANSPORT AND THE ECONOMY

Simple aggregate measures of transport activities show the importance of private vehicles in personal travel and the continuing importance of rail and marine freight transport, despite growth in trucking. Geography, economic activity and social trends determine transport demands, and transport industries contribute to national output.

Total National Transport Activity

The main chapters of this report focus on the nature of transport activities in Canada, the extent of the movement of people and freight, the finances of transport enterprises and the state of safety and the environment. This chapter will provide some simple aggregate measures of the size of transport activities and will describe their relatilonship to the country's total economic activity.

A simple summary of total national transport movements is provided in Table 2-1, showing all domestic activity in 1995, by mode of transport, with passenger movements measured in passenger-kilometres, and freight movements in tonne-kilometres. The totals are approximate, as no comprehensive measurements exist in Canada of the extent of use of private cars, vans, and pickups, nor of commercial trucks apart from those (the small minority) operated by the main for-hire carriers. The range shown in the table for those vehicles indicates the extent of the uncertainty.

The table allows an appreciation of the total amount of domestic transport, and the relative contributions of the different modes. The overall total of about 500 billion passenger-kilometres amounted to nearly 17,000 kilometres per capita among the 1995 population of 29.6 million. About 94 per cent of that was by private vehicle, and only the remaining six per cent by public transport. Of travel in urban areas or rural municipalities (nearly 300 billion passenger-kilometres), urban transit accounted for five billion, or less than two per cent. Of total intercity travel (about 200 billion passenger-kilometres), private vehicles accounted for some 87 per cent, while air travel constituted 11 per cent and intercity bus and train shared the remaining two per cent.

Domestic freight movement totalled about 410 billion tonne-kilometres. Rail remains the largest freight mode by this measure, with about 50 per cent of total traffic, while trucking is responsible for about 40 per cent (if the estimate of the extent of private trucking is correct), and marine about 10 per cent. It must be noted that tonne-kilometres allow only a crude comparison among modes, since the services they provide are very different, as will become more evident when these services and their revenues are described in the chapters that follow.

Nevertheless, the measure allows a simple aggregation of all freight activity. The national total could also be placed in perspective by relating it to national output. It could then be expressed as nearly 600 tonne- kilometres per thousand dollars of gross domestic product. Alternatively, it could be related to population and expressed as equivalent to nearly 14,000 tonne-kilometres per person per year.

While this last ratio is an unfamiliar construct, it allows simple comparisons to be made among countries, and is thus instructive about the extent of transport activities in the various economies. Figures 2-1 and 2-2 show comparisons in the ratios of passenger-kilometres and freight tonne-kilometres to population ^{note 1} among some similarly developed countries. There are doubtless some strict incompatibilities of the data, but the general comparisons are clear:

• the annual number of passenger- kilometres travelled per person is about 40 per cent greater in Canada than in the Western European countries shown, and about double that in Japan; and
• in tonne-kilometres per capita, the divergence is even greater, with the Canadian figure being more than three times greater than those of these European countries or Japan.

These data reflect two great differences between Canada and all of these other countries.

First, the much lower density of settlement in Canada, arising from the great size of the country, the widely dispersed population, and the choice of low-density development for residential areas of cities and towns, results in greater distance travelled per person compared to other developed countries, both for routine daily activities and for interci trips. These factors also result in a greater reliance on private vehicles, for both urban and intercity trips, though with the additional difference that air travel is much more common for intercity trips in Canada than in any of the other countries included in the comparison.

The second great difference, apparent in tonne-kilometres per capita, is the continuing importance of domestic natural resources - notably forest products, minerals and agricultural produce - to Canadian economic activity. Those resources and the industries based on them are widely dispersed, as are their ultimate markets (domestic and foreign), and the commodities are of high volume and/or weight relative to value, demanding high capacity freight transport over long distances. Moreover, the related economic activity - the secondary and tertiary manufacturing, inter-corporate trading of intermediate products, wholesale and retail distribution systems, and the other large service and government sectors of the economy - also generates more tonne-kilometres per capita in Canada than is the case in Europe and Japan, again as a result of the dispersion of population and businesses. The overall result is considerably greater tonne-kilometres of freight relative to population in Canada than in those countries. A further consequence is a much larger role for rail in freight traffic in Canada - 51 per cent of total tonne-kilometres, compared to an average among the seven European countries included in Figure 2-2 of less than 20 per cent.

It is also clear from Figures 2-1 and 2-2 that the US figures are even higher than Canada's: by up to 50 per cent in passenger-kilometres per capita an per cent in tonne-kilometres per capita. The reasons for such differences are doubtless complex, but the geographic dispersion of population and economic activity again plays a role, as does the greater income and national output per capita of the United States compared to Canada. ^{note 2}

Factors Affecting the Scale of Transport Activities

Such international comparisons point to some of the important determinants of the overall amounts of national transport activity, and a number of other key influences deserve mention. First, the general point should be repeated that the amount of transport is essentially a reflection of social and economic activities - the need for transport derives from those activities. Therefore, as those activities change, so also do the needs for transport. As the dominant aggregate trends through recent decades have been population expansion and growth in both personal income and economic activities, so the need for transportation of people and freight has grown. And as the pace of growth in population and the economy has varied over time, so the demands for transport have varied.

Table 2-2 illustrates some of this variability: over the period 1984-95, population growth averaged 1.3 per cent per year, following a 1.2 per cent annual increase in the previous decade. The Canadian population is now growing by about 350,000 annually, compared to less than 200,000 in the early eighties. The acceleration is due to several factors, including net immigration, a higher birth rate (the "baby boom echo"), and a lower death rate. However, the overall ra are substantially lower than during the period 1961-74, when they averaged 1.8 per cent a year. Nor has growth in average income provided such a strong stimulus to travel in the past decade as it did to the mid-1970s. Table 2-2 indicates that real personal disposable income (RPDI: essentially income after tax, adjusted for inflation) on a per-capita basis grew by only 0.2 per cent per year from 1984 to 1995, compared to 4.2 per cent per year from 1961 to 1974.

The relationships among population, income and travel are not simple, and the aggregate changes conceal some significant trends within different sub-groups, a number of which have tended in the same direction, that of increasing average travel. For example, the age structure of the population has changed. While in 1961 the average Canadian was 29 years old, by 1995 the average age had risen to 33.4 years. The travel needs of a younger population are substantially different from those of an older population with higher labour force participation. Moreover, early retirement, better health, greater wealth and higher automobile ownership among the older population are providing stronger impetus for travel. Leisure time has also increased for the working population over recent decades, as a result of shorter working hours. The work week dropped from 42 hours in 1961 to 37 in 1984 and to 35 in 1995. In consequence, more leisure journeys are being made. In addition, the rise in female labour force participation from about 35 per cent in the early 1960s to close to 58 per cent in 1995 has expanded travel requirements for women.

Other factors are also noteworthy. Changes in family structure have been extraordinary in recent years, particularly through unprecedented divorce rates: the number of families rose 56 per cent between 1971 and 1995, while the average family size fell from 3.7 to 3.0 persons, trends that have now slowed considerably. ^{note 3} And the nature and extent of urbanization has been significant. Even when narrowly defined to include only centres of 100,000 persons and more, urban population rose from 49 per cent in 1961 to 61 per cent in 1994. In general, urban population growth has been accompanied by dispersion within widening urban areas, resulting in increased average annual travel by private vehicle.

In summary, these broad social trends have meant that personal travel has grown faster than overall population or income. The main determinants of trends in freight transport activities are changes in production and consumption and their geographic characteristics - essentially the locations of the plants and offices and the markets for their products and services. In a complex modern economy, those activities and locations change continually, and the details are not obvious from national statistics. But from the national perspective, some broad trends can be observed in industrial structure, with implications for freight transport. For example, growth in service industries (of all kinds, including financial services, professional services, distribution activities, and government operations) has been much faster in recent decades than growth in the production of goods, such that the share of services in the total value of national output has increased rapidly. Figure 2-3 illustrates this trend, showing a climb to 66 per cent in the services category in 1995. As service industries require fewer freight tonne- kilometres per dollar of output than do goods industries, total freight tonne-kilometres have grown more slowly than has total national output. On the other hand, service industries require higher levels of other types of transport. With shorter distance and faster service requirements, their needs are more likely to be provided by truck or by courier, than by rail, for example, so the nature and relative share of transport services have changed.

Another significant trend has been that of faster growth within the goods-producing sector of secondary and tertiary industries, rather than in primary production and processing. Whereas, on average, such "industrial" production accounted for about 65 per cent of total goods production in 1961, the proportion had increased to about 75 per cent by 1995. Again, this structural change has affected the amount and type of freight transport demanded, withthe requirement for fast, flexible services growing faster than that for bulk service, for example. The growth in external trade has also been an important factor in the growth in freight transport demand. Canada ranks among the world's largest trading nations, and trade has expanded rapidly relative to national output: exports of goods and services in 1995 amounted to more than one-third of the total value of national output, up from about 19 per cent in 1965. Import and export flows are approximately equal in value, so growth in imports of goods and services has also stimulated the need for transport services. And both categories show some of the same structural changes evident in national output, including faster growth in trade in services than in goods, and faster growth in trade in manufactured goods than in primary products, with similar consequences for the types of freight transport required.

Finally, the scale and role of transport in the economy are, of course, also determined by developments in the nature of transport services offered, particularly their price and certain dimensions of their quality - such as speed, reliability, safety, and comfort. Key to all these features are developments in technology and the organization of transport itself, in other words, the "infrastructure" (roads, railway tracks, canals and seaways, airports, ports, stations, terminals and navigation systems), the "vehicles" (cars, trucks, aircraft, trains, ships and buses), and the "carriers" (trucking firms, airlines, railways, shipping lines and bus companies). Over the long term, advances in transportation technology have been so fundamental that they have been a defining feature of economic and social development. Major inventions in transportation - the steamship, the railway, the automobile, the airplane, the jet - were so revolutionary that they engendered a reorganization of communities and economies. In each case, the cost of transport fell, speed increased, delivery be more reliable and safety improved.

At the same time, the nature and quality of services has improved continually through incremental technological development. The improvements in passenger car engine performance, fuel consumption, ride quality, safety and emissions are familiar examples, as are the increased capacity and noise reductions of jet aircraft, but similar improvement has occurred elsewhere as well. Major technological advances have been incorporated into navigation and control systems (air and marine navigation systems, road traffic control systems, and carriers' tracking systems, for example), most recently through advanced information processing technology. And even roads, tracks and the various terminals have improved their service and reduced unit costs through new materials or new designs. Internally, the trans-port industries - the carriers and infrastructure providers - have improved their productivity and service through more intelligent resource management and organizational structures, as have business enterprises in developed economies everywhere. Some of these service improvements have only been achieved at higher costs - for example, some of the improvements to safety, emissions and noise control of vehicles, boats and aircraft. But over the long term, the gains from technology and productivity have combined to reduce the costs and prices of most transportation services. They have also been supported by reductions in the price of fuel, a large component of most transport service costs; allowing for inflation, motive fuel prices in Canad are lower than they were in 1960. ^{note 4} Consequently, the long-term view reveals that transport services in Canada have continually improved in quality and fallen in price.

The interplay of these features of what might be called transport "supply" - the nature, quality and price of transport services - with those of the requirements, or transport "demand," determines the scale and mix of national transport activities at any particular moment. The relationships are subtle and not well-defined. As noted earlier, changes and developments in underlying social and economic activities result in changes in the demand for transport services. At the same time, changes in transportation services exert a strong influence on social and economic activities. As the price and quality of transport services change, social and economic activities adapt to them. Individuals adapt their travel behaviour, their choice of vehicle and the location of their home. Businesses adapt in the short term by changing the amount and quality of transport services or vehicles they buy, and in the longer term by optimizing their location, distribution networks, markets served or suppliers. It may take a revolutionary improvement such as the invention of the internal combustion engine to fundamentally change patterns of settlement and industrial location, but the smaller, incremental changes in prices and quality of transport services also produce continual adaptations in individual and business behaviour that are significant, even if less evident.

Transport Contribution to National

Output The outcome this interplay of factors is illustrated in Table 2-3, which shows changes in economy-wide output measured by gross domestic product (GDP), and changes in the same measure of the value of output within the transport industries - i.e., the private-sector carriers. The table also shows changes in the price levels for the economy as a whole and for the transport industries specifically. Since similar measures of the value of "output" and "price" cannot be provided for spending by individuals and businesses on private transport, the comparisons are limited to commercial transport. The table shows a strong similarity between the growth rate of overall output for the economy and total output on services of the transport industries, particularly in the earlier decades. But considerable divergence was evident in the rates during the last decade, when growth in the economy was double that of spending on transport services. Much of the explanation lies in the relative price changes. As the table also shows, prices in the transport industries rose more slowly than did general output prices throughout the period, though the gap narrowed in 1974-84 when fuel prices rose rapidly. In the last decade, however, transport prices slowed again, rising only half as fast as general prices.

Total Expenditures on Transport

An alternative perspective on the scale of transport's proportion of total national economic activity can be obtained by totalling transport spending, as shown in Table 2-4. This calculation extends consideration beyond the transport industries to include spending individuals on private transport, which is by far the largest component of total transport expenditure. It also distinguishes business spending on in-house transport services, and indicates uncertainty about the extent ofprivate trucking spending through the use of a range of estimates. The table also shows government transport spending for the provision of public infrastructure - especially roads, but also some ports and airports, air and marine navigation systems, the Seaway, and so on - and for operating subsidies. The intention is to include only net spending, after deduction of government revenues from relevant spending, in order to eliminate double-counting. Thus, in cases where subsidies are paid directly to operators, such as is the case for urban transit companies or Via Rail, the spending is included here as government spending, and not as carrier revenues. Similarly, fees charged directly for transport services, such as the federal air transportation tax (for air navigation system expenses) or provincial road vehicle licence fees (for road infrastructure or control expenses) are deducted from the relevant government spending.

But the treatment of fuel taxes ("excise duties") - the major government revenues from the sector - is not resolved so easily. No government in Canada - federal, provincial or territorial - dedicates fuel taxes to transport investment funds. Instead, the proceeds are directed into general revenues, from which all expenses, including provincial road construction and maintenance, are paid. The question then is whether these fuel tax revenues should be treated in the same way as other general taxes in these accounts, and included as part of the relevant individual or business spending, or whether they should be set against government spending, leav only net spending in the government section of the table. The table does not resolve the issue, instead showing the effects of both procedures, with government revenues ranging from $3.6 billion, if only the more direct fees and taxes are included, to $14.4 billion if fuel taxes are included. ^{note 5} The total, in rounded figures, is $100-115 billion, an amount equivalent to about 14 per cent of total national output. ^{note 6} Relative to the total population, this equals $3,400-3,700 per capita.

Household Spending on Transport

A further indication of the scale of transport to economic activity can be obtained by examining its importance in household spending. Table 2-5 provides information from the latest data, that of 1996. More than 85 per cent of spending on transportation, nearly $5,100, was on the purchase and use of private vehicles, while spending on public transportation averaged about $840 per household and was dominated by air travel.

Business Spending on Transport

No equivalent summary accounts can be compiled for all business spending on transport, as the relevant data are not available for this sector. Instead the amount of transport spending within business cost structures has been computed for some major products to show the significance of transport services in terms of costs to those industries. Table 2-6 shows the significance of transport costs to the value of output for major primary product sectors and for the manufacturing sector, calculated as a percentage of the selling price as well as separately for domestic and export sales. The data used are from 1991, the last year for which the analysis was undertaken. On average, transport costs were only 5.1 per cent of commodity prices of the goods-producing industry. There was wide variation, however, the ratio being much higher in the primary sector (11.8 per cent) than in the manufacturing sector (3.5 per cent). The proportion of transport costs was generally higher for export than for domestic sales (average 6.7 per cent, as compared to 4.2 per cent.) Major export commodities for which transport costs made up a relatively high proportion of overall costs include coal, lumber, fertilizers, iron ores, grain and newsprint. Those for which the proportion was relatively low include motor vehicles and parts, steel bars and rods, and machinery and equipment see( Figure 2-4).

Employment in Transport

In 1995, the transportation sector directly employed some 462,000 persons, almost unchanged from 1984. Trucking is the largest single employer in the sector, with 159,000 employees, and marine the smallest with 32,000 (see Table 2-7). A large reduction occurred in the rail mode in both relative and absolute terms. Since 1984, the streamlining of operations has reduced rail employment by some 40,000, at an average rate of 5.1 per cent per year. Both aviation and trucking experienced increases in employment: aviation was up by 11,000 employees, or 1.9 per cent per year, and trucking increased by 17,000 to reach 159,000. Salaries in transportation over the same period increased at an average annual rate of 3.5 per cent to reach an average of $37,119 in 1995, and have been consistently higher than the national average, which was $33,140 in that year (see Figure 2-5). The highest average annual salaries are in aviation (about $52,000), followed by marine ($51,000), rail ($46,000) and trucking ($36,000).

Transport Industries' Price and Productivity Performance

A special study of the economic performance of commercial carriers is included as Chapter 15 of this report. The following is a brief summary. The study looks at trends in carriers' prices and outputs, and examines the influence of changes in productivity as well as input prices. These aspects of economic performance are inter-related, and the analytical techniques to distinguish them are complex. The study applies the developing techniques of "total factor productivity" analysis to assess changes in the carriers' efficiency in service delivery.

The analysis examines performance over the period 1981-1994, and shows first that output prices not only increased more slowly in the transport sector than in the economy as a whole, but actually fell, if general inflation is taken into account. The reductions were not universal, how-ever, and domestic passenger services showed price increases higher than general inflation. Total output of the sector - the amount and value of services - increased over the period. Output growth in freight services was much greater in trucking than in rail or marine, and in passenger services was greatest in international aviation, while domestic intercity services (air, bus and rail) declined. After examining changes in output prices, the analysis considers their relationship to consumer prices, as registered in the Consumer Price Index (CPI). It concludes that the standardized comparison of price changes in the fixed "basket" of transportation services purchased in the base year of 1986 fails to take into account shifts toward relatively lower-priced services and modes, and therefore overstates true prices paid by consumers. The crux of the analysis is its investigation of productivity. The study found that total factor productivity increased much faster in the transport sector than in the economy as a whole over the period in question. Gains in productivity were widespread among the freight modes and in international passenger services. Domestic passenger services again provided the exception, with productivity in this area actually declining through much of the period. In summary, the analysis reveals that, by these standard measures of economic performance, the carriers examined have performed generally better than the economy as a whole. Their prices have risen more slowly than inflation, aided by productivity improvements greater than those in the general economy. The changes in domestic passenger services have been less positive in recent years, as declining demand has raised unit costs. Unfortunately, improvements to productivity have not kept up.

Overall, the transport sector's output - the value of transport services used - has fallen in relation to the value of total national output, as savings from productivity improvements have been realized throughout the economy.