Strategic Risk at CP Rail - An Emerging Case Study

We often tell clients in our Board Risk Workshops that when risks get out of control, you may need to exit a business or line. While boards and management get it conceptually, it can be hard to do without a significant triggering event. Target did that in Canada (see here). We have a few great case studies we use in our Board Workshops to help make the point crisp. And now CP Rail is asking penetrating questions in a case study that is playing itself out.

CP Rail is musing quite publicly (see the Globe and Mail Article) about whether it should be in the business of hauling dangerous goods across the country. 

The business case “for” is quite simple. The revenue opportunity is huge.  Oil in particular, though there are other dangerous goods too, is a huge revenue opportunity. Pipelines, which in some ways may be preferred, are not in the right places and take a long time to approve and build.  Also on the “pro” side is the notion that the railway may not have a choice – the laws and regulations require the railroads to take all products, and not to choose which customers to serve. This is standard fare for “regulated monopolies and regulated industries” and would stem from well-established conventional thinking. The power of an abusive monopoly or entrenched party is simply too great. 

The downside is in the cost and likelihood of a catastrophic derailment. The interesting question is “why now?” What is suddenly making the risks of transporting oil and other dangerous goods suddenly so problematic?  Several forces have come together:

  • There is, relatively suddenly, a need to transport lots of oil (and other things) by rail because it's coming from places without pipelines. And some of that oil seems to be much more volatile (explosively) than conventional crude;
  • The Lac Megantic derailment and explosion got everyone’s attention. The railway involved is in bankruptcy; the regulators are tamping down on rules; the public is suddenly much more aware. And that was not the only explosion / derailment / spill.  
  • The changed rules have practical impacts for railroads. Trains must go slower in populated areas, more safety equipment is required, more insurance is required. Many of the necessary railway routes are through big cities. Costs and risks are shooting up for the carrier. 
  • There is also a terrorism trial underway in which the intended target was a train.  Foreign terrorists are also starting to think of Canada and Canadian interests as a target, and Canadian lone wolf activists are starting to think about ways to do dramatic things. 

Put these together, and it’s no longer ridiculous to imagine an explosion of a train carrying hazardous goods in a major urban centre. Should it be up to a railroad to shoulder all that? Which should rightly lead a Board and the senior management team to ask “Should we be in this business?” 

No question there are lots of wheels in motion here (pun definitely intended).  Governments, regulators, transport companies, public interest, and the underlying commercial realities which include the recognition that we do need these hazardous materials to be transported from point A to point B create many points of view.

The best role for each actor, and who bears the risks, and whether they are outsized is exactly what Boards should be discussing.  Tere are clearly many different forms of solution here, and by making its musings public, CP is also no doubt looking to see if the regulatory yardsticks can (or should) be moved. (This is also an example of trying to influence factors to mitigate external aspects of these risks.)

This will be an extended conversation and bears watching. We rarely get to see one of these “exit the business” cases developed and progressed in such a public way.  

If your Board needs to explore or think through how to tackle emerging risks, contact us here