The Resurgence of Rail

There was a very good article in the Wall Street Journal last Wednesday on the resurgence of rail. “North America’s major freight railroads are in the midst of a building boom unlike anything since the industry’s Gilded Age heyday in the 19th century, this year pouring $14 billion into rail yards, refueling stations, additional track,” stated the article.

But that is not the whole story. Rail investments have often had a significant level of public investment. Investing public money in projects that would help a private company grow its revenues could be seen as a boondoggle. However, there are two such projects that I support.

One project is the National Gateway project, which benefits CSX, a rail carrier in the eastern part of the US. CSX refers to this project as a “public-private partnership,” which sounds better than “boondoggle,” “crony capitalism,” or “pork.” The National Gateway project will improve the flow of intermodal rail traffic by enabling the use of double-stack trains on CSX-controlled tracks that link Mid-Atlantic ports with Midwestern markets. The National Gateway is expected to cost $850 million, with $575 million coming from CSX and the balance from public funds. The project is expected to be completed by 2015.

To accommodate the height of double-stack trains, tunnels and clearances under bridges must be raised, which is where most of the funding from federal and state governments is going toward. CSX is building new intermodal terminals, and I visited one of them in Worcester, MA (unrelated to this project) and came away surprised at how expensive these terminals are to build. It is hard to build a terminal for less than $100 million.

The other public-private partnership is the Crescent Corridor project that will benefit Norfolk Southern, which operates the most extensive intermodal network in the east. Crescent Corridor will create a major new intermodal corridor running between Louisiana and New Jersey. According to Norfolk Southern’s latest annual report, “the Crescent Corridor has received or expects to receive a total of $267 million in public capital funding commitments” from various states and the federal TIGER Stimulus Program. The company “estimates spending up to $360 million for the substantial completion of work on these projects, which is expected in 2014. Planned 2012 investments for the Crescent Corridor approximate $128 million.” It is not clear how sequestration has affected the funding.

There are, of course, environmental benefits to switching from truck to rail shipments.Rail can move a ton of freight nearly 500 miles on a single gallon of fuel! Rail is also good for safety. Every mile that a truck, or car for that matter, is not driven adds to the safety of everyone else on the road.

But I’m mainly in favor of these programs because of the improved economics for shippers. According to the annual reports of the Class 1 railroads in the US, intermodal revenues are up 18 percent over the past two fiscal years. The revenue increase stems in roughly equal parts from increasing demand and increasing prices. In theory, more intermodal capacity should lower costs and help to improve service. However, as more traffic comes through a bigger Panama Canal, and East Coast ports get busier, these projects may serve only to mitigate price increases that would be even higher without these investments.

Of course, what the government gives with one hand it often takes away with the other. Class 1 railroads are grudgingly spending hundreds of millions of dollars each on Positive Train Control (PTC) systems to comply with the US Federal Railroad Administration’s Rail Safety Improvement Act. PTC systems monitor and control train operations by enforcing train separation and speed control, thus helping to prevent collisions. PTC operates by sending and receiving a continuous stream of wireless signals about the precise location, speed, and direction of trains.

While the impetus for PTC is safety, an exact understanding of where trains are should allow trains to actually safely increase average line speeds and operate closer together. Thus, PTC could also serve to increase intermodal capacity. The deadline for implementing these systems is 2015, but considering the slow rate of implementation and the fact that this is an unfunded mandate, the deadline might get extended to 2018.

All these things are good for shippers. I’m willing to call these taxpayer-funded projects “public-private partnerships” rather than “pork.”

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