Introduction:

Thanks so much for the invitation to talk with you this morning. I must confess that when Rich Juliano invited me to do this, I asked him how many people had turned him down that he would invite a rail guy to a gathering like this.

He assured me that I was really their choice, and the more I thought about it, the more appropriate it seemed to me that this annual gathering would continue its broadening scope of interests.

One of the great things about working with the railroad industry is its long history, almost as long as our nation itself. And throughout those respective histories, railroads have been fostered in many ways by public-private partnerships.

Many railroads got their start in the early 19th Century through state authorized franchises or stock offerings, just as canals and turnpikes had. The transcontinental railroad was made possible through federal loans (which by the way were paid back in full at the turn of the 20th Century). Other railroads in the west benefited from land grants, and in return, the federal government benefited from reduced rates for government shipments up until the Second World War.

This morning, I’ll share with you some information about our nation’s railroads, explain some of DOT’s existing and proposed innovative financing tools, and offer some glimpses into two proposed partnerships for rail projects.

Freight Railroads:

Let me begin by offering a brief introduction into the world of freight railroads.

Freight railroads, predominately privately owned and operated, are vital to our economy and are instrumental in global competition. In 2001, the railroad freight industry generated $36.6 billion in revenue. Eight major railroad systems accounted for 92 percent of that total. The railroad industry set a new high for freight traffic of over 1.5 trillion revenue ton-miles, up 2 percent from 2000.

In 2001, there were 8 Class I freight systems, with annual operating revenue in excess of $267 million, 34 regional railroads, line-haul railroads with revenue more than $40 million but less that Class I threshold, and over 500 local railroads.

The rail industry has returned much of its productivity gains back to the shippers in the form of lower rates. Freight rates adjusted for inflation have declined by an average of 1.6 percent a year between 1990 and 2001. The rail industry is capital intensive. The railroads are responsible for maintaining their track, rights of way and fleets of railcars and locomotives. The industry must invest heavily in both its capital and maintenance programs to remain competitive and to maintain their impressive safety record.

Since 1980, the Class I railroads have increased their traffic (ton-miles) by 63 percent, while their network (miles of road owned) declined by 41 percent. This has increased traffic density by concentrating traffic over a smaller network.

Between 1981, after the Staggers Act partially deregulated rail rates and service and 2001, the railroads have spent $331 billion on capital and maintenance of their track and equipment. Capital expenditures have grown 50 percent from $3.6 billion in 1990 to $5.4 billion in 2001, or one-third faster than the increase in the price level of railroad purchases of inputs. Between 1990 and 2001, freight railroads made major strides in improving productivity, nearly doubling from 4.8 to 9.3 million revenue ton-miles per employee as traffic increased and employment dropped.

Freight railroads are also making more efficient use of fuel. Between 1990 and 2001, ton-miles per gallon of fuel consumed rose from 332 to 403.

Pressures on the System:

There are a number of pressures on our freight railroad network in the immediate future: increased demand for freight and passenger services and other financial pressures.

First, USDOT’s comprehensive freight analysis study forecasts total traffic (domestic and international) increasing by about 70 percent in 2020, with truck traffic increasing about 77 percent and rail traffic increasing about 55 percent. Unless we do something about it, these huge increases in freight movement are and will continue to result in increased congestion and greater inefficiencies throughout the nation's transportation system.

AASHTO has published an illuminating study on the potential for the freight rail network to begin to accommodate some of this growth, and I’d recommend their Freight Rail Bottom Line Report to you, found on their website.

In recent years, more and more communities are implementing or investigating the possibility of commuter rail or intercity passenger rail because of the public benefits. Unless public investments are made in infrastructure capacity, sharing the tracks with passengers can reduce the available capacity for freight traffic. Also, increased rail traffic can cause hardships for communities as longer and more trains traverse communities.

Finally, between 1990 and 2001, the Class I freight railroads have averaged 7 percent return on their net investment. In 2003, The Surface Transportation Board found for the third year in a row that no railroad earned a return on investment equal to its cost of capital. Just as air cargo and motor carriers are private companies, railroads must maintain profitability at a sufficient level to allow the systems to be maintained adequately in order to provide the service demanded of them.

Surface Transportation Reauthorization:

It is in this context that the Bush Administration is proposing important new project financing tools and improving the performance of existing programs.

Several months ago, the Administration unveiled the details of our proposed legislation for surface transportation reauthorization; SAFETEA.

First and foremost, this Administration’s proposal ensures the highest possible investment in our country’s critical transportation infrastructure.

We will achieve this by building upon the legacy of earlier surface transportation legislation—and look forward to working with the Congress and all affected stakeholders to ensure swift passage of this legislation.

We have learned that guaranteed annual funding is one of the biggest success stories from ISTEA and TEA-21. We believe such guarantees should be retained and refined wherever possible.

And because states and localities have impressed upon us the need to exercise a degree of autonomy in allocating such funds, our proposal calls for increased funding flexibility for State and local authorities so that they can address specific areas of concern.

Finally, we intend to expand the range of innovative financing tools so states and localities can better leverage the federal funds they receive.

While the TIFIA program is already available for intercity rail projects, SAFETEA proposes to expand the use of TIFIA credit assistance by broadening eligibilities to include private freight rail facilities and reducing the project size threshold for TIFIA projects to $50 million from $100 million.
States would be allowed to impose user charges on federal-aid highways, including the Interstate System, provided that such charges were part of a program to relieve congestion and/or improve air quality.

Transportation projects (highway facilities and surface freight transfer facilities) will be eligible for tax-exempt private activity bonds, exempted from a state's private activity ceilings, encouraging private operation of transportation projects.

States will be given more freedom to use innovative project delivery methods such as design/build, which are often a key in setting fixed prices for projects to attract private investment.

If our rail system is to play its role in delivering our nation’s growing freight volumes, we need to encourage more private sector investment in infrastructure projects. I’ll talk about this in more detail in few moments, but let me first share some information about a financing program that could be an element in public-private rail projects.

Freight Rail Development:

On the rail development side, I’m pleased to report that the RRIF program is alive and well.

For those of you who may not be familiar with the program, RRIF, or the Railroad Rehabilitation & Improvement Finance program is intended to provide eligible borrowers direct loans or loan guarantees to develop or rehabilitate rail equipment and infrastructure.

We continue to meet with prospective applicants to identify potential federally financed improvement projects ranging from track rehabilitation, line acquisition and equipment purchases.

We’re working very hard to simplify what some have dubbed an intimidating and technically burdensome application process.

We’re in the final phases of an unflinching third party review of our management of this program, so that we can live up to the expectations of Congress and the nation’s Short Line and Regional railroads.

Soon, we should be announcing the award of our largest RRIF loan to date.

Example of Partnerships – I-81:

Let me talk about two major partnerships in the offing: I-81 in Virginia and the CREATE program in Chicago.

FRA has partially financed a study by the Virginia Department of Rail and Public Transportation on the market for improved rail intermodal service to reduce truck traffic on I-81. VDOT has issued a request for proposal under the Public-Private Transportation Act for improvements to the I-81 corridor.

Among other issues to be addressed, the RFP notes the “development of the I-81 corridor, to the extent practical, as a multi-modal facility, reasonably shifting a portion of future commercial traffic to rail.

Two Proposals are being considered: Star and Flour. Both include rail improvements.

Flour: Rail improvements are estimated to reduce truck traffic along the corridor by 500,000 trucks or more per year.

The project calls for $132 million in near term rail improvements to the line between Manassas and Front Royal, a current bottleneck, and improvements between Front Royal and Harrisburg.

Improvements would also allow VRE to extend commuter service to the Haymarket Area.

Rail improvements financed by a surcharge on freight cars traveling on the rail lines through Manassas, although the toll would be less than charged commercial traffic on I-81 under Flour’s plan.

Rail toll revenues will allow a RRIF loan to be secured, although FRA has not received a proposal for such a loan.

Norfolk Southern, the railroad whose line parallels I-81, has talked to Flour but is still studying the plan and has not as yet taken a position on the plan.

Star: Star will consider dedicating parts of the highway corridor to passenger rail.

Rail projects would address access to Virginia’s Inland Port at Front Royal and improvements in the line between Manassas and Front Royal and Front Royal and Harrisburg.

Star estimates costs of rail project at $116 million with $55 million related to VRE’s implementation of service to Haymarket.

Star does not set forth a specific funding proposal for rail improvements but notes that NS is “open to some form of a public-private funding approach to accomplish this improvement.” Star believes these improvements could divert 560,000 trucks a year. If more than 560,000 are diverted, more rail investment would be needed.

Star notes that cooperation with other states is necessary to achieve significant diversion because a longer length of haul is needed.

NS has not taken a position on the Star proposal, either.
The FRA will continue to work with the State of Virginia as it considers the merits of these two impressive proposals.

Create and Lessons Learned

Another very encouraging example of this kind of public/private investment in rail is the local Chicago Region Environmental and Transportation Efficiency project (or CREATE), a billion dollar project to speed railroad movement through Chicago.

This is an unprecedented coalition of six major Class 1 railroads, the City of Chicago and State of Illinois. We are working with local leaders to see that the DOT assists this important project.

Let me close by offering some advice on approaching rail public private projects, as gleaned from the Chicago experience. The first three points are valuable observations of Mike Payette of the Union Pacific Railroad, one of the major participants in the CREATE team. The second two come from FRA’s own Chicago project expert, Raphy Kedar, in our Office of Policy.

First, a project must be designed with the unique operating characteristics of railroads in mind. This means that infrastructure improvements must be operationally consistent. It’s best if they can be based on a foundation of management/coordination efforts already in place to maximize railroad efficiency.

And just as a toll road developer relies on sophisticated modeling for roadway design and ridership projections, rail projects need modeling to test which infrastructure options will result in optimization for rail operations.

Second, a successful infrastructure project will require a pre-existing, functioning relationship between local and regional governments and the railroads.

In Chicago, the City, State and railroads had been dealing with service issues and community impacts for two or three years before they all decided to begin to think about infrastructure improvements. In Chicago, this has resulted in a better product, and it was easier to develop among multiple partners, and is based on a greater level of trust.

This is not dissimilar to the multi-jurisdictional relationships that precede successful design, financing and construction of major road or transit projects. If you want to help advance the cause of rail, you’ll need to expand the scope of those current relationships to include railroads.

Furthermore, it will need to be a real relationship, not one where the public sector invites the railroads in and tells them what the project is going to be.

Third, Chicago benefited from the commitment of an honest, third party broker, who kept the project moving. In Chicago’s case, that broker was Linda Morgan, former Chairman of the Surface Transportation Board, the federal agency charged with economic regulation of the nation’s railroads.

After a disastrous winter storm in 1999 crippled railroads in Chicago, Chairman Morgan, invited by Mayor Daley, began working with all six Class 1 carriers in Chicago to foster more coordination and cooperation.

Any major project with multiple actors will benefit from the coordination and facilitation of a reasonably disinterested party—not disinterested in the outcome, but not wed to any particular interests of any given party.

Fourth, the infrastructure project might bring larger benefits if it also involves some degree of asset sharing among all the railroads involved.

Shared assets are as popular with freight railroads as pavement guarantees are with AGC highway contractors. However, if that degree of sharing is voluntarily chosen by railroads, as a means of balancing out competing interests among railroads, it will go a long way to maximizing the public and private utility and limiting the extent of infrastructure improvements.

Finally, and somewhat related to the first point, a regional rail project will need to consider the functional nature of the rail system in the region in question. There is a qualitative difference between hub and corridor projects.

Chicago is a hub project, involving a confluence of many different railroads, with a heavy mixture of destination and through cargo movements.

The Alameda Corridor was a corridor project, linking a major traffic generator with the rest of the rail network.

Corridor projects may be easier to finance and involve more contiguous infrastructure improvements, while hub projects are more dispersed and therefore less easy to develop typical project finance tools.

Conclusion:

I’m very pleased to have been invited to share some time with you, and I thank you kindly for your attention so early in the morning. I’m also encouraged that you not only invited the FRA Administrator, but because your program also includes rail related discussions.

Thanks again for the chance of visiting with you.