February 19, 2008

Freight Railroads Undergoing Dramatic Expansion

Ken Orski

According to the Association of American Railroads, freight railroads carry more than 40 percent of the nation's freight measured in ton miles, and had aggregate revenues of $54 billion in 2006. The Association's January 2008 report "Overview Of U.S. Freight Railroads" notes that "a typical train takes the freight equivalent of several hundred trucks of our highways." And freight railroads are experiencing unprecedented expansion. "For the first time in nearly a century railroads are making large investments in their networks," wrote Daniel Machalaba in the Wall Street Journal ("New Era Dawns For Rail Building," February 13, 2008). He reports that since 2000, freight railroads have spent $10 billion to expand track, build freight yards and buy rolling stock and they have $12 billion more in upgrades planned.

"Their campaign is altering the corridors of American commerce, more so than any other development since interstate highways spread to the interior....It's been a century since railroads embarked on a similar spate of capital investment."

Booming International Trade Fuels Freight Rail Growth

The catalyst for this burst of investment has been the rapid growth of international trade and its rising demands to move containers of finished goods from ports to major cities. Demand for rail service increased sharply when Asian imports intensified starting in 2003. While long-haul trucking continues to be the backbone of the nation's land-based freight system, railroads are stepping in to supplement the goods carrying capacity in many corridors.

Burlington Northern was the first to begin expanding the physical capacity of its rail network by adding a second set of tracks to portions of its Chicago-Los Angeles Transcon line, now nearing completion. Union Pacific followed with an upgrade of its Sunset Corridor from Los Angeles to El Paso, Texas. Norfolk Southern is improving access to the ports of New Orleans and Norfolk by expanding the capacity of its Crescent (New York- New Orleans) and Heartland (Chicago-Norfolk) rail corridors. CSX is doing the same in its Chicago-to-Florida Southeast Corridor.

The Long Beach Press-Telegram reports that recognition of continued growth in Asian imports to North America, plus congestion at Southern California's busy ports, helped prompt the Mexican government's commitment of $1 billion to a hoped-for mega-port at Colonet, Baja California. It would include new inland rail connections to speed goods to north of the border, and requires $4 billion more, in private capital.

A spokeswoman for the Los Angeles Area Chamber of Commerce tells the newspaper that the proposed Baja port should compel further and timely investment in on-dock and near-dock rail at SoCal ports. She adds:

Rail is not impacted by road congestion so it helps avoid bottlenecks, which provides an even greater benefit to the region.

Financial Self-Sufficiency

What is remarkable about the massive expansion and modernization of freight rail infrastructure in the United States is that it has been accomplished without the help of any public funds. From 1980, when the Staggers Rail Act partially deregulated railroads, through 2006, railroads have invested some $400 billion of private capital in their systems according to the AAR report issued last month. From 1980 through 2006, freight railroads invested a robust 40 cents of every revenue dollar in infrastructure and equipment, says AAR. They are able to do so because dramatic increases in freight volume due to  booming international trade have led to record earnings. Forecasts are for continued profitability, with freight railroads prepared to continue funding internally the vast majority of their planned infrastructure investment.

A Model for Highways?

Could highways become more like freight railroads? Could future highway infrastructure be financed with user fees and private capital, just like rail infrastructure? Or is the notion that highways are a public good to be supported primarily by taxpayers too deeply ingrained to allow for such a radical change in approach?

The debate on this score has just begun and its eventual outcome is uncertain. Ultimately, the answer may hinge less on how Congress decides to fund the federal contribution to the surface transportation program than on how governors, state legislatures and local governments across the nation decide to approach the long term challenge of financing new road infrastructure.

The signals from many state capitals suggest that user fees in the form of tolls are  increasingly being considered as the principal means of financing future highways and bridges. Governors and legislative committees in as many as 14 states are contemplating adding tolls to their arsenal of revenue measures. 

This does not mean that the need for fuel taxes will disappear. The gas tax will continue to be needed to fund  the ever-growing costs of preserving and modernizing the nation's aging road facilities.  However, finding the resources to pay for new capacity will require a more entrepreneurial approach, with the freight railroads serving as a possible financing model. User fees in the form of tolls may turn out to be the most sensible way to ensure the long-term integrity of the highway system without imposing an unacceptable tax burden on the American people.


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