# Presentation: 079147

## The Challenge of MeetingFreight Infrastructure Demands:  Public-Private Partnerships the Answer?

**The Challenge of Meeting****Freight Infrastructure Demands:  ****Public-Private Partnerships the Answer?**

- Jim Hixon
- Exec. Vice President Law & Corporate Relations
- Norfolk Southern Corporation
- June 2007

## Overview

- Freight Capacity Constraints and the Need for New Rail Infrastructure
- Rail Infrastructure Economics – An Overview
- Two PPP Models
- Public Benefits of Rail

## Summary

- Freight demand growing rapidly; more rail infrastructure needed
- Both public and private investment will be required to meet future rail infrastructure needs
- Federal incentives would increase private investment in rail infrastructure
- More rail infrastructure would produce substantial public benefits

## Major Freight Growth Projected(Domestic Tons All Modes)

**ATA**

**DOT**

**AASHTO***

- All figures indexed with each source’s 2005 traffic levels equal to 100 percent
- *AASHTO:  American Association of State Highway and Transportation Officials

## Highway Capacity Already Strained

*Interstate traffic has grown *
*much faster than lane miles *

- Source: Dept. of Transportation, National Transportation Statistics

**VMT per****Lane Mile**

**Vehicle Miles****Traveled (VMT)**

**Lane Miles**

## More Highway Gridlock Coming

- Source: Dept. of Transportation, FHWA Freight Analysis Framework

- Truck Traffic
- 1998                 2020

## Rail Capacity Already Strained

*Class I Rail ton-miles have *
*increased dramatically without *
*growth in track miles*

- Source: Dept. of Transportation, National Transportation Statistics

**Ton Miles per****Mile of Track**

**Ton Miles**

**Track Miles**

## Variety of Forces Pushing More Freight to Railroads

**Variety of Forces Pushing More Freight to Railroads**

## Railroads Are Highly Capital Intensive

- All figures based on 2002 economic census except railroads and trucking
- All transportation includes NAICS 48 industries including: air, rail, trucking, water and pipeline transportation
- Trucking figures are 1999-2005 average for NAICS 484 based on Census Services Annual Survey
- Railroad figures are 1999-2005 average based on STB R-1 filings (Class I railroads cash capital)

**Capital Investment as a % of Revenue**

**Railroads Are Highly Capital Intensive**

## U.S. Freight Railroad Performance Since Staggers

**Revenue**

**Volume**

**Productivity**

**Price**

**Staggers Act Passed Oct. 1980**

**U.S. Freight Railroad Performance Since Staggers**

**Index 1981=100**

## Freight Rail Investment Challenge

- AASHTO *(American Association of State Highway and Transportation Officials)*
- issued a study in 2003 analyzing the state of freight rail capacity
- concluded that freight railroad investment must grow sharply over next 20 years to maintain railroads’ share of growing freight traffic
- also found that freight railroads may not be able to attract necessary investment to handle their share of growing freight demand

## AASHTO Investment Goal 

- Based on averages of AASHTO estimates adjusted for inflation

- Investment needed to...

## Support for AASHTO Findings 

- Subsequently, similar concerns about the ability of the industry to attract necessary capital have been expressed by:
- CBO
- Transportation Research Board
- Hudson Institute

## Capital Investment Has Grown inTandem with Profitability...

- Historical nominal dollars invested based on STB R-1 filings (Class I railroads cash capital)
- Industry profits based on R-1 filings of Class I railroads

## Yet Industry Capital Investment StillInsufficient to Meet AASHTO Goal

- Based on averages of AASHTO estimates adjusted for inflation to nominal dollarsTrend in actual investment levels based on regression of historical nominal dollars invested (from STB R-1 filings, Class I railroads cash capital)
- Trend in industry profits based on regression of historical nominal profits excluding 1991 losses (from STB R-1 filings, Class I railroads)

- Investment needed to...

## Past Industry Capital Investment Shortfalls Will Require Even Higher Levels Than Projected

- Based on averages of AASHTO estimates adjusted for inflation to nominal dollarsActual investment levels from STB R-1 filings (Class I railroads cash capital)

- Investment needed to...

## Past Industry Capital Investment Shortfalls Will Require Even Higher Levels Than Projected

**Past Industry Capital Investment Shortfalls Will Require Even Higher Levels Than Projected**

- Necessary investment levels based on averages of AASHTO estimates adjusted for inflationActual investment levels from STB R-1 filings (Class I railroads cash capital)

- Investment needed to...

## An Overview

**Rail Infrastructure Economics**

## The Fundamental Infrastructure Financing Issue

- Issue is not whether capital exists – capital markets have effectively unlimited capital
- Issue is the number of infrastructure projects where expected risk-adjusted investment returns meet or exceed capital costs
- Much of infrastructure “need” being discussed are projects that have high returns to customers and for the country, but low returns to the railroad, at least at current pricing

## Rail Infrastructure Economics

**Market Return**

**Cost of Capital**

**HIGHER RETURN PROJECTS**

**LOWER RETURN PROJECTS**

## Rail Infrastructure Economics

**Market Return**

**Depressed Return**

**Cost of Capital**

- --Subsidies to competition
- -- Sector-specific government mandates (e.g., HAZMAT)
- -- Price regulation
- -- Risk of increased regulation

- ACTUAL

- HIGHER RETURN PROJECTS

- LOWER RETURN PROJECTS

## Rail Infrastructure Economics

**Market Return**

**Depressed Return**

**Social Return**

**Cost of Capital**

- -- Less pollution
- -- Less transportation congestion
- -- Reduced energy consumption
- -- Increased safety

- OPTIMAL

- ACTUAL

- HIGHER RETURN PROJECTS

- LOWER RETURN PROJECTS

- HIGHER RETURN PROJECTS

- LOWER RETURN PROJECTS

## Rail Infrastructure Economics

**Market Return**

**Depressed Return**

**Social Return**

**Cost of Capital**

**   ...****Proposed**

- _PPPs objective_:
-    Reduce gap by lowering
-    cost of capital

- PROGRESS

- HIGHER RETURN PROJECTS

- LOWER RETURN PROJECTS

## Two PPP Models

- Direct Investment by BOTH the Public and the Private Sector
- “Indirect” Support by the Public:  Investment Tax Credits for Rail

## Direct Federal Investment:  Highway Bill Principal Sections

- Section 1301 – Projects of National & Regional Significance
- Track, Technology, Facilities
- Section 1702 – High Priority Projects
- Technology, Small Facilities
- Section 11143 – Private Activity Bonds
- Large Facilities
- Other Mechanisms [CMAQ, TIFIA, RRIF]

## Heartland Corridor 

**Columbus**

**Rickenbacker**

**Ashville**

**Huntington**

**Kenova**

**Prichard**

**Williamson**

**Welch**

**Bluefield**

**Roanoke**

**Petersburg**

**Richmond**

**Washington, DC**

**Christiansburg**

**Portsmouth**

**To Chicago, Detroit, and Points West**

**VA**

**OH**

**WV**

**KY**

**Portsmouth**

**664**

**664**

**264**

**264**

**464**

**Western Freeway Rail Corridor**

**Portsmouth**

**Norfolk**

**16`4**

**CIDMMA**

**PMT**

**NIT**

**Maersk**

**CIMT****(Proposed)**

## Chicago’s Rail Corridors

**Chicago’s Rail Corridors**

## Charlotte IM Terminal

- Bring in the PAB leveraging effect!!

## Indirect Federal Support

- Investment Tax Incentive Legislation
- Introduced Last Congress and this Congress
- Provides for 25 % Credit for “new” capacity
- Applies to track, technology, facilities, and locomotives
- The rail industry has a number of corridor projects, like the I-81 Crescent Corridor on NS, that could be facilitated by this type of PPP

## Why Are Tax Incentives Needed?

- 2006 CBO Report recognizes that a variety of forces complicate railroads’ ability to attract capital:
- Tax policies tilt infrastructure playing field in favor of competitors
- Railroads bear complex risk on immobile investment
- Continued government regulation imposes pricing and operational constraints and many industry- specific financial burdens

## Tax Credit for Qualifying Property

- 25% tax credit for investment in property that allows for an increase in the speed, weight, or volume of freight moved
- “Star Trek” property
- Bridge or tunnel expansion
- Qualified new locomotives

## Public Benefits ofFreight Rail Incentives

- A single intermodal train can remove up to 280 trucks from roadway travel ...

- ... saving lives and fuel; reducing
- congestion, pollution and greenhouse gases

## Public Benefits of Freight Rail: Less Congestion

- Sources: FMCSA & FRA / DOT & DOE / U of Iowa & DOT / Texas Transportation Institute & Transportation Research Board

- Rail
- Trucks

***Highway congestion caused by rail is minimal***

## Public Benefits of Freight Rail: Less Pollution and Greenhouse Gas

- Sources: FMCSA & FRA / DOT & DOE / U of Iowa & DOT / Texas Transportation Institute & Transportation Research Board

*Ratio of Emissions**per ton-mile**(2003)*

- Rail
- Trucks

## Public Benefits of Freight Rail: Fewer Fatalities

- Sources: FMCSA & FRA / DOT & DOE / U of Iowa & DOT / Texas Transportation Institute & Transportation Research Board

- Rail
- Trucks

## Public Benefits of Freight Rail: Reduced Energy Consumption

- Sources: FMCSA & FRA / DOT & DOE / U of Iowa & DOT / Texas Transportation Institute & Transportation Research Board

- Rail
- Trucks

## Public Benefits From Expanded Rail Capacity

- Projections based on costs of congestion, accidents, air pollution derived from FHWA, Texas Transportation Institute, EPA and other sources
- Toxic air pollution does not include the costs of carbon dioxide emissions

## Public Benefits From Expanded Rail Capacity

- Projections based on costs of congestion, accidents, air pollution derived from FHWA, Texas Transportation Institute, EPA and other sources
- Toxic air pollution does not include the costs of carbon dioxide emissions

- Social Cost Differential Between AASHTO Reduced Share and Increased Share Scenarios:Totals $200 Billion Over 20 Years

## The Challenge of MeetingFreight Infrastructure Demands  

**The Challenge of Meeting****Freight Infrastructure Demands  **

- Questions?