A Review of Alternative Approaches to

Federal Funding of Rail Rehabilitation

September 1975

NTIS order #PB-250632
UNITED STATES CONGRESS

Office of Technology Assessment

Federal Funding

of Rail Rehabilitation

A REVIEW OF ALTERNATIVE APPROACHES

PREPARED AT THE REQUEST OF

THE SENATE COMMITTEE ON COMMERCE

SURFACE TRANSPORTATION SUBCOMMITTEE

PREPARED UNDER CONTRACT OTA C-25 BY

HARBRIDGE HOUSE, INC,

AUGUST 1975

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402- Price $1.55
—

DIRECTOR’ S OFFICE

Emilio Q. Daddario, Director

Daniel V. De Simone, Deputy Director

CONRAIL REPORT REVIEW PANEL

Robert Calhoun Prof. Thomas Sutherland

Sullivan & Worcester Princeton University

G. Gerald O’Donahoe James Tapley

Harbridge House, Inc. Southern Railway

Lawrence Goldmuntz Prof. Robert Tollison

Economics & Science Planning, Inc. Texas A & M

OTA TRANSPORTATION PROGRAM STAFF

Gretchen S. Kolsrud, Ph.D., Program Manager

Mary E. Ames Larry L. Jenney

V. Rodger Digilio Beverly Johnson

Thomas E. Hirsch, 111 Teri Miles

Harbridge House, Inc., contractor

(iii)
Honorable 01 in E . Teague

Chairman of the Board

Office of Technology Assessment

U. S. Congress

Washington, D. C. 20510

Dear Mr. Chairman:

In response to the requests* of Senator Schweiker of

the OTA Board on February 26, 1975, and Senator Warren G.

Magnuson, Chairman, Senate Commerce Committee on March 20,

1975, I am pleased to submit an initial report: A Review

of Alternative Approaches to Federal Funding of Rail

Rehabilitation.

Prepared by the Office of Technology Assessment, with the

assistance of an ad hoc task force of consultants knowledgeable in rail industry operations and problems and a contractor, the report is part of an OTA review of the United

States Railway Association's Plan for restructuring the

bankrupt Northeast railroads.

It is anticipated that the report will be used as background “for hearings planned for mid-September by the Senate

Commerce Committee and for hearings to be held by the House

Committees on Commerce and Appropriations.

*see Appendix
The Honorable Warren G. Magnuson

Chairman, Commit tee on Commerce

United States Senate

Washington, D. C. 20510

Dear Mr. Chairman:

On behalf of the Board of the Office of Technology Assessment,

we are pleased to forward a report: A Review of Alternative

Approaches to Federal Funding of Rail Rehabilitation.

This study is a part of a review of the United States Railway

Association’s Plan for restructuring the bankrupt Northeast

railroads. This report considers the Final System Plan submitted

to Congress on July 26, 1975.

This report is being made available to your Committee in accordance with Public Law 92-484.

Sincerely, Sincerely,

v i i
Preface

In 1973, the financial disarray of the Northeast and midWest railroads led to the passage of the Rail Reorganization

Act of 1973. The Act established the United States Railroad

Association (USRA) to develop a plan for a Consolidated Rail

Corporation (CONRAIL) to be formed of the financially distressed railroads. On February 26, 1975, USRA issued a Preliminary System Plan for CONRAIL, and on 26 July USRA submitted the Final System Plan to Congress.

This review and others in the series were prepared in

response to requests from the Senate Commerce Committee.

Originally intended to deal with the Preliminary System Plan,

these reviews are based on the Final System Plan to maximize

their utility to the Congress.

This review was accomplished in a two month period by

OTA’S Transportation Assessment Group supported by Harbridge

House, Inc. and a task force of individuals knowledgeable in

railroad problems. Contact was maintained with authorizing,

appropriations and budget committees of both the Senate and

the House as well as the GAO, Library of Congress and the

Congressional Budget Office.

The brief period of time precluded a rigorous assessment.

Instead, the major issues have been identified, frameworks

have been developed for their consideration and the data have

been organized to allow for thorough review.

(ix)

593-078 0 - 7.5 - 2
TABLE OF CONTENTS

● *******9***

1. INTRODUCTION . . . . . . . . . . . . .

A. Purpose and Scope of the Study

B. Organization of This Report .

9***** *

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IL ESSENTIAL COMPONENTS OF ALTERNATIVE

PROPOSED MECHANISMS

A. Introduction . . . .

B. Objectives . . . . .

c. scope ● ● ● ● ● ● . ● ●

1. Geographic .

9 0

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2. Facility Types

D. Government Funds . .

1. Amount

2. Timing

3. Source .

4. Form. .

5. cost ● ●

E. Government Control .

1. Route Structure

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2. Industry Structure .

3. Operations . . . . . .

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III. POTENTIAL IMPACTS OF PROPOSED MECHANISMS

A. Introduction . . . . . . . . . . . . . . . . . . . . . . . .

 B. Economic Viability. . . . . . . . . . . . . . . . . . . .

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Page

c. Quality and Cost of Rail Service . . . . . . . . . . . . . . . . . . . . . 28

D. Intermodal competition. . . . . . . . . . . . . . 0 . 000 . . . . . . . . 30

E. Intramodal Competition . . . . . . . . . . . . . . . . . .30

IV. SPECIFIC PROPOSALS ● **e* **. ******e******..******* 32

A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

B. Selected Alternative Proposals . . . . . . . ● 33

1.

2.

3.

4.

5.

6.

7.

v. SUMMARY

A United States Rail Trust Fund ● oeeeeoeoeoooocoe 33

Railroad Rehabilitation and Improvement

Act of 1975 ● 35

National Transportation Rehabilitation

and Modernization Act of 1975 ●   37

Financial Procedures to Assist Conrail's

Viability . . . . . . . . ● 39

Railroad Revitalization Act . . . . . . . . . . . . . . . . . . . . 41

Railroad Revenue Act of 1975 . . . . . . . . . . . . . . . . . . 43

Transportation Development Act of 1975 ● ** ***O**** 45

AND OBSERVATIONS ● 47

(Xi i
EXHIBIT I

EXHIBIT II

EXHIBIT III

EXHIBIT IV

EXHIBIT V

EXHIBIT VI

EXHIBIT VII

EXHIBIT VIII

EXHIBIT IX

EXHIBIT X

EXHIBIT XI

LIST OF EXHIBITS

Summary of Railroad Reports. . . . . . ..e. ... ... me . 6

Estimated Annual Yields from Four

Transportation Taxes . . . . . ● * . * . * . * . *.**.... * 13

Basis for Subjective Estimates of Cost Elements. . . . . . 20

Components of “A United States Rail Trust Fund’f . . . . . 34

Components of ‘Railroad Rehabilitation and

Improvement Act of 1975” . . . . . . . . . . . . . . . . . . . . 36

Components of ’National Transportation

Rehabilitation and Modernization Act of 1975’. . . . . . . 38

Components of “Financial Procedures to Assist

Conrail’s Viability” . . . . . . . . . . . . . . . . . . . . . . . . 40

Components of “Railroad Revitalization Act” *-***** 42

Components of “Railroad Revenue Act of 1975” . . . . . . . 44

Components of “Transportation Development

Act of 1975’ ● *.** e*** .*** .a*O*e***e***m* m 46

Alternative Approaches to Federal Funding of

Rail Rehabilitation . . . . . . . . . . . . . . . . . . . . . . . . . 48

(xiii)
EXECUTIVE SUMMARY

This report provides a conceptual framework for the evaluation of

alternative approaches to federal assistance for the rehabilitation of the nation’s

railroad fixed plant. The report is not intended to provide an analytic evaluation

of the alternatives. Rather, it identifies the pros and cons involved in the major

issues raised by the alternatives.

The conceptual framework identifies five major areas of interest (or

components) essential to an assessment of alternative proposals for federal involvement. They are:

● Objectives--The stated objectives of various proposals are

couched in fairly general terms. A significant difference

emerges, however, between those approaches with a primary

emphasis on the use of federal assistance to promote the rationalization and contraction of railroad fixed plant and those

which emphasize an expansion of rail service.

● Scope--Two asPects of scope emerged from the study. They

are geographic coverage (that is, regional versus nationwide)

and the types of facilities included in the rehabilitation.

● Government Funds--The conceptual framework indicates four

areas of concern arising from the funding aspects of the

proposals:

--Amount and Timing. Wide differences exist in terms of the

total amount of rehabilitation proposed and the period of time

over which this rehabilitation should be accomplished.

--Source. Alternative sources of public monies to support rail

rehabilitation include general revenues; rail freight surcharges;

freight surcharge, all modes; fuel taxes; and “no-cost’ sources

such as the ability of the government to guarantee private loans.

There are- many significant implications in the choice of funding

sources.

--Form. The alternative forms of government involvement range

from ownership, as in the case of the ‘Confac’? proposals,

through grants, soft or hard loans, and several forms of equity;

to loan guarantees. The pros and cons of each are explored.

(xiv)
--cost. Four kinds of cost are identified. They are the commitment cost, which is the amount of public funds deliberately

planned to be spent per $ billion of rehabilitation; the risk

cost, or the amount which may become a federal liability (in

the event of default in a guaranteed loan, for exarnple); the

administrative cost; and the cost of acquiring rail rights-ofway in those cases involving federal ownership.

● Government Control--This category covers a range of important

issues involving the degree of government control over route

structure, industry structure, railroad operations, and other

control aspects such as railroad dividend policies. These control aspects of the various proposals for federal assistance in

rail rehabilitation are of great interest to the industry as well

as to other observers of the rail scene.

● Related Actions--Other aspects of proposed rail legislation,

while outside the scope of this study, are inextricably linked

to a valid perspective on rehabilitation in the eyes of most observers. Such actions include rate reform, regulation of industry restructuring, relief from discriminatory taxation and

passenger service losses, and the prescription of improved

accounting systems.

The conceptual framework summarized above is applied in this report to a selected group of specific legislative proposals. A comparison chart

of these proposals appears at the end of this summary.

As noted above, this is not an evaluative study, nor was it designed

with the objective of recommending a particular legislative path. Some of the

impressions gained in the course of the study are highlighted in the following

paragraphs. These impressions, held by at least a majority of the industry,

shipper, labor, state, and administration officials interviewed, are pertinent

to any legislative efforts. They are as follows:

● The problem of deteriorating rail fixed plant is national in

scope, although by no means uniform. Priorities lie in the

Northeast and the Midwest regions of the country.

● Public ownership of rail rights-of-way raises many problems.

It should be seriously considered in terms of whether it is necessary or whether alternative solutions which have yet to be

tried have sufficient probability of success to warrant the deferral of nationalized rail plant.

(xv)
● There is no cheap solution. Hard, or highly leveraged, financing will not get rehabilitation money where it is needed most,

and a small program will not really test the role that federal

funding of rehabilitation can play in establishing a viable rail

industry.

● The cost of soft loans may approach the cost of an outright grant

as the term of the loan, the repayment schedule, and the interest

rate become more liberal.

● A trust fund is generally regarded as a desirable device to provide a secure stream of funding for rail rehabilitation and to

permit, through the authority to issue bonds, large initial outlays to be made based on a limited, but longer term stream of

receipts.

● Care should be taken to ensure that the necessary control over

what facilities get rehabilitated is used to promote a rational

rail system. The potential for excessive politicization of the

process can be minimized with a legislative requirement for all

analysis used as the basis for route decisions to be made available for public review.

● In terms of the corporate structure of the rail industry, the

current ‘Balkanized” structure is not ideal. A more desirable

structure is achievable through means other than federal coercion based on rehabilitation funding.

● Many unknowns are involved in the question of federal investment in rail fixed plant. Among them, as noted above, are:

--What is the need?

--What is the return on the investment (both internal to the

railroads and external to society as a whole)?

--What other legislative actions are necessary or desirable to

enhance the effectiveness of federal financing of fixed plant?

The existence of these unanswered questions requires that some

means of determining the answers be set in motion, and that

sufficient flexibility be built into the program to avoid making

lasting mistakes in the early stages while answers are being

sought.

(xvi)
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I. INTRODUCTION

A. Purpose and Scope of the Study

The purpose of this study is to explore the proposed mechanisms

for injecting federal funds into the rehabilitation of railroad fixed plant--that is,

the roadbed, ballast, ties, signaling systems, yards, and terminals that make

up the nation’s physical rail system. Such proposals are generally motivated

by recognition that the railroads play a vital role in the nation's economy and

that their fixed plant is deteriorating to the extent that it interferes with that

role.

The study accomplishes two specific tasks:

(i) It identifies and describes selected alternative mechanisms

in a way that facilitates comparison among them.

(ii) It identifies key issues arising from the wide range of funding

mechanisms and informally reviews the reactions of major interests to these issues.

In the course of the study, contacts were made with railroad executives, the Association of American Railroads, shippers and labor representatives, spokesmen of competing modes, and the administration. While an attempt

was made to secure unbiased representation (interviews were conducted with

strong and weak railroads, Eastern and other railroads, and so forth), this was

not a rigorous sampling and no quantitative results were derived.

The study is fairly narrow in scope. It accepts as a starting point

the assumption that some federal involvement in rail rehabilitation is desirable,

without evaluating the wisdom of that popularly held assumption. It does not

embrace the related question of whether or to what extent service on the socalled light-density branch lines should be curtailed or subsidized. This question has been widely discussed and analyzed elsewhere. Finally, the study is

descriptive and expository in nature and does not involve analysis or evaluation

of the various points of view expressed. For this reason, the study is not intended to result in a recommendation regarding a preferred alternative.

A recurring observation by railroad industry sources and others

contacted in the course of the study is that federal assistance in rail rehabilitation is not, in itself, enough to achieve a viable rail system. Many of those

who feel that rail should play an expanded role believe that other government

actions are required to complement the beneficial effects of rail rehabilitation.

1
2

Those who desire a contracted level of rail activity argue, as noted below, that

the effect of rehabilitation without other actions would be detrimental to the nation’s rail system in that it would postpone the needed reduction in excess capacity. Among the other rail-oriented actions being discussed are the reform of

rate regulation and regulatory procedures for industry restructuring (for example,

through mergers); the subsidization of light-density branch lines (or the easing

of procedures for their abandonment); the prohibition of discriminatory taxation;

and the encouragement of integrated transportation companies to promote efficient allocation of traffic between modes.

Many of the proposals for federal assistance in rail fixed plant rehabilitation are presented as legislative packages which incorporate one or more

of these related actions. While the current focus on mechanisms for rehabilitation is a valid and useful one, a broader perspective embracing other federal

actions is also necessary.

Although this study was precipitated by the impending congressional

review of the U. S. Railway Association’s final system plan for the Northeast and

Midwest regions, the majority of the proposals for federal involvement in rail

rehabilitation are national in scope; consequently, a national focus was taken in

the research. The establishment of Consolidated Rail Corporation (Conrail),

an entity formed under the Rail Reorganization Act of 1973, is a special case in

the sense that it reflects much more direct government involvement than other

railroads. Conrail is also special in that its funding has implications in terms

of the liability of government, through a claim under the Tucker Act. It is not

a special case, however, except in degree, in terms of the existence of deteriorating fixed plant or the availability of internally and externally generated capital,

without government assistance, for rehabilitation. Where the unique aspects of

Conrail appear to be important, they are pointed out in the balance of this report;

otherwise, the observations made can be assumed to apply to Conrail as well as

to other railroads.

B. Organization of This Report

Following this Introduction, Part II describes and discusses the essential components of the range of alternative mechanisms, including their objectives, scope, funding considerations, and degree of government control. It

does this largely without reference to the proposals themselves, in an attempt

to lay out the fundamental considerations involved. Part III surfaces some additional key issues, or impacts. Part IV describes selected alternative mechanisms, and Part V closes with some general observations arising from the

study effort. An abbreviated format showing the pros and cons of key issues

related to the proposed alternatives for federal involvement in rail plant rehabilitation is appended.
3

II. ESSENTIAL COMPONENTS OF ALTERNATIVE

PROPOSED MECHANISMS

A. Introduction

The primary task of any effort to describe a series of alternative

proposed mechanisms for government assistance in rail rehabilitation is to isolate the essential elements, or components, which account for the differences

among them. Such a description is provided below. Section B discusses the

objectives of the various proposals. Section C explores issues of scope, both

geographic and types of facilities involved. Issues related to government funds

are presented in Section D. These include the amount, timing, source, form,

and cost of funds. Finally, issues of government control are discussed in Section E.

B. Objectives

At a sufficiently high level of generality, all of the proposed mechanisms share the same objective. At such a level, a general articulation of

this shared objective might be:

. . . to enable the nation's rail system to play its appropriate and

necessary role in a balanced transportation system that provides

service in an economical and efficient reamer, taking into account

energy and environmental concerns.

Below this level of generality, two contrasting philosophies emerge.

One is that the railroads’ appropriate role is an expanded one and that government assistance in rehabilitation, necessary because of a variety of historical

causes (including inequitable government treatment of the modes, railroad management incompetence, or whatever), is primarily needed to nudge the industry

to a new threshold of earning power through improved service, reduced costs,

and increasing revenues, whereupon natural market forces will lead it into the

appropriate expanded role. The other basic philosophy is that the primary

cause of the industry’s ills has been the gradual restructuring of the national

economy and the development of competing modes to the point where rail fixed

plant is far in excess of the need, and that rehabilitation of plant should only

be supported to the extent that it moves the industry toward an appropriate, contracted level of service which enables the industry to achieve viability at a new

and lower equilibrium point.

As might be expected, these two objectives produce rather different proposals for federal involvement in rail rehabilitation. Proponents
4

of the latter view, favoring a contracted fixed plant, emphasize limiting the

amount of dollars flowing into the rail system and maximizing control over what

plant gets rehabilitated. In fact, proponents of this view within the administration argue that large amounts of federal support are not only an inefficient use

of public resources, but they would also have the perverse effect of enabling

the industry, in its current and inappropriate form, to survive longer and resist

movement toward the new and lower equilibrium.

Proponents of the more optimistic view favor mechanisms which

maximize the dollars flowing into rail plant, prefer “softer" forms of federal

assistance (that is, less insistence on repayment by the railroads) in order to

improve the industry viability, and are less concerned with exercising control

over what gets rehabilitated.

Clearly, the views of most concerned individuals are more complex

and less “black and white" than those painted above. Nevertheless, these general differences in perspective do exist and do influence the assessment of

mechanisms for federal support, to an extent that policymakers on this issue

are required to identify their own view of the future level of rail’s place in the

nation’s transportation system.

One objective which is a valid and important consideration is that of

promoting employment to counter the effects of the current recession. This

study deals with long-range, large-scale programs for rail rehabilitation. All

of the proposals presented, regardless of the funding mechanisms involved,

will have a positive impact on employment. An examination of their specific

impacts, however, is beyond the scope of this study.

c. Scope

Two dimensions of scope have surfaced in the course of this review:

geographic coverage and the types of facilities for which rehabilitation should

be supported.

1. Geographic

This component revolves around the question of whether the rail

reorganization problems which rehabilitation assistance addresses are national

or are limited to the Northeast and Midwest railroads. With the exception of

the U.S. Railway Association, whose mandate from Congress was specifically

limited, all proposals address the problem as a national one. This is supported

by informed observers representing every major interest who feel that although

the priorities may lie in the Northeast, the existence of deteriorating fixed plant

and the inability to rehabilitate it without federal assistance is a nationwide
5

problem. A minority of sources within the industry feel that some railroad

companies have the long-term viability to maintain their fixed plant. The clear

majority feel that these seemingly fortunate roads are merely behind the rest in

terms of the inevitable appearance of inadequate long-range earning power.

Exhibit I shows deferred maintenance and capital improvement projects, and indicators of car and track conditions for major railroads. Although

of only general value because of imprecise measures of deferred maintenance

and deferred capital projects, the exhibit supports the predominant view that

rail fixed-plant deterioration is a national concern.

Despite the national scope of the problem, the current differences

among regions and individual roads in terms of plant condition and financial

strength suggest that federal involvement, either explicitly or through the administrative process, provide for the establishment of priorities for assistance

and perhaps some flexibility in the softness (that is, repayment requirements)

of the financial assistance provided.

.

2. Facility Types

Some of the proposals for rehabilitation focus on high-density mainlines; others do not limit federal assistance to any specific type of fixed plant.

Two areas of agreement emerge from discussions with industry and shipper

spokesmen. One is that although service-oriented priorities may favor the

high-density mainlines, secondary mainlines are also important, and in the

process of deferred maintenance tend to suffer before the higher usage lines.

They, therefore, should not be excluded from any program of rehabilitation assistance. The other area of agreement is that the rehabilitation or modernization of yards and terminals may have more impact in terms of service improvement and reduction in railroad costs than that of line-haul track. A caveat to

this is the view raised by one senior industry official that because of the complexity of the system and institutional constraints, such as local labor agreements, the benefits of yard and terminal improvements are absorbed into the

system very slowly.

D. Government Funds

Clearly, the use of government funds is an essential component of

proposals to assist in the rehabilitation of rail plant. It is not, however, a

simplistic question of a lot or a little, or cheap versus expensive, which sheds

light on this aspect of rehabilitation. Five aspects of hinds have been chosen

for discussion here. They are (i) the amount of federal funds; (ii) the timing of

expenditures; (iii) the source of federal funds (for example, general revenues

versus specific taxes); (iv) the form in which funds are injected (such as debt,

equity, or grants); and (v) the cost (per $ billion of rehabilitation).
6

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1. Amount

Current proposals for federal assistance in rail rehabilitation call

for sums of money ranging from $2 billion or less to more than $12 billion.

But what is the real requirement?

A primary determinant of the answer to this question lies in the objectives which prompt federal involvement, In terms of the underlying philosophies discussed above, someone whose objective is to use federal assistance to

contract the rail system will, of course, come up with a different requirement

than someone whose objective is to expand service from its current level. Looking first at the contracted system, desired by those who feel that excess capacity

is at the root of the industry problem, the analysis which would answer the question of ‘how much contraction" has simply not been done. On the low side,

therefore, there really is no valid estimate of the requirement. On the high

side, some measures of the requirement for fixed plant to support expanded service nationwide his been provided by the Pennsylvania Office of State Planning

and Development:

Development:

Rehabilitation of Roads and Track $ 6.9 billion

Electrification 3.2 billion

Modernization and Expansion of

Roadway and Structures 1.9 billion

Modernization of Yards and

Terminals .9 billion

Total $12.9 billion

Efforts to narrow the range from that of $2 to $13 billion run head

on into many difficult questions. For example:

● To what standard do you rehabilitate? Possible standards

include:

--Some historic level of utility or speed. This has some

nostalgia value, but reflects past traffic patterns which

may no longer prevail.

1 A United States Rail Trust Fund: Prescription for Modern Rail Transportation,

December 1974.

593-078 0 - 75 - 4
8

--Specified mile per hour or Federal Railroad Administration

track standards related to traffic flows. This appears workable if flexibility is provided to adapt to specific local conditions. For example, freight service at 60 miles per hour

on some mainlines in mountainous areas would require relocation at enormous financial and environmental expense,

and is therefore not warranted.

--Rate of return on investment. This is a rational approach,

but requires a line-by-line analysis of the costs of rehabilitation or modernization and the estimated returns in terms

of reduced costs and increased revenues resulting from improved service. To accomplish this in a consistent, sitespecific manner is an enormous task that would take several

years.

● How do you select projects? If the data were available for a

project-by-project analysis of the rate of return, the question

of a cutoff point below which one would not invest remains.

Any investment of federal funds with a return above zero will

improve the economic viability of the railroads somewhat . . .

but is it a valid investment from the public policy perspective?

The standard 10 percent opportunity cost of federal funds can

be used as a cutoff point. Currently, some railroads with

limited capital use a cutoff point of 25 percent return for discretionary capital improvement projects. No clear picture

is available of the impact of a cutoff on federal spending.

● What kinds of returns will be considered? Virtually every

public statement favoring federal involvement in rail rehabilitation mentions the energy, safety, and environmental benefits

of rail freight transportation. Presumably, these benefits

are among the returns on a federal investment, but no one appears to have measured them. The tools to do so are available;

it is possible to estimate, for example, that a shift of one billion ton-miles of long-haul traffic from truck (three-tenths of

1 percent of 1970 truck traffic) to an efficient rail system will

save roughly 11 million gallons of diesel fuel. Many individual

1

Office of Management and Budget, Circular A-94, revised 27 March 1972.

2

Methodology for Determination of Environmental and Energy Consumption

Impacts, Harbridge House, Inc., November 1974.
9

studies have addressed pieces of the problem. No one, however, has related this kind of benefit to the rehabilitation of

rail fixed plant. Such an analysis is far outside the scope of

this study, but would seem to be an indisputably valid input

into the estimation of the amount of rehabilitation which represents a requirement for federal funding.

● What private capital is available to meet the total requirement

for rail rehabilitation? During the period from 1961 to 1970,

the Class I railroads devoted approximately $3.25 billion to

capital expenditures for road and structures. During the

same period they “disinfested” to the extent of about $4.5

billion paid out in cash dividends. What portion of these sums

might be available for further investment in fixed plant in partnership with the federal government ? While many of the proposed mechanisms for federal rehabilitation imply the availability of private capital (for example, loan guarantees,

matching grants), no analysis of the quantity or distribution

of this private capital in relation to needs has been done.

This facet of the problem has a direct and significant bearing

on the requirement for federal funds.

The thrust of this discussion of the amount of the requirement for

rehabilitation assistance leads to the somewhat disconcerting conclusion that

the answers are not currently available. Several observers, however, feel that

this need not bar an immediate attack on the problem of deteriorated rights-ofway, provided:

(i) That a mechanism is established to secure the answers to

these questions, and that any firm commitment to a total

dollar requirement is deferred until the answers are at hand.

(ii) That initial government expenditures on the rehabilitation of

rail fixed plant are made through a mechanism which ensures

that only high-priority, high-return projects are undertaken

before the answers are found. Those projects will probably

be defensive in nature (that is, situations where significant

deterioration has occurred on lines which are clearly a part

of a stringently rationalized national rail system).

2. Timing

The consensus among the sources contacted during this study is

that the need for federal rehabilitation assistance is now. They point out that
10

inflation is increasing the cost of rehabilitation, as is the continuing deterioration of the fixed plant. There is also wide agreement that additional railroad

bankruptcies of significant import will occur if something is not done quickly.

As noted above, the need to start quickly on the higher priority projects does

not necessarily conflict with the need to assess the true extent of the total need;

the two can be done simultaneously.

Advocates of the "go-slow" approach feel that it is dangerous to begin without an assessment of the whole need, and that the danger of further rail

bankruptcies, though real, does not outweigh the advantage of a more cautious

approach. Further, some feel that the financial crises of the railroads which

might result from the deferral of federal assistance would facilitate the needed

rationalization of the rail system.

3* Source

Five main sources of funds are discussed in the various proposals

for federal involvement in rail rehabilitation. They are general revenues; rail

freight surcharges; freight surcharge, all modes; fuel taxes; and what might

be called “no-cost" sources. Some discussion of each of these and their associated pros and cons as seen by informed sources follows.

a. General revenues. Justification for the use of general revenues for assistance in rail rehabilitation has not been formally articulated. However, it would include the assertion that the railroads are so embedded in the

national economy that their well-being is of general concern. Indeed, the economic impacts of a collapse of rail service would reach every citizen and every

corporation in the country. In addition, the energy and environmental advantages

of rail freight transportation are shared by all. The main disadvantage of appropriations out of general revenues as a funding source is that this is a highly visible source, it is viewed as “expensive” compared to other sources, and it is

perhaps too uncertain for the planning of a long-range rehabilitation program.

b. Rail freight surcharge. This source, proposed in conjunction

with a trust fund mechanism, is essentially a user charge and has the advantage

of placing the funding burden upon those who most directly benefit from improved

rail service: the shippers. Proponents of the rail freight surcharge point out

that it provides a secure source of funds, that it is not a drain on the public treasury, and that it allows accelerating the timing of rehabilitation by issuing bonds

backed by income from the surcharge.

Those opposed to the surcharge, including the bulk of the rail industry executives contacted, argue that it does nothing for the industry because it

“gives with one hand while taking away with the other, ” and that it would cause
11

further diversion of the freight to competitive modes because of the added cost

of rail. Interestingly, from the perspective of the big shippers, at least, the

freight surcharge is not viewed as unthinkable, perhaps because other proposals

such as fuel taxes (discussed below) would, on an overall basis, cost the shippers

more.

c. Freight surcharge, all modes. As opposed to the rail freight

surcharge, a tax on all intercity freight has several advantages. It is a user

charge across all shippers which preserves the current intermodal competitive

situation. When used for rail rehabilitation, it addresses the historical inequity,

perceived by the railroads, among modes. For a given revenue requirement,

the all-modes freight surcharge can be at a much lower level than that applied

to rail waybills alone.

Proponents of the freight surcharge, all modes, say that although

the surcharge will be passed onto consumers, its effect will be so diffuse that

it will not be burdensome; further, the consumer will simultaneously be gaining

from the efficiencies generated.

Those opposed to the freight surcharge argue that it is inequitable

to assess other modes to assist the railroads and that it presents difficult and

expensive problems of administration, particularly in its application to public

carriage.

d. Fuel taxes. Several variants of a fuel tax are being widely

discussed as sources for public support of rail rehabilitation. They share some

major advantages:

● By discouraging fuel consumption, and particularly petroleum

products, they serve a national purpose quite unrelated to

railroads. In fact, fuel taxes have been proposed as conservation incentives independently of railroad problems.

● By bearing more heavily on trucks than on railroads, fuel

taxes, to some extent, redress the perceived imbalance in

historical government treatment of rail’s major competitors.

Another perspective on the same point is that fuel taxes would

tend to divert traffic toward the rails (rather than away, as

with the rail freight surcharge) because fuel is a proportionately

smaller component of rail cost than of truck cost.

● Fuel taxes are broadly enough based taxes, particularly those

including a gasoline tax, to raise sufficient money to fund even

a very aggressive rehabilitation program while representing

only a small burden on any single economic entity.
12

● Fuels and fuel uses covered by the taxes can be varied, as

can the amount of the taxes, to fine tune the overall effect to

reflect a variety of objectives, estimates of need, and political

realities.

Against these advantages is the inevitable feeling of those who are

taxed that the tax is an inequitable burden (particularly when it is being used to

assist a competing mode), as well as the fear that a special tax creates a form

of revenue which is typically easier to initiate than to terminate and which may

therefore outlast the need for which it is created.

In terms of specific proposals, the major choices appear to be in

the breadth of the fuel tax and in the amount. Three major alternatives in terms

of breadth are:

(i) All surface transportation modes (except bus), all fuels.

(ii) Freight modes, all fuels.

(iii) Freight modes, diesel and residual fuels only.

An informal analysis of these alternatives prepared by the Rail Services Planning Office of the ICC demonstrates two important points (see Exhibit

II). One is that as the tax base is broadened to include non-diesel trucks, and

then to include private automobiles, the cents per gallon tax required to provide

about the same annual revenues decreases markedly (from 15¢ to 6¢ to 2¢). The

second effect of broadening the tax base is to lower the share borne by freight

modes (except trucks, whose share increases when the tax is extended to nondiesel freight fuels, but then decreases if the tax is applied to private passenger

vehicles).

Rail industry, shipper, and government sources interviewed in the

course of this study did not feel strongly about alternative fuel tax proposals,

but generally preferred a broader based tax as being easier to swallow because

of the lower level of tax required.

The second major choice regarding a fuel tax relates to the amount

raised, and is a choice between a larger amount for a shorter period and a

lesser amount for a longer period. The analysis in Exhibit 11 reflects an approximate revenue of $2.3 billion per year, which could provide over $11 billion

of federal money for rehabilitation in five years. However, through a trust fund

or other mechanism, the same amount of rehabilitation money could be raised

with a much lower tax extending over a 20- or 30-year time span. For example,

a 3/4 cent per gallon tax for 25 years could support the same expenditures as

the 2 cents per gallon tax in Exhibit II (assuming an 8 percent interest and discount rate).
13

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14

e . “No-cost” sources. This phrase refers to several proposed

mechanisms for federal involvement in rail plant rehabilitation where the funding source is actually railroad earnings. Examples include proposals for federal

guarantee of railroad loans and for federal takeover of existing railroad debt secured by fixed plant.

The main advantage of a funding source such as a loan guarantee is

that it is “cheap” in terms of government expenditures. Proponents, who hold

that the industry needs contraction of its physical plant, argue that loan guarantees are all that are needed, and that more generous funding programs would

only defer the inevitable contraction to the detriment of the national interest.

The main disadvantage is also that such a solution is “cheap. “ Opponents within and without the rail industry point out that a least a part of the

problem is that railroad earnings are inadequate and that a solution which relies

heavily on those earnings as a source of funds is no solution at all. Further,

they feel that a guaranteed loan program which requires the ability to repay the

loan puts money where it is needed least (that is, into the healthier roads). Observers who hold the view that the industry needs to be turned around to fill an

expanded role in the nation’s transportation system almost unanimously feel, as

the president of one financially weak railroad put it, that ‘there is no cheap

solution."

Of course, a loan guarantee does represent a potential government

expenditure, due in the event of default.

the expenditure are uncertain, depending

gram is administered.

4. Form

The likelihood, timing, and amount of

largely on the way in which such a proThe form in which government funds are introduced into the rehabilitation of rail fixed plant has wide implications. Alternative forms proposed

range from ownership (that is, full or partial nationalization); through loan guarantees, loans of varying degrees of hardness (that is, low interest, deferred

interest, or deferred principal repayment); to matching grants or outright

grants. Three major choices involving the form of funding are discussed below.

They are ownership versus non-ownership, soft versus hard, and through a

trust fund versus direct assistance.

a. Ownership versus non-ownership. This is clearly a heavyweight issue. It surfaces through several serious proposals for legislative action which involve federal ownership of all or some of the nation’s rail fixed

plant. These proposals would create a situation analogous to that of the highways and waterways, with government ownership and maintenance of the fixed
15

plant, and of the airways with public rights-of-way and government control.

The term ‘f Confab” (for Consolidated Facilities Corporation) was coined within

USRA to identify a plan (later rejected by USRA) in which the government acquired ownership of the rights-of-way of Conrail, Full nationalization, in which

the government not only owns the fixed plant but operates the rail service, is not

currently represented by any fully articulated proposals and, therefore, will not

be discussed here.

Proponents of Confac solutions on a nationwide scale point to several

major advantages (many of those who favor a Confac solution do so reluctantly

because they do not see workable alternative solutions):

● It avoids criticism of windfall profits or ‘bailoutf" which result from the infusion of public funds into the rehabilitation of

privately owned assets.

● It affords the opportunity to centrally plan and implement a

truly national rail system.

● It frees the private railroads of fixed debt and potentially

converts them to viable operating companies with primarily

variable costs.

[Note: Many observers feel that viability can only be enhanced

if user charges are non-compensatory (that is, if the government does not attempt to recoup the full cost of ownership and

maintenance, or even the cost of maintenance alone if it reflects an expanded maintenance program). ]

● It makes it easier to plan and provide a national passenger

service network.

Against this array of advantages are a list of perceived (and often

strongly felt) disadvantages:

● Confac, because of the absence of a profit motive in public

enterprise, or ‘Bureaucracy,” or “politicization,” will be

an inefficient way to own, rehabilitate, and maintain the

fixed plant. (Amtrak and the Post Office are most often mentioned as examples of this phenomenon. )

● Related to the above, foreign nationalized railroads are described as leaving huge deficits and high-cost service. [A

counterpoint is that, in many cases, these public railroads

593.07!3 c1 - 75 - 5
16

are deliberately seeking public benefits (for example, better

passenger service, employment, energy, and environmental

improvements) and, consequently, deliberately incur losses. ]

● The separation of operations from maintenance and ownership

of fixed plant will create practical problems in train control,

scheduling, use of terminals, and so forth, which will increase

the cost of rail service.

● The ‘public way concept” is felt to be very threatening among

large segments of the industry. The concept that “anyone can

operate trains over the government right-of-way” may lead to

cream-skimming competition by shippers or new entrant car -

riers. [On the other hand, public ownership need not mean free

entry. Airways and communication bands are examples of the

regulated use of public facilities. In addition, several legis–

lative proposals for public ownership make specific provision

for protection of the service rights of existing rail carriers. ]

● The purchase of all rail fixed plant will be very expensive

(estimates within the industry range from $9 billion to $60

billion).

● If the Confac proposal is a voluntary exchange of real property

for relief from ownership expense, it will not be feasible un–

less user charges are much less than compensatory, because

current bondholders will not release their security. A user

charge which is much less than compensatory, of course,

will also result in a high public cost overall.

● A final argument against Confac is that it is unnecessary:

there are alternatives (of which rehabilitation is only a part)

which can create a viable, privately owned national rail system.

b. Soft versus hard. This imprecise terminology is used to indi–

dicate the degree to which a proposed form of funding represents a net infusion

of public dollars into the railroad industry. The range of possibilities is almost

limitless. A sampling, arranged in descending order of ‘hardness, ” might

include:

(i) Straight debt, full repayment, at market interest rates.

(ii) Same as (i) but with government guarantee; therefore, less

than market interest rates.
17

(iii) Same as (ii) but with principal and/or interest payment de–

ferred, but accruing.

(iv) Same as (iii) but with interest accruing only if earnings permit.

(v) Same as (iv) but interest waived for some period of time.

(Note: Any of the above can be made softer by extending the time

period of deferral or repayment. )

(vi) Confac with non–compensatory user charges.

(vii) Matching grants, in which the railroad funds about 50 percent

of the project and receives a grant with no financial strings

attached (except in the event of sale or taking of the property)

for the other 50 percent.

(viii) Outright, 100 percent grants.

This list could be extended for pages with income preference bonds,

debentures, preferred stock, all with the fine tuning of terms and conditions.

As it stands, however, it is sufficient to illustrate one key point: that there is

a line, probably between (v) and (vi), above which no real enhancement of the

economic viability of the rail industry will be achieved. This is regarded as

true, and of critical importance by most observers of the rail scene. (The as–

sertion ignores absurd extremes such as a 200-year” loan with principal repay–

ment deferred and interest waived for the first 100 years. ) This point surfaced

in conversations with rail executives, shipper representatives, state and re–

gional transportation officials, labor, and some members of the administration.

It was expressed in many ways:

‘

f There is no solution unless the Congress is willing to bite the bul–

let and spend real money. "

"If you spend pennies, it’s pennies down a rat hole. "

"No scheme . . . will be of any practical help to the railroad unless

it produces a substantial direct cash subsidy free of future repayment obligations. ”

Even those who feel that the economic viability of the current rail–

road industry is not a primary objective, or those who point out that even large

grants for rail rehabilitation are not enough to achieve viability, generally agree

with the assertion that the economic viability of the railroad industry cannot be

enhanced with public funds in the form of debt.
18

Two other key points arise from discussions of the softness of government funding. One is that although the harder forms of assistance (for ex–

ample, low–interest loans) may be attractive to the sounder railroads, they do

not get the money where it is needed most, into the fixed plant of the weaker

railroads. A second point is that there are weaker and stronger railroads,

and rehabilitation projects with higher and lower returns, which suggests to

some observers that different forms of government assistance may be appro–

priate for different railroads or for different projects (for example, low–interest

loans to strong roads, matching grants to less strong roads, and 100 percent

grants to weak roads). Alternatively, debt may be appropriate for a project

which provides a high return to the railroad, while defensive projects (such as

rebuilding a bridge to enable a weak road to keep a line in service) may be more

usefully funded with a very soft form of assistance.

A logical conclusion from the last two points is that some flexibility

in terms of the form of funding might be a criterion for the evaluation of funding

mechanisms. That flexibility can, of course, be explicitly legislated or left in

the hands of the organization which administers the assistance program.

c . Through a trust fund versus direct assistance. One aspect of

the form in which public funds are used to rehabilitate rail plant is the structure

established to administer such a program. While this study does not review the

appropriate roles of the DOT, ICC, USRA, Congress, and so forth, one issue

deserves comment, and that is whether financial assistance (loans or grants)

should be provided through a trust fund or similar device, or directly.

A trust fund is suggested in several of the proposals under review.

One advantage of such a mechanism is that it facilitates the acceleration of the

timing of the funding (see Section D2, above); that is, a trust fund where the

income is a small but secure stream of payments (from a tax or a surcharge)

can issue bonds in order to make large grants or loans in the early years from

the proceeds, and use the continuing income stream to repay the bonds over the

longer term. Through such a mechanism, as noted above, a 3/4 cent per gallon

fuel tax over a 25-year span could be used to pay for a $2.3 billion per year rehabilitation program over the first five years. The same program with direct

funding would require a 2 cent per gallon tax, although for only five years.

A second major advantage of a trust fund approach is that it is a

fairly secure form of funding and is not subject to changing political or economic conditions. This is considered a disadvantage by some, because the existence of an income stream creates a tendency to spend, a tendency which may

persist even after events have reduced or invalidated the need.
19

For the purposes of this study we have not discussed the issue of an

integrated trust fund versus a separate rail trust fund because the impacts under

review are the same in both cases. The issue, however, may be the subject of

much public debate.

5. cost

The public cost of assistance in the rehabilitation of rail fixed plant

has two main determinants. One is the amount of rehabilitation required or provided, as discussed above. The other, the subject of this section of the report,

is related to the form of the particular program under review. In an attempt to

isolate these costs, the cost per $ billion of rehabilitation is used here as a

measure.

The five cost elements discussed below are commitment, risk, administrative, acquisition, and financing. The basis for subjective estimates

of these cost elements is outlined in Exhibit III.

a. Commitment. This cost relates to planned public expenditures

per $ billion of rehabilitation. If the form of assistance is a direct 100 percent

grant, the cost of that public commitment is $1 billion per $ billion of rehabilitation. A 50 percent matching grant program has a commitment cost of $500

million. A loan which the government expects to be repaid in full, bearing interest at a rate which equals the governments cost of capital, involves no commitment cost whatsoever. A soft loan, which is expected to be repaid but at

an interest rate below the government cost of capital, does have a commitment

cost. That cost is related to the difference between the two interest rates.

For example:

If the government, with a cost of capital of 10 percent, loans $1

million to a railroad, to be repaid at the end of 10 years at an interest rate of 2 percent payable annually, the present value of the

interest and principal payments, discounted at 10 percent is

$508,900. The commitment cost is $1 million less the $508,900,

or $491, 100.

Alternatively, the same loan for a 20-year period has a present

value of $321, 800, for a commitment cost of $678,200.

Finally, a 10-year loan at 2 percent, but with the principal re- .

paid in 10 equal annual installments, has a commitment cost of

$309,800.
20

EXHIBIT III

BASIS FOR SUBJECTIVE ESTIMATES OF COST ELEMENTS

Commitment Cost - Calculated if proposal provides sufficient data.

Risk Cost - Dependent on extent of loans, and “softness. "

No loans None

soft loans plus grants Low

Soft loans only Medium

Hard loans High

These costs are highly dependent on the actual administration of a program,

and thus are difficult to quantify.

Administrative Cost

Collection - Dependent on the source of funds.

General revenues or an increase in

an existing tax

New tax

New tax including complexity, such as tax on the

value of private carriage services

Distribution - Dependent on degree of planning and

control required.

No central planning

Limited central planning

Full central planning, and designation of

national system

Ownership

Acquisition Cost

Low

Medium

High

Low

Medium

High

Very High

Very High in all cases involving ownership. (See text, Part II. )
21

These examples illustrate two points about the commitment cost of

soft loans. One is that a longer term loan has a higher cost than a shorter term

loan. The second is that for a given term, delayed or deferred repayment increases the cost, which is also increased by a lower interest rate. In general,

it is interesting to note that the cost of a soft loan can approach that of an outright grant as the term of the loan, the repayment schedule, and the interest

rate become more liberal.

Commitment costs are not affected by financing mechanisms such

as a trust fund.

Part IV of this report, where specific proposals are discussed,

presents a dollar estimate of the commitment cost per $ billion of rehabilitation associated with each proposal.

b. Risk. While commitment cost represents planned benefits

conferred on the rail industry, risk costs are the result of unplanned failure to

repay. With any loan, the lender assumes that the risk may be partially offset,

for example, by the value of the property pledged as security for the loan. One

function of the private capital markets is to assess the degree of risk present in

a loan and reflect it in the interest rate charged.

For the purposes of this study, perhaps the best measure of the risk

cost is the difference between the cost of capital and the interest rate charged

by private money markets for the same loan. Thus, if the government cost of

capital is 10 percent (at which rate the govermnent would theoretically be willing to make risk-free loans), and the railroad would be forced to pay 15 percent

interest on private loans, the difference would be a reflection of the risk assumed by the government.

For example, a $1 million government loan at 10 percent interest

to a railroad whose riskiness is reflected in a private capital interest rate of

15 percent, for a 10-year period with repayment at the end of the 10 years,

would "cost" the government $251, 100 in risk-associated cost.

A soft loan may bear both risk cost and commitment costs. For

example, the loan in the example above, if made at 2 percent rather than at

10 percent interest, would carry a $508,900 commitment cost and an additional

$251,100 risk cost.

The above discussion and computation is a very much oversimplified

treatment of some very complex concepts. The resulting cost estimates, however, are believed to be useful, if rough, approximations of the costs involved.
22

In the discussion of specific proposals, risk cost is presented as

High, Medium, or LOW. Although these costs may be substantial, they are very

difficult to measure and are primarily dependent on the way in which the program is administered.

c. Administrative. Administrative costs are the public expenditures required to administer the collection of income to both support a rehabilitation program and administer the distribution of funds, including planning, the

review process for applications, and monitoring of the results.

The collection and distribution of administrative cost is estimated

in Part IV as High, Medium, or Low. The estimate of collection cost is based

on the extent to which new revenue sources are tapped, as well as their complexity. For example, funds from general revenues have a low administrative

collection cost because little or no incremental administration is involved. On

the other hand, a new surcharge on the value of freight services has a high administrative cost because of the need for an organization to establish procedures,

arbitrate disagreements, and monitor compliance.

Distribution costs associated with the alternative proposals vary,

primarily according to the degree of central planning and rationalization expected to accompany rehabilitation funding. The exception is a proposal involving government ownership of rights-of-way. The notation used in this case is

Very High, to reflect the cost of the extensive organization that would be established to administer such a program.

d. Acquisition. The cost of acquisition of rail rights-of-way,

associated only with those proposals which involve government ownership, is

noted in Part IV as being Very High. This is a judgment of the study team,

based on its discussions with industry sources and a line of reasoning whereby

acquisition is either through purchase/condemnation or voluntary dedication

of rail properties by the owners and creditors. The purchase/condemnation

price tag for the national rail system is not known, but industry estimates are

in the neighborhood of $9 billion (net salvage value) to more than $60 billion

(net reproduction value). Allowing for some possible self-interest reflected

in the estimates, that is rather expensive. If voluntary dedication is the means

of acquisition, it will have to be through clearly and significantly non-compensatory user fees which make the transaction attractive to rail owners and creditors

(which would be a large and continuing cost to the government).

e. Financing. In the context of this study the cost of financing

is an elusive concept relating to the cost of transferring a long, small stream

of receipts (such as those from a rail freight surcharge) into a shorter, larger

stream of rehabilitation expenditures. The mechanism proposed for doing this
23

is most often a trust fund which can issue bonds whose proceeds finance the rehabilitation program, and which are repaid over, say, a 20-year period from

tax receipts.

Such a mechanism can be described as expensive, because it results

in large expenditures over time for interest charges on the money borrowed.

It can also be described as cheap, because it requires a much smaller (although

longer lasting) tax rate to support a given rehabilitation program than that required by a direct funding mechanism. Actually, however, it is neither.

If one views the government as a large bank, with the ability to

borrow at 10 percent (cost of capital) and a large range of spending projects

available which return 10 percent in public benefits, then the trust fund mechanism has no relevant financing cost. In this example the government would be

financially indifferent to the choice of direct financing or a trust fund.

The picture presented above is not clearly and precisely true, however. The cost of capital and the return on public spending are extremely complex, both conceptually and in terms of practical problems of measurement.

For example, the cost of capital does not remain constant in time or over an

infinite range of amounts. At times, public funds are spent on programs with

low returns; at other times, high-return projects are rejected. Moreover,

many government programs have returns which are not measured quantitatively

at all. The essential point remains, however, that the trust fund versus direct

funding choice should not be made on the grounds of financing cost. It is essentially a public policy choice between two different but equal-cost approaches to

the same problem. Appropriate considerations include the need for secure funding of a major capital spending program, the danger of ‘‘too secure’ funding in

the view of the uncertainties surrounding the need, and perhaps the matching of

the time period over which benefits from the spending are expected to be received.

E. Government Control .

In the course of this study it became increasingly clear that a central issue raised by the proposed mechanisms for federal funding of rail rehabilitation is that of control. This is not to suggest a simple equation such as

“the more control the government gets for its money, the better the deal. ” It

is a complex issue, raising emotional responses based on philosophical beliefs,

and involving degrees and forms of control. None of the study sources indicated

that the government should not attempt to control the spending of public funds at

all, but all were concerned with the extent and nature of the control proposed.

The discussion below centers on three main areas of control: route structure,

industry structure, and operations. A final paragraph comments on other aspects of the control issue.

593-o78 0- 75 - 6
24

1. Route Structure

This refers to the question of "who decides what lines get rehabilitated," which has strong implications for the future route structure of the rail

system. Proposed federal control over route decisions accompanying alternative funding programs ranges from total control in the case of Confac solutions,

to very tight control in some non-ownership proposals, to fairly loose control.

The minimum degree of control still consists of an approval process which

would presumably prevent gold plating, or clearly uneconomic duplication, and

would provide government monitoring to ensure that funds are spent as planned.

The basic issue here is whether the government, in return for financial assistance, should be able to rationalize the rail system by reducing duplicate mainline capacity. To a large extent, feelings on this question reflect the

split in basic philosophies mentioned above. Those who feel that rail activity

should be expanded do not see long-run excess capacity as much of a problem,

and thus are not desirous of tight federal control over route decisions; those

who feel that contraction is in order see any federal financing as an opportunity

for a federally planned rationalization of the system. Many of the former group,

who do not favor a forced government rationalization, would welcome government assistance in the analysis and planning required for a more modest, and

voluntary, rationalization process.

Those who argue that free ‘market forces, acting through private

railroad management and investor decisions, are preferable to centralized planning, have two counterarguments to contend with. One is that market forces

are not free at all because of the extensive regulation of transportation. The

other is that considerations of public benefits in terms of energy consumption

and environment are not reflected in private sector decisions and require a

central, governmental role in the rationalization process.

Two problems surface repeatedly in discussions of government control over route decisions. One is that where duplicate mainline capacity exists,

the choice of one or two routes as the high-density throughlines, and their rehabilitation to high standards, decreases the value of the other routes. This

can be “made up to” the losing railroads through rehabilitation of their lines

elsewhere or by the granting of operating rights, but it remains a very thorny

problem in the eyes of many railroads and others.

A second problem is that rationalization, although it may fulfill its

proponents!” hopes of better rail service overall, may result in worse rail service for shippers served by current mainlines not selected as through routes.

Industry sources point out, however, that this problem reflects a widely held

misconception. They note that quality of service on a route is not related to

the density of through traffic but to the frequency of local service, which is

likely to improve if through service is removed from a route.
25

2. Industry Structure

Government control over the corporate structure of the railroad industry, such as required mergers or the transfer of property as a condition of

financial help, is closely related to the issue of control over routes but deserving of special comment. Most of the funding proposals do not envisage such control, but some provide for it explicitly.

While the consensus of views on the control of route structure (other

than those of the administration) reflect an uneasy recognition that there is a government role in that decision process, most sources interviewed were opposed

to government control of the corporate structure of the industry. The opposition

came from railroads, shippers, labor, and others, despite the fact that many of

them felt that a more desirable industry structure could be achieved. The majority expressed the view that government control was not necessary (and, there

fore, inadvisable), but that government facilitation, through relief from burdensome regulation of structural changes and other means, was an appropriate role.

The Rock Island merger case was frequently mentioned as an example of government frustration of private sector attempts to move toward a more rational

industry structure.

3. Operations

Government control of, or involvement in, railroad operations is

inherent in the funding mechanisms which include federal ownership of rightsof-way. It is ‘also inherent in government control of rehabilitation, since track

work must be coordinated closely with train operations. This aspect of control

was troublesome to almost all sources, since they felt that the railroads know

railroad operations and the government does not, and bureaucracy and politics

can potentially result in inefficient operations. The clear consensus

is important for government involvement in railroad operations to be

4. Other Control Aspects

Other aspects of government control related to the public

rail rehabilitation include the control of railroad fund flows for other

was that it

minimized.

funding of

than rehabilitation, such as future deferred maintenance, dividends, or non-transportation

investment, and the more general control of railroad management expenditures.

By far the most important of these is the control of major railroad

fund flows. The essence of this issue lies in the question: If the government

provides financial assistance to the railroads, should it attempt to prevent disinvestment by railroad investors in the form of future deferred maintenance,

cash dividends, or reinvestment of railroad earnings in nontransportation
26

ventures ?" This question does not appear to have been extensively considered,

but some general observations were made in the course of the study:

● Some control is probably necessary to prevent windfall profits

to investors or to prevent the waste of public money through

failure to maintain federally rehabilitated plant.

Such controls are difficult to legislate, and as one industry

representative put it, "They will keep the accountants and

lawyers busy searching for ways to circumvent them. "

● Perhaps the best way to control disinvestment is for the government to take the right steps, including but not limited to

rehabilitation assistance, to improve the economic viability

of the railroad industry to the extent that it again becomes an

attractive investment for private capital.

A secondary aspect of the control issue is the concern expressed

by at least one source interviewed that the government should try to prevent

exorbitant salaries or luxurious perquisites for the management of assisted

railroads. One response to this was the fear that clumsy bureaucratic attempts

to interfere with railroad management and investor prerogatives would compound the problem of attracting competent management to the industry. No

resolution of this issue has been forthcoming and it is not generally regarded

as important.
27

III. POTENTIAL IMPACTS OF PROPOSED MECHANISMS

A. Introduction

Some of the potential impacts of various federally assisted rail rehabilitation proposals are categorized and described below. There is no set of

impacts which is universally viewed as desirable. This is not surprising, how–

ever, since those persons who are proposing the different alternatives do not

even agree on the objectives to be achieved. The potential impacts are inter–

related in complex ways, and any attempt to isolate them for individual examina–

tion risks oversimplification. It is all of these impacts which determine whether

a specific form of public investment in rail plant is “good” or “bad” public policy.

The impacts selected for brief discussion here relate to the economic

viability of the railroads, the quality and cost of rail service, the competitive

position of rail service versus other modes, and the nature of intramodal rail–

road competition.

B. Economic Viability

The impact of federal assistance on the viability of the rail industry

is of unquestionable importance. For many, enhancement of rail profitability is

the objective of such assistance. Even those persons whose objective is more in

terms of improved service, or more efficient allocation of energy and environ–

mental resources, regard the impact of public investment in rights-of-way on

rail viability as the determinant of whether the nation moves toward or away

from a nationalized rail system.

Looking first at those forms of assistance which do not involve ownership, there is a general assumption that federal involvement will enhance the

viability of the railroad companies. The extent to which this is true is largely

determined by the amount of money injected into each railroad’s system, the

cost of that money to the railroad, and the return on investment for those rehabilitation projects. (Considerations of amount and cost--soft versus hard forms

of assistance--were discussed above. ) The return on railroad rehabilitation

projects is the subject of much debate, and no consensus emerges as to whether

it is high or low. The question is of critical importance, however. For example,

if the railroads are to spend money costing 5 percent on projects returning 4 percent, their viability is not enhanced. On the other hand, providing money at a

cost of 5 percent to railroads with rehabilitation investment opportunities returning 20 percent will clearly have a positive impact on their economic viability.

(More generally, if returns are low it is difficult to justify public investment,
even

ergy

total

28

if made at no cost to the railroad, unless the external returns such as enand environmental benefits are measurable and high enough to bring the

return above the cost of public capital. )

Much public debate has centered on the return on new capital investment for the rail industry as a whole. Calculations indicating a low return were

presented in the report of the Task Force on Railroad Productivity. 1 Those

people who feel that the return is potentially high point out that the task force’s

analysis does not distinguish between investment in plant and investment in

equipment, and that it ignores the possibility that old investment was producing

negative returns which brought average returns on old and new investment down

to very low levels.

Despite uncertainty as to the level of return on fixed plant investment

for the industry as a whole, two conclusions about return seem clear. One is

that the rate of return on new plant investment differs among individual railroads.

This fact is a function of the differing access to, and cost of, capital over the last

five or ten years; it suggests the need for flexibility in federal funding mechanisms

The other conclusion is that any single railroad has plant investment opportunities

with a range of returns and different objectives. For example, the rebuilding of

a bridge whose collapse will interrupt service over a wide area is a defensive investment which produces no short= run financial return. Such a project may more

justifiably require soft federal financing than a project whose objective is pri- .

marily short-run financial return through cost reduction.

Proposals which involve public ownership of rail fixed plant, (Confac,

for example) introduce some confusion into consideration of the economic viability of the railroad industry. If the resulting industry is defined as a partnership

of government roadbed owners and private operating companies, it seems clear

that the shift in ownership by itself has no direct impact on industry viability.

The main determinant of the viability of the system is still the return on rehabilitation investments, although the main determinant of the viability of the operating

railroad companies is the relationship of user charges to ownership costs of

which they have been relieved.

c. Quality and Cost of Rail Service

There is a general assumption that federal involvement in rail rehabilitation will result in better and less costly service. The extent and nature of

1

Improving Railroad Productivity, A Report to the National Commission on Productivity and the Council of Economic Advisers, Washington, D. C. , November

1973.
29

the improvements made, however, is a function of the mechanism by which public

assistance is infused; it is also a critical component in an attempt to evaluate alternative mechanisms.

Quality improvements are expected to result directly from rehabilitation in the form of speed (from higher line-haul speeds and, more important,

from improved switching and terminal operations); reliability (regarded as very

important by shippers); and reduced damage. Cost reduction is expected to be

achieved both directly through reductions in the cost of maintenance; crew costs

(due to higher speeds); switching and terminal operations; train derailments;

and so forth; and indirectly from the spreading of existing fixed costs over the

greater amounts of traffic attracted by the quality improvements.

The benefits of improved quality and cost of service are not necessarily universal. For example, specific features of some funding mechanisms

may provide the assumed improvements, but at increased rather than reduced

cost.

Finally, there is a question of the relationship between reductions

in cost to the railroads and reductions in cost to shippers. Many observers

argue that railroad prices bear no rational relationship to railroad costs or to

“value of service, ” but merely reflect decades of individual regulatory decisions.

This murky relationship between the cost of rail service and the price of that

service means that, from the shippers ' (and the consumers perspective, reductions in the cost of rail operations do not translate into readily discernible

reductions in the price of service. This cost/price relationship is outside the

scope of this particular study, but it should be incorporated into any broad

consideration of rail-oriented legislative action.

An interesting facet of the service quality impact is the possibility

of a positive impact which is greater than the sum of its parts. An assumption

which is largely implicit in general discussions of railroad problems is that a

significant and quickly perceptible upward shift in service quality provided by

federal rehabilitation assistance can start a cycle of increased traffic, reduced

costs, improved viability, further service improvements, and so forth, which

will result in the equilibrium at an expanded level of activity discussed above.

Those who view rail’s appropriate equilibrium point as being at a lower level

of activity do not accept the possibility that this phenomenon may occur. Even

industry sources, with a generally positive view of the desirable level of rail

service, recognize that many changes, in addition to federal rehabilitation assistance, would be needed to start this kind of upward cycle.
30

D. Intermodal Competition

The impact of federal rehabilitation assistance on rail's ability to

compete with highway and waterway transportation modes is very much intertwined as both cause and effect, impacting both economic viability and the quality

and cost of service. Because of its central importance and a general lack of

confidence in understanding the extent of this impact, however, it is worthy of

separate consideration. In part, the central importance of the impact of rehabilitation on intermodal competition derives from its impact, in turn, on the cost

of service and the viability of the railroads. In large part, however, this impact

is important because it determines the external, societal benefits, such as energy conservation and environmental protection. If rail traffic is in an inevitable

long-term decline (in relative terms), it may still be desirable to maintain its

efficiency and viability as part of a balanced transportation system. However,

if a reversal of historical traffic shifts is possible through federal rehabilitation

of fixed plant (and other steps), then a significant, though largely unquantified,

public interest emerges.

Some analytic work has been done on the ability of rail to attract or

reattract traffic through service improvement. USRA studies indicate a potential upward shift of up to 15 percent in rail carloadings, with large variations

by individual commodities. This kind of analysis should be extended to consider

the extent of a large-scale nationwide public investment in rail fixed plant.

The impact on intermodal competition lends special importance to

those aspects of the proposed assistance mechanisms which most affect the ability

of rail to compete for traffic. As noted above, the funding sources (particularly

fuel taxes and freight surcharges) are key determinants of this impact.

E. Intramodal Competition

The impact of federal assistance on competition among the railroads

is viewed by industry observers in terms of two potential problems. One is that

in any mixed system, with federally assisted (or owned) railroads competing

against unassisted private roads, 1 problems of equity and of the viability of the

the latter carriers arise. These problems come about not only through direct

competition in service and rates (if permitted by regulation), but also in more

subtle ways. An example given by one railroad executive was the possibility

of a federally owned road acting to hold down a general rate increase to the

1

This situation can occur through a regional approach such as Conrail, through

attempts to rationalize the rail plant, or through uneven participation in a

voluntary government program.
31

detriment of its private competitors. In the Northeast, the USRA has avoided

major problems of this sort (in the opinion of most observers), but it is still a

potential impact associated with many proposed programs of national scope.

The second potential problem relating to intramodal competition is

that government assistance or ownership may be accompanied by the “public

way” concept noted above. This concept, that anyone can run trains over publicly

rehabilitated rights-of- way, leads to a fear on the part of some railroad spokesmen that destructive intramodal competition will result. This destructive competition would lead to the cream-skimming of lucrative traffic by new entrants

or shippers who have no broad service responsibilities. Generally, non-railroad

sources do not regard this as a likely or significant problem. However, some

proposed legislation for rehabilitation funding contains specific provisions to

prevent, or limit, this problem.

Set against these potential negative impacts of intramodal competition is the more general consideration, expressed by several railroad spokesmen, that the nature of the industry involves as much cooperation as competition

between the railroads. Therefore, despite competitive-problems arising from

a rehabilitation program, an improvement in service provided by any railroad

or line would allow the entire industry to provide better service to its customers.
32

IV. SPECIFIC PROPOSALS

A. Introduction

The earlier parts of this report were designed to provide a basic

framework with which any proposed mechanism, or approach, for federal involvement in the rehabilitation of rail fixed plant can be examined. Part II discussed the components essential to any federal rail rehabilitation program as

well as the important advantages and disadvantages of each component. Part

III briefly summarized some of the key impacts in terms of which the proposed

mechanisms must be assessed.

With Parts I through III as a foundation, selected specific proposed

mechanisms are described below, using the framework developed in Part II, and

highlighting some of the impacts of each proposal as viewed by the sources interviewed during this study. Each proposal is briefly introduced, with a reference made to the source document where full details of the proposal are presented.

Individual Summaries of each of the alternative proposals, with the essential

components briefly described, are also included. A composite of these individual exhibits appears in Exhibit XI (see Part V, below).

The selection of proposals was a joint effort of Harbridge House,

Inc. , The Office of Technology Assessment, and several Congressional Committee staff members. The proposals chosen were intended to embrace those proposals which are being widely discussed today and those which are interesting

conceptually. Some valuable proposals have not been included here because they

were either formulated or articulated in detail too late to be incorporated in the

stud y.

The sequence in which the proposed mechanisms are addressed reflects no evaluation or preference. In general, the options not involving federal

ownership are arranged, first, in rough order by softness (that is, the extent to

which they represent new infusions of capital into the railroad industry), then by

several ownership alternatives.
33

B. Selected Alternative Proposals

1. A United States Rail Trust Fund

(see Exhibit IV)

This proposal, presented by Governor Shapp of Pennsylvania, is intended to “enable privately-owned railroads to obtain sufficient funds to modernize and expand [their] facilities. ” It provides for rehabilitation funding for all

lines.

The amount of funds estimated to be required for this proposal is

$12.9 billion over a six-year period. The funding source is a 5 percent surcharge on all rail freight revenues. A trust fund with bond issuing authority is

used to translate the continuing income stream into the six-year rehabilitation

program. Grants made from the trust fund carry no repayment obligations.

The government controls expenditures to the extent of approving

railroad grant applications, but that control is not intended to force major system rationalization. No explicit control is gained over the railroad industry

structure or railroad operations. Ninety percent of the trust fund distributions

are made to the railroads, proportionate to the trust fund income they generate

through the waybill surcharges. Ten percent of trust fund distributions are

discretionary.

In addition to the provision of fixed plant rehabilitation, the proposal

includes a $1 billion revolving fired to facilitate the purchase of rolling stock.
34

EXHIBIT IV

COMPONENTS OF “A UNITED STATES RAIL TRUST FUND”

Stated Objective To enable privately owned railroads to obtain sufficient

funds to modernize and expand all of their facilities in

order to better serve the public.

Scope

Geographic Nationwide

Facility Types All lines

Government Funds

Amount & Timing $12.9 billion over 6 years*

Source 5% surcharge on all rail freight revenues

Form Grants, no matching or repayment, from proceeds of

bonds issued by trust fund

cost Commitment per $ billion $1 billion

Risk None

Administrative

Collection Medium

Distribution Medium

Acquisition None

Government Control

Route Structure Railroads design projects and apply for grants based on

their priorities; 90% of funds are allocated, proportionate to the surcharge

Industry Structure None specified

Operations None specified

Other Control Aspects None specified

Related Actions None specified

*Rehabilitation – Road and Track, $6.9 billion; Electrification, $3.2 billion; Modernization – Road and Structure, $1.9 billion; Modernization – Yards, $0.9 billion.

Source: Pamphlet by Milton J. Shapp, Governor of Pennsylvania, Rev. December 1974.
35

2. Railroad Rehabilitation and Improvement

Act of 1975 (see Exhibit V)

This proposal was developed in draft legislative form by the Union

Pacific Railroad. Its stated objective is "improvement of the Nation’s rail system through efficiency gains . . ., strengthened competition, and enhanced carrier profitability. ” Its scope is nationwide (including the Northeast), and it

embraces all lines.

The proposed legislation calls for a $10 billion program spread

evenly over a 10-year period, although the authors of the proposal ackmowledge

the difficulty of estimating the amount required. The source of funds is a diesel

and residual fuel tax on all railroads, trucks, and water carriers (except passenger, farm, and foreign commerce use).

The form of financial assistance is purchase from the railroads of

preferred stock which is subordinate to secured debt and preferred stock currently outstanding. No principal or interest payments are required during the

first 10 years after issuance of the preferred stock. Level interest and principal payments are required over the subsequent 20 years, at an effective 2 percent interest rate. This is equivalent to a 75 percent grant with 25 percent of

the principal amount covered by a loan to the railroad at 10 percent interest.

A trust fund with bond issuing authority is used to translate the 20-year stream

of receipts of the fuel tax into a 10-year outflow for rehabilitation.

The proposal provides for designation by the U.S. Department of

Transportation of a national system composed of main and branch lines. Applications by the railroads for rehabilitation funds are approved or rejected by

the DOT in accordance with loose guidelines included in the act. The DOT can

set terms and conditions to ensure that the rehabilitation is performed as represented in the application.

This proposal gives the government no explicit control over industry

structure or rail operations; however, if a railroad fails to meet the repayment

provisions, the DOT may appoint two members of the carrier’s board of directors to represent the government’s interests.
36

EXHIBIT V

COMPONENTS OF

“RAILROAD REHABILITATION AND IMPROVEMENT ACT OF 1975”

Stated Objective To improve the nation’s rail system through efficiency

gains ... , strengthened competition, and enhanced carrier profitability.

Scope

Geographic Nationwide

Facility Types All lines

Government Funds

Amount & Timing $10 billion over 10 years

Source Diesel and residual fuel tax of approximately 5¢/gallon

for 20 years

Form Preferred stock, interest and principal deferred for 10

years; repaid in 30 years at effective interest rate of 2%;

trust fund, issuing bonds to accelerate rehabilitation

payments

cost Commitment per $ billion $754 million

Risk Medium

Administrative

Collection Medium

Distribution High

Acquisition None

Government Control

Route Structure Railroads apply; DOT designates main and branch lines

and approves specific projects

Industry Structure None specified*

Operations None specified*

Other Control Aspects DOT sets terms and conditions

Related Actions None specified

*Government has minority representation on railroad’s board of directors in the event of default.

Source: Preliminary draft for discussion purposes only, developed by Union Pacific Railroad, 14 July 1975.
37

3 . National Transportation Rehabilitation and

Modernization Act of 1975 (see Exhibit VI)

This proposed legislation was developed by the Rail Services Planning Office of the Interstate Commerce Commission. Its objective is to provide

“Federal funding for the rehabilitation and modernization of railroad properties. ”

It is national in scope and it applies to all types of facilities, although it calls

for the designation of interstate, secondary, and branch line systems.

The proposal suggests a $6.25 billion program over a five-year

period, based on a fuel tax over the same period. The source of funds is a 2¢

per gallon tax on all liquid fuels for highway, rail, and waterway uses (except

buses, government vehicles, and farm use). Expenditures are in the form of

matching grants, with a provision for soft loans to railroads which are not able

to provide matching funds.

Extensive control, through a central planning process, is envisioned

over the route structure and over joint use of rehabilitated facilities.
38

EXHIBIT VI

COMPONENTS OF “NATIONAL TRANSPORTATION REHABILITATION

AND MODERNIZATION ACT OF 1975”

Stated Objective To provide for employment, conservation of resources,

sound economic conditions in rail transportation, and

improved services.

Scope

Geographic Nationwide

Facility Types All Lines

Government Funds

Amount & Timing $6.25 billion over 5 years

Source 2¢/gallon tax on fuel + .014¢/KWH of electricity used

by rail and water carriers and road vehicles (except

buses)

Form Matching grants, plus “soft loans”

cost Commitment per $ billion $500 million +

Risk Low

Administrative

Collection Medium

Distribution High

Acquisition None

Government Control

Route Structure Extensive control by Secretary of Transportation

Industry Structure None specified

Operations Joint use may be directed by ICC

Other Control Aspects None specified

Related Actions Improved accounting system

Source: Rail Services Planning Office, ICC, undated draft.
39

4. Financial Procedures to Assist Conrail's Viability

(see Exhibit VII)

This proposal, as its title suggests, focuses on the rehabilitation

and other needs of Conrail only. Essentially a financing mechanism, it is not

concerned with control aspects. It was proposed by Mr. Richard Dicker, Chairman of the Penn Central Institutional Creditors Group, and is described in a

statement made by John Ingraham of the First National City Bank before the Surface Transportation Subcommittee of the Senate Commerce Committee on 15

May 1975.

The proposal calls for the U.S. Railway Association to borrow with

federal guarantees. The proceeds are advanced to Conrail in the form of grants,

or through the purchase of Conrail preferred stock. The stock would have a

dividend rate set 1 percent higher than the USRA borrowing cost. Dividends

are cumulative, if earned, but are not paid during the first eight years of Conrail’s operation.
40

EXHIBIT Vll

COMPONENTS OF

“FINANCIAL PROCEDURES TO ASSIST CONRAIL’S VIABILITY”

Stated Objective To assist Conrail’s viability, during the first 8 years of

its operation, by virtually eliminating debt service in

that period on capital required for rehabilitation.

Scope

Geographic Northeast and Midwest

Facility Types All lines

Government Funds

Amount & Timing $2 billion or more over 8 years

Source Loan guarantees; default covered out of general

revenues

Form U.S. guarantees USRA borrowing; USRA advances the

proceeds to Conrail either in the form of grants or

through the purchase of Conrail preferred stock (dividend rate 1% above USRA borrowing rate; dividend

cumulative, if earned, but deferred 8 years)

cost Commitment per $ billion’ –

Risk High

Administrative

Collection Low

Distribution —

Acquisition* * —

Government Control

Route Structure

Industry Structure

Operations

Other Control Aspects

Related Actions None specified

Not addressed since this is a

financing mechanism for Conrail

*Cannot be calculated with available data; estimated to be fairly low due to interest rate at

1 % above market for guaranteed loan.

**Not addressed.

Source: Annex B of letter from Richard Dicker to Art Lewis, 25 April 1975.
41

5. Railroad Revitalization Act

(see Exhibit VIII)

This legislation, proposed by the U.S. Department of Transportation,

is intended, among other things, to “provide needed financial assistance to the

railroad industry” and to “encourage rationalization and restructuring. ” It is

nationwide in scope, and it does not distinguish between main, secondary, and

branch lines.

In terms of funding, this proposal provides a revolving-loan guarantee program over a 10-year period with a maximum government exposure of $2

billion at any time. Coverage of defaults, if any, on guaranteed loans are paid

from general revenues. The deferral of interest and principal (through the

Federal Financing Bank) is permitted, but eventual repayment is mandatory.

The proposed government control is extensive. The routes for rehabilitation can be approved or rejected, based on loose guidelines which include

“efficiency of rail operation. ” The DOT can require, as a condition of the loan,

that the applicant railroad participate in a merger, consolidation, joint use, or

the purchase or sale of assets. No operational control is specified, but loans

may be conditioned on the railroads carrying out its common carrier obligations

satisfactorily.

In addition to the rehabilitation program, the act provides for rate

reform, expedites restructuring procedures, prohibits discriminatory taxation

of rail property, and provides for a uniform accounting system.
42

EXHIBIT Vlll

COMPONENTS OF “RAILROAD REVITALIZATION ACT”

Stated Objective To provide needed financial assistance to the railroad industry, and to encourage rationalization and restructuring.

Scope

Geographic Nationwide

Facility Types All lines

Government Funds

Amount & Timing About $2 billion over 10 years (includes terminals, rolling stock, and data systems)

Source General revenues

Form Loan guarantees (loans through federal financing bank);

allows deferral of principal and interest

cost Commitment per $ billion Low

Risk High

Administrative

Collection Low

Distribution High

Acquisition None

Government Control

Route Structure Railroads initiate and Transportation Secretary approves,

subject to guidelines which include ability to repay, efficiency of rail operations, and management’s fulfillment

of its “obligations” as a common carrier

Industry Structure Transportation Secretary can require applicant railroad

to participate in merger, consolidation, joint use, or purchase or sale of assets as condition of loan guarantee

Operations Satisfactory operations can be a factor in decision to

guarantee loans

Other Control Aspects None specified

Related Actions Rate reform; expedited procedures for restructuring; prohibition of discriminatory taxation; uniform accounting

system

Source: Proposed by the U.S. DOT, undated draft.
.

43

6 . Railroad Revenue Act of 1975

(see Exhibit IX)

This proposal, S. 1143, is a complex one. Its objective includes

the promotion of modern and efficient rail service. It is national in scope, and

it provides for federal ownership of a high-density mainline network and state

ownership of the balance.

The amount and timing of rehabilitation funding is not specified in

the act; however, the amount envisioned is clearly large. Sources of funds include a 1 percent tax on the value of all surface freight transportation, including

private carriage, and a flat $1 per thousand gross ton miles user charge (adjusted for inflation).

The form of investment is ownership, as noted above, through voluntary dedication of rail property in exchange for relief from ownership expenses.

If it is assumed (see Part II, above) that the non-compensatory nature of the

user charge reflects the acquisition cost, then the commitment cost is virtually

100 percent of the rehabilitation program. The administrative costs, relative to ‘

other proposals, are estimated to be high.

The government control implied by ownership is very extensive, including total control over route structure, a significant impact on industry structure, and a deep involvement in operations.
44

EXHIBIT IX

COMPONENTS OF “RAILROAD REVENUE ACT OF 1975”

Stated Objective To obtain modern and efficient rail service.

Scope

Geographic Nationwide

Facility Types All lines

Government Funds

Amount & Timing Not specified, but include major rehabilitation

Source 1% tax on all freight surface transportation, private and

for hire; appropriations from general revenues; user

charges [$1 per thousand gross ton miles (adjusted for

inflation) ]

Form Government ownership (federal-interstate, stateintrastate); voluntary dedication of property; no

compensatory user charges

cost Commitment per $ billion* $1 billion

Risk None

Administrative

Collection High

Distribution Very High

Acquisition* * Very High

Government Control

Route Structure Total control

Industry Structure Carriers remain as operating companies; structure affected by control over joint use

Operations Extensive

Other Control Aspects None specified

Related Actions None specified

*Assumes non-compensatory nature of user charge is part of acquisition cost.

**See Part I 1.

Source: S.1143
45

7. Transportation Development Act of 1975

(see Exhibit X)

This proposal, developed by the Illinois Department of Transportation, is directed at the efficient accomplishment of reconstruction and modernization of the rail system, and the achievement of healthier railroads and improved

service. It is national in scope, and it covers all rail facilities.

Although the amount and timing of financial assistance depend on how

discretionary funds are used as well as on decisions made at the end of an initial

two-year program period, the proposal provides at least $4 billion over the first

two years.

The source of funds includes a 5 percent tax on the value of all surface freight transportation, private and for hire, and non-compensatory user

fees set at 75 percent of each carrier’s 1974 ownership cost.

The form of funding is ownership (by the states) through voluntary

dedication in exchange for relief from some portion of the ownership costs.

Grants (100 percent for capital projects, 70 percent for routine maintenance)

are made to the states from the rail segment of a unified trust fund whose receipts derive from the freight surcharge.

As with the other approaches involving ownership, a great deal of

government control is associated with this proposal. Route structure is designated by the federal (interstate) and state governments (intrastate). Some coordination is planned, although protection of the current service patterns is

given to the carriers. State and federal government involvement in operations

is extensive.
46

EXHIBIT X

COMPONENTS OF “TRANSPORTATION DEVELOPMENT ACT OF 1975”

Stated Objective To efficiently accomplish the reconstruction and

modernization of the rail system.

Scope

Geographic Nationwide

Facility Types All lines (interstate system designated by U.S. DOT,

intrastate system designated by state government)

Government Funds

Amount & Timing $2 billion/year, plus $1 billion in discretionary funds

(all modes); plus state inputs from user charges; subsequent funding unspecified

Source 5% tax on all modes of freight (private and for hire);

non-compensatory user charge set at 75% of 1974

ownership cost

Form Ownership (by state)

Grants (100% for capital improvements, 70% federal/

- 30% state for ‘routine maintenance)

cost Commitment per $ billion $1 billion

Risk None

Administrative

Collection High

Distribution Very High

Acquisition Very High

Government Control

Route Structure Total control

Industry Structure Limited; some coordination, but protection of current

carriers’ service rights

Operations Extensive

Other Control Aspects None specified

Related Actions None specified

, . Source: I Ilinois Department of Transportation, unaatea aran.
47

V. SUMMARY AND OBSERVATIONS

The selected specific proposals described in detail in Part IV are

arrayed side by side in Exhibit XI, using the framework developed earlier.

Displayed in this manner, the information can be used as a decision-making

tool. What is missing is the reader's resolution of the pros and cons of each

issue, together with an underlying personal hunch about the future of the railroad industry, an estimate of the political realities, and so forth.

The entire framework can be used to analyze (i.e. , break down into

essential components) any new proposals as they emerge and to formulate individual new, preferred mechanisms for federal involvement in rail fixed plant.

As noted earlier, this is not an evaluative study, nor was it designed

with the objective of recommending a particular legislative path. The following paragraphs highlight some of the impressions gained in the course of the

study. These impressions, held by at least a majority of the industry, shipper,

labor, state, and administration officials interviewed, are pertinent to any

legislative efforts. They are as follows:

● The problem of deteriorating rail fixed plant is national in

scope, although by no means uniform. Priorities lie in the

Northeast and the Midwest regions of the country.

● Public ownership of rail rights-of-way raises many problems.

It should be seriously considered in terms of whether it is necessary or whether alternative solutions which have yet to be

tried have sufficient probability of success to warrant the deferral of nationalized rail plant.

● There is no cheap solution. l-lard, or highly leveraged, financing will not get rehabilitation money where it is needed

most, and a small program will not really test the role that

federal funding of rehabilitation can play in establishing a

viable rail industry.

● The cost of soft loans may approach the cost of an outright

grant as the term of the loan, the repayment schedule, and

the interest rate become more liberal.

● A trust fund is generally regarded as a desirable device to

provide a secure stream of funding for rail rehabilitation and

to permit, through the authority to issue bonds, large initial

outlays to be made based on a limited, but longer term,

stream of receipts.
EXHIBIT Xl

ALTERNATIVE APPROACHES TO FEDERAL FUNDING OF RAIL REHABILITATION

I i

Nafmnd Tr~ortalmn

Rmlmd Rafmk.dmfmII and Rtidtf~n and I

Fmumd Pmadwss to

A Lf!umd .%ta Rad Tru* Fund Inwmwmnrnt Acf of 197S ModunwmtotI Acf of 19T5 Asnsf Cwwa,l.s V~,ktV I

RaIlrosd RwltahztilOn Act I ! RaIlrosd RwaIm Act of 1975 T-mmrtmmn &of *975 Dmfommm

Iamd Ob)ut,ve To mablc prwately c.wncd rad. To ,mprovc !fm nat,on.s ra,l To prc.wda for employ nm”t. To nam Con,a,l.s wabtl,ty.

roads to obtain suffkcm.t funds s@em throu$h CNICIOIWY

To ~OV#& “W f,na?le,al as. To obtain modem ● nd cftuwnt To effmcntly accompfwh tfm

comwvw,on of rccowcas.

to InOdunlzo ● nd ● xpand ● ll

during the fusf 8 VCWS of Its smfanc. to the ra,koad mdus

9,.5. strmsthwmd corn.

raol servoce. rommtmcfmn ● nd modarm.

sound cconomu condmons ,“ o~aoon. by vmually efama. try. and to .ncouragw ratnmd,

of Ihclt fac,htm ,“ Ordc, 10 fmt,t,o”, ● nd e“hanud “rrw

zwt,on of tlw rad system.

better SNW tfw fniblw

.*oI tram~,tatu.n. 4 om. natmg tibt servtca m that zatton and rcstr.cturt~.

pro fllakul,l” Provad *VIM fwrmd on caplul roqunod for

rdwb,lotat,c.n.

:OP

G~aph,c Nalmnw,de Natmnswde Natmnw,& No,th~t ● nd Mtdwem Nat,onw,de Natmnwwk Natmnwtda

Fae,l,ty Types All l,”- All l,nes All hnes All hms All II.- Alf 1,”s All I,IUS hmustam syswm

dastgnawd bv U.S. OOT, mtra.

sfata s-cm dngrntaf bv

$fat* rJOWrnmsm)

. . .

owr”nwnt Funds

Amou”t % T,m,ng S12 9 Imll,on ovw 6 years “ S1O b,lk.n over 10 years S6.25 bAlton o.er 5 years S2 btllton or mom over 8 About S2 bdlton ovoc 10 V- Not ,pec,f,ad. but ,nclude ma-, S2 bdlmd~r. pkus Sl btl.

Wars (mcluti ternmwh. mllmg rehab,l,tatm” I,on m dncrtitonwv fund$

stock. and data systems) (afl mock), @us stat9 mwta

from ~ cfursOS: 9Jbsoquent

funding UMpa,tlwd

Source 5% Surcfurg, 0“ ● ll ,aol Olesd and residual fuel tax of 209allon tax on f“of + o14f/ Loan QllUantW5. default CO”.

frmght rmmnu-s ac.c-0.,~lelv 5C/9al10n for

General rwenues 1% tax 0“ ● II frmght Wrfaca

KWH of afecfrtcrty und by ,ad

5% fax on ● ll InOdm of fwgftt

20 ye=

auf out of general revenue, twwportatmn, pnvat. ● nd for (pnvata ● nd fm hwa), non-

● nd Htcr carrmrsand mad h,,., eppropr,at,ons from sm. compumtory U90C efurqa sm

veh,cfes (excePt bmas) -al rovcnuex uaw ch~ 1S1 ● t 75% of 1974 —Sfllp Cosf

WI thou-rid OIOS ton mlfes

(afhuti for mffatmtd 1

Form Grams. no mamhmg or ,epav Prticrmd stock, mtarnf and Matching Fa”ls, Ph,S %c.ft U S quamntees. uSRA borrow

mem, from proceeds of bonds wmwd defwmd fof 10 V_IS, loam’.

Loan guwanteas {Iosns tfwo”gh Govw.ment ownustup lfadwat. OWIM6’SIWP (by Sfata)

IIW; USR~ advances ths pro. fderal fnw”cm$ bank). allows mtmatat*, statm. mtrastatd.

,ss”ed by tr.ai fund repa,d m 20 vears ● t effutwa

Grams I1OO% for capml wn.

cuds to Conrad *ttttu m the deferral of w,nc,pd a“d voluntary dochcatton cd prop.

mtemst rale of 2%. frusl fund, form cd erants w through ths

prownlwlts, 70% fc&raf/30%

ontermt

mumq bonds to accelerat. m

● rtv. no compcmatarv user $fSw for rouwm mslmmsrlcd

hab,htat,on Pwnmms

p.rchasa of Conm,l pm ferwd cha,ges

stock (d,v,dmd retc 1% abov,

USRA borroiw”g rat., dtvtdaod

cumulatw*. if Wrwd, but defw,ad 8 years)

cost Comm,mmm pm Commitment w

S bdlmn S1 b,llmn

Commmnent per Comm,tmem PW

S btlhon S754 m,llmn S b,llmn

Commtitmmt pa

SW mdhon+

Commitmmt w

S btll,o”.. .

Commmnam W

R,sk Nom

S btill,on Low

R,sk Med,um R,sk

S b,llmntt S1 btllton

Low

S btllmn

Rtsk Hqh

S1 bdkon

R,sk Hqh R,@I Nom RItk

Adnu”,strat,w Adm,”mrat,ve Adm,nrmratw.

Norta

Adm,”,st,at,,e Adm,”mratwe

Colfecfton

Admmmwalwe

Msd@”m Colkcflc.” Med,um Colfut,on

Admmmratw9

Mcd,. m

O,slr,but,o”

C0119ct,0n Low

Medtwn Omnbuko” H,gh Omr@but,on

Collutlon Low

H~h

COlloctmn Fhgh Collattorl f + *

Omr,butmn Omrdwtton

Acq”,m,o”

H,gh O,sfr,but,on

None Acqu,mmn

very nqh

None Acqu,ntmn Non.

Dmrtkumon VW” nqfh

Acqutsmont — Acqu,m,cm None AcqummonT*? Very Hqh Acquwm.an VWV Hqh

O“a”lnrnt Comrol

Rome Structure Ra$lroads dmtgn fnopcfs and Radrwds apply. OOT desq Em.nnm comrol by %cwtary Ra,lrwdt ,“mate and Tram

aPPIy for ~a”ts Lusad on thet,

Total c.a”tml

nates mam a“d branch IIMS of TransF=xt*t,o.

Total control

prmr,tms. 90% of f“nds we *I.

portat,on S.~etarV approves.

● nd ● pproves spudu pmfuts

Iovtad. fwc.pcwtaonate to tfw

subfect to SUuJ.l,nm wft,ch ,n

surcharge

elude abtltty to r*pay. cff,ctencv

of *all Opuatoom. ● nd nulug9

mcnt”s fuffllhnc”t of ,ts ..obl~

t,om,’ as ● comma” cam..

IndusIty Structure No”e spe.mf,ed Norm spec,f,ad. . No”. spa,fud Not addrasaod Tra”sportat,.an !jgcretarv can re Carrtgn ,.ma,n as opar.tmq Lemmd, some caordmmton.

smcc !hm os a quw* apphcanf radroad to c0mpum5; stmctur* ● ff9ct9d but pmtatton of curre”t car

fmancnlg nwchm,sm partOcOpat. ,“ mw~. consolda by confrol ovw ptna U- r,em, torv,ca oghfs

fcw Cmwa,f 1,0”. fOO”l use, o, pu,chmc m

sak of a-m as cond,tmn of

Ioa” guarmtoa

Operatmns None spec,f,ed No”. spec,f,ed. - Joint “w may Lm d,racmd by Sat,sfacfory OWatmns can be Exte”swe

ICC

Extensmm

,a factor ,“decmon to g“wantoa

loans

Other Control No”e spec,f,ed OOT sets terms and cond,tmns None spec,f,ed

Aspects

None spec,fed NOIW spemf,ed None $pemfted

elated Actions None <. .w,f,ed None speaf,@d Improved acwuntmg system None spcc,f,ad Ram reform. expdfed proce Norm spec,f,ed NorIe specd,ad

dur~ for rmfruclurmg, pmh,b,.

t,on of d,scmmmatory taxatm”,

umfwm accw”tm~ system

- Rehab!lltat)on – Road and Track. S6 9 bllllon, Elect rlf!catton, $32 bllllon. Modernization – Road and Structure, $1 9 b!lllon, Modernlzatlon – Yards, SO 9 blll,on

“ “Government has mlnorlty representit,on on railroad’s board of dtrectors tin fhe event of default

. . .

Cannot be calculated with available data, estimated to be fairly low due to Interest rate at I%above market for guaranteed loan

tNot addressed.

t tAssum~ ~o”.comw”=torv “at”re of UWr Cha,ge In part of acquus!tuon cost

tttSee Part I 1.
— — ——

49

● Care should be taken to ensure that the necessary control over

what facilities get rehabilitated is used to promote a rational

rail system. The potential for excessive politicization of the

process can be minimized with a legislative requirement for all

analysis used as the basis for route decisions to be made available for public review.

● In terms of the corporate structure of the rail industry, the

current ‘Balkanized’ structure is not ideal. A more desirable

structure is achievable through means other than federal coercion based on rehabilitation funding.

● Many unknowns are involved in the question of federal investment in rail fixed plant. Among them, as noted above, are:

--What is the need?

--What is the return on the investment (both internal to the

railroads and external to society as a whole) ?

--What other legislative actions are necessary or desirable

to enhance the effectiveness of federal financing of fixed

plant ?

The existence of these unanswered questions requires that some

means of determining the answers be set in motion, and that sufficient flexibility be built into the program to avoid making lasting mistakes in the early stages while answers are being sought.
APPENDIX A

Analysis of Issues
The following pages represent what is essentially an abbreviated presentation of

the material contained in Part II of the report. They lay out a series of issues in a format

which is useful for assessing the components of the alternative proposals for federal

involvement in rail plant rehabilitation. Each issue is articulated in the form of a declarative

statement which favors one side of the issue. The major pros and cons of that statement, as

expressed by the sources contacted during the study, are then listed side by side below the

statement, and are followed by questions intended to further clarify the issue. All of the

issues covered in the report are included here, and are in the same sequence. They are:

Scope

Geographic

Density (Facility Types)

Government Funds

Amount

Timing

Source

General Revenues

Rail Freight Surcharge

Freight Surcharge, All Modes

Fuel Taxes

“No-Cost” Sources (Guaranteed Loans)

Form

Ownership vs. Non-Ownership

Soft vs. Hard

Trust Fund vs. Direct Assistance

Government Control

Route Structure

Industry Structure

Other Control Aspects

A-1
A-2

THE NEED FOR FEDERAL ASSISTANCE IS NATIONWIDE

PRO

● Deferred maintenance and capital projects exist throughout the rail system.

● Further deterioration should be halted

on a national basis.

CON

● The most pressing problems are in the

Northeast and Midwest regions.

. Some experience should be acquired in

these regions before attempting a national program.

QUESTIONS

!. What are the needs for rehabilitation on a region-by-region basis?

2-. To what extent are the needs increasing outside the Northeast and Midwest regions?
A-3

FEDERAL ASSISTANCE SHOULD BE LIMITED TO HIGH-DENSITY MAINLINES

PRO

● The federal government has a clearer ●

interest in long-haul mainline traffic between major population centers. States

and communities should be responsible

●

for local problems.

● The only lasting role for rail freight

transportation is in

service. Other service

handled by trucks.

long-haul mainline

●

will, and should, be

QUESTIONS

CON

The rail system is an integrated one;

therefore, rehabilitation should seek

system-wide improvements.

The worst of the deferred maintenance is

on lower density branch lines and secondary mainlines.

State and local governments do not have

the funds required for secondary and

branch lines.

If only high-density mainlines receive major rehabilitation, what will be the impact on

service? On industry costs?

What is the cost of mainline-only rehabilitation as opposed to rehabilitation of the entire

system?
A-4

THE AMOUNT OF FUNDS REQUIRED FOR RAIL

REHABILITATION IS MORE THAN $10 BILLION

PRO

● Due to rail’s energy and environmental ●

advantages, it should play an expanded

role in our transportation system. This

●

will take major investments.

● Rail’s competitors

over the years to

$10 billion.

have been subsidized

a larger extent than

●

● It is possible that a large investment will

evidence a threshold effect (i.e., that it

will take a massive infusion, but the

result will be a growing, economically

viable industry). Smaller amounts will be

wasted.

QUESTIONS

CON

The federal government shouldn’t have

to pay the whole bill.

Rail as an industry is in a long-term

decline. Pouring large amounts of money

into it is a waste of public funds.

The major problem with the industry is

excess

crease

needed

capacity. Rehabilitation will inthat capacity and defer the

contraction.

I. What is the appropriate role for rail over the next few decades? Will it represent a greater or

smaller portion of our transportation system?

2.. What route structure will be required to support that role?

3. To what standards should that route structure be rehabilitated?

4. What is the cost of that rehabilitation?

5. What is the return on that investment in terms of economic return? In terms of social

benefits?
●

●

●

●

A-5

THE RAIL REHABILITATION THAT SHOULD BE DONE SHOULD BE

ACCOMPLISHED WITHIN THE NEXT SIX YEARS

PRO

The financial condition of a number of ●

railroads means that timely rehabilitation could prevent further bankruptcies.

The effect ‘of inflation is to make any ●

delay increase the cost of rehabilitation.

Further deterioration of rail fixed plant

means that any delay will increase the

cost of rehabilitation.

Appropriate legislation can allow a quick

start and simultaneous refinement of the

total requirement.

QUESTIONS

CON

It is best to proceed slowly because the

real need for rehabilitation is not yet

known.

Further rail bankruptcies will facilitate

the ultimate rationalization of the

system.

1. What will be the costs of deferring the rehabilitation program, in terms of inflationary

impacts, further deterioration of rail plant, and the financial condition of the weaker

railroads?
A-6

GENERAL REVENUES ARE THE BEST

SOURCE OF FUNDS FOR RAIL REHABILITATION

PRO

● The nation’s rail system is so integral to

the economy that everyone benefits

from its rehabilitation; therefore, general

tax revenues are an appropriate funding

source.

● In terms of administrative expense of

collection, general revenues cost less.

CON

QUESTIONS

. Appropriations out of general revenues

are highly visible and appear to be

expensive.

. Planning a long-range program, such as

rail rehabilitation, which involves major

capital investments by suppliers (e.g., rail

fabrication plants) requires a secure

source of funds. Appropriations are too

uncertain.

1. What are the supply implications of a nationwide rehabilitation program?
A-7

A RAIL FREIGHT SURCHARGE IS THE BEST SOURCE

OF FUNDS FOR RAIL REHABILITATION

PRO CON

● It is a user charge applied to those who ● It will degrade the economic viability of

benefit most directly from it. the rail industry by increasing the cost of

rail service vis-a-vis truck and barge.

. It is a secure source and is not a drain on

the public treasury.

QUESTIONS

1. How much traffic will rail lose to its competition if rehabilitation is funded through a rail

freight surcharge?

?. How will the cost of a rail freight surcharge be distributed among consumers?
 -

A-8

A FUEL TAXIS THE BEST SOURCE OF

FUNDS FOR RAIL REHABILITATION

PRO CON

● It is desirable as a conservation incentive. ● Any tax is viewed as an inequitable

burden by those who are taxed. . It bears more heavily on trucks than on

railroads, and thus partially redresses the ● Rail’s freight competitors should not be

historic inequity in government support. asked to pay for rail rehabilitation.

. It is broadly enough based, particularly

if it includes private use of gasoline, to

raise substantial revenues with a very

small tax per gallon.

QUESTIONS

1. Will the nation benefit if rail rehabilitation is achieved at the expense of some increase in

fuel cost?

2 Of the alternative fuel taxes (all fuels for all surface transportation; all fuels for freight

modes only; freight modes, diesel and residual fuel only), which is the most appropriate?
●

●

A-9

LOAN GUARANTEES ARE THE BEST SOURCE

OF FUNDS FOR RAIL REHABILITATION

PRO

Loan guarantees are a “no-cost” solution ●

except in the event of default.

They make low-cost capital accessible to

the rail industry. ●

●

QUESTIONS

CON

They are available only to the railroads

which can repay them, and these are the

railroads which need assistance the least.

The government liability is uncertain as

to timing and amount.

Inadequate railroad earnings are part of

the problem. A solution which relies on

those earnings as a source of funds is no

solution at all.

1. To what extent is the rail plant needing rehabilitation owned by railroads which are able to

repay a low-cost loan?
A-10

GOVERNMENT OWNERSHIP OF RAIL RIGHTS-OF-WAY IS AN

APPROPRIATE FORM OF REHABILITATION INVOLVEMENT

PRO CON

. It avoids criticism of federal assistance to . Bureaucracy or politicization make

privately owned companies.

● It affords the opportunity

plan and implement a truly

system.

to centrally

nationalized rights-of-way an inefficient

arrangement, even with a rehabilitated

system.

national rail

● The separation of plant ownership and

train operations creates practical operat- . It permits a viable industry of private

railroad operating companies.

ing problems.

. Publicly owned rail rights-of-way

● It facilitates the planning and implemen-

“destructive” competition. tation of a national rail passenger service.

invite

● The acquisition of rail fixed plant will be

very expensive, in terms of either purchase/condemnation or noncompensatory user charges needed to make a

voluntary turnover feasible.

QUESTIONS

1. Is nationalization of rail rights-of-way necessary now? Or are there alternative “private”

solutions (with government assistance) which may create a viable private industry, with

public ownership available as a fallback position if they fail?
 .—

A-1 1

GRANTS, MATCHING GRANTS, OR “SOFT” LOANS ARE

PREFERABLE TO FULL REPAYMENT LOANS AS A FORM OF

FINANCIAL ASSISTANCE FOR REHABILITATION

PRO CON

Hard loans will not enhance the eco- ● Hard loans are cheaper.

nomic viability of the rail industry.

Hard loans are of no use to the financially weaker railroads which need rehabilitation the most.

QUESTIONS

1. Can flexible assistance be provided so that the softness of the assistance varies according to

the individual owning railroad’s ability to repay?
A-12

A TRUST FUND ISA DESIRABLE MECHANISM

FOR RAIL PLANT REHABILITATION

PRO

● A trust fund is a good way to provide

the secure funding program required for

a rehabilitation plan which involves major capital investment by suppliers.

● A trust fund facilitates the conversion of

a long-term, lower level of income into a

short-term, higher level of outflow for

rehabilitation.

CON

● A trust fund approach is too secure for a

program with as many unknowns as the

rehabilitation program. It is difficult to

“turn off” if the need turns out to be

less than initially estimated.

QUESTIONS

1. Can flexibility be built into a trust fund mechanism to avoid overfunding as the true

measure of the rehabilitation requirement emerges over time?
●

●

●

●

A-13

GOVERNMENT CONTROL IS DESIRABLE OVER THE

ROUTES AND FACILITIES REHABILITATED

PRO

If the government puts money in, it ●

ought to be able to control how that

money is spent:

The central problem of the rail industry

is excess capacity. Federal rehabilitation

is an opportunity to take charge of the ●

rationalization process.

System rationalization requires a major,

centralized analysis and planning function which is best performed at the

federal government level.

Only the government can be expected to

plan a system which reflects social benefits as well as financial returns.

CON

Centralized planning does not work as

well as free market forces, so the focus

should be on freeing the market forces

from regulatory control, not on taking

over the rationalization function.

The government should help with analysis and planning, but should leave the

decisions to the railroads.

QUESTIONS

1. What administrative mechanism is best for exercising control (e.g., the USRA/DOT/ICC

approach used in the Northeast)?

2. How can a nationwide government rationalization effort avoid placing a financial burden on

those railroads whose lines are not selected for a rationalized system?

3. How can shippers who are subject to reduced service, through rationalization be

compensated? Should they receive compensation?
A-14

GOVERNMENT CONTROL OVER THE CORPORATE

STRUCTURE OF THE INDUSTRY IS DESIRABLE

PRO

● The current “Balkanized” structure is a ●

major contribution to the industry’s

problem.

CON

While a more desirable structure is

needed, it will evolve without government control if the current procedures

for restructuring (10 years for the Rock

Island merger) are expedited.

QUESTIONS

1. Can the procedure for the approval of industry-initiated restructuring be improved?
—-— -

A-15

GOVERNMENT CONTROL OVER RAILROAD INDUSTRY SPENDING

FOR OTHER THAN REHABILITATION IS DESIRABLE

PRO CON

● If public money is invested in rail ● A bureaucracy established to monitor

rights-of-way,” the railroads must be pre- railroad spending will reduce the effivented from simultaneously disinfesting ciency and effectiveness of railroad manthrough cash dividends, or from wasting agement.

funds in exorbitant salaries or management perquisites.

QUESTIONS

1. What mechanisms can be set up to protect the public investment in rail rehabilitation

without creating a bureaucracy or interfering unduly with private management functions?

2. Will rail rehabilitation, and related government actions, enhance the viability of the industry

to the extent that private owners are no longer motivated to “disinvest” in the rail system?
APPENDIX B

Congressional Letters of Request
March 20, 1975

B-1
Honorable Richard Schweiker

United States Senate

Washington, D. C. 20510

Dear Dick:

Thankc you for your letter concerning a proposed Office of

Technology Assessmcnt of the United Stateds Railway Association's

preliminary system plan for rcstructuring the bankrupt railroads

in the Northeast and Midwest.

It does seem to me that an independent review of this proposal

will be useful if it can be completed in about 90 days, in time for

Congress to have full

- benefit of findings beforc receiving the final

systems plan next July 2 6 .

I suggest that the OTA study be directed at the basic question

of whether ConRail can be expected to be profitable.

This question raises many issues. The main one, I think, has

to do with the amount of money ($2 billion) which must be spent to

rehabilitate 15,000 miles of trackage and facilities.

Obviously ConRail’s track and rail facilities will have to be

rehabilitated. Yet, I must also agree with the New York Times that

the volume of federal funds involved in rehabilitation "raises doubts

about the propriety of such commitments to a private company organized for profit "

The U. S. Railway Association suggestion that a separate corporation

ConFac be established to rehabilitate, maintain and hold trackage is

intriguing.

B-2
Honorable Richard Schweikcr

Page 2

March 14, 1975

It would be valuable to me to have a thorough discussion of

this suggestion since I agree with the U. S. Railway Association

that a number of public policy, legal and tax questions " remain to

be resolved. “ Obviously this bears directly on concern about the

profitability of Con Rail and inevitably consideration of national

own c r ship of trackage leads to the question of nationalization of

the total rail system.

Certainly I would expect that the Office of Technology Assessment

study would consider nationalization- perhaps limited to the Northeast.. -

as another alternative.

There is also the problem of the branch lines and I suggest that

the OTA study be drafted so as to answer the following questions:

Is the federal- state subsidy program adequatc for allowing

continuance of 1ines which a r e necessary to the economic and social

health of local communitics} but which the U. S. Rail Association

finds should not be included in ConRail ?

What are the alternatives to the federal- state subsidy program?

At what point can so- called margina1 lines be made part of the

ConRail system without adverse effect to the profitability of the system?

I do think that we can depend on public hearings and the Rail

Services Planning Office (RSPO) of the Interstate Commerce Commission

t.o inform us of state and community response to the U. S. R. A. proposals

and it s e ems to me that the OTA group should work with RSPO rather

than attempting to gather the same material on its own.

CPC:t d

B-3
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B-4
House which must authorize or appropriate funds for

CONRAIL, I believe a method similar to the one that

OTA used to review the ERDA budget could be employed

to this review.

Becausc of the short time until commcnts are due,

I W O U1d appreciatc your urgent attention to. this request.

cc: Membcrs of thc Technology

As.sessment Board .

B-5

U.S. GOVERNMENT PRINTING OFFICE : 1975 0–593-078