Urban Rail Transit and Freight Railroads: A Study in Contrasts

published in Innovation NewsBriefs Vol. 19, No. 6 www.innobriefs.com

February 17, 2008

Investment in Urban Rail Transit Has Peaked

Two years ago we suggested that the era of multi-billion dollar system-building investments in urban rail transit is coming to an end. We wrote:

“The 30-year effort to retrofit American cities with rail infrastructure, begun back in the Nixon Administration, appears to be just about over. To be sure, federal capital assistance to transit will continue, but its function will shift to incrementally expanding existing rail networks and commuter rail services rather than embarking on construction of brand new rail transit systems. (“The New Starts Program is Changing Its Emphasis,” March/April 2006).”

The newly released Fiscal Year 2009 Budget Proposal of the U.S. Department of Transportation confirms the truth of that speculation. Of the 30 transit capital projects proposed for funding in FY 2009 17 are rail projects and only two among them are new projects recommended for full funding grant agreements (FFGA) (the projects in question are light rail transit extensions in Denver and Seattle). The remaining 13 projects are modestly funded “Small Starts,” of which 11 are Bus Rapid Transit (BRT) projects. Twelve additional rail projects are in Final Design or Preliminary Engineering, for a total of 29 rail projects in construction or the engineering pipeline. By contrast, seven years ago, the FY 2002 budget listed a total of 69 rail projects in construction or engineering stage (NewsBrief, “The Prospects for Rail Transit,” Sept/Oct 2001.) Even as recently as FY 2007, seven new rail projects were recommended for FFGAs.

What accounts for this profound transformation in the federal transit program? The simplest and most obvious explanation is that after 30 years of sustained federal investment in urban rail systems— an investment program that resulted in the construction of 22 new light rail systems and 5 new heavy rail systems— the New Starts program is beginning to run out of cities that can afford or justify cost-effective rail transit investment. Norfolk, VA, has been the only new urban area to have joined the “club” of rail cities in recent years. The only other cities that can hope to join the rail club in the foreseeable future are Charlotte, NC and Orlando, FL, (their projects are currently in preliminary engineering.) The bulk of future investment in rail transit will almost certainly take the form of incremental additions to existing rail networks.

Also responsible for the decline in rail projects is the rising attraction of the more affordable bus rapid transit (BRT) alternative with its incentive of a simplified FTA evaluation and rating process. Indeed, a recent GAO report noted that “bus rapid transit has become the most common transit mode for projects in the New Starts pipeline.” (Future Demand Is Likely for New Starts and Small Starts, July 2007). While rail projects still represent a major share of the latest New Starts budget (87.5% of the $1.62 billion capital investment budget in FY 2009 ), the share of capital assistance devoted to rail projects is expected to decline as existing major rail grant commitments are fulfilled and the pipeline fills with more affordable “Small Starts” projects of the BRT variety.

Freight Railroads Are Undergoing a Dramatic Expansion

In the meantime another rail sector — the freight railroads— is experiencing unprecedented expansion. “For the first time in nearly a century railroads are making large investments in their networks,” wrote Daniel Machalaba in a well-documented front-page article in the Wall Street Journal (“New Era for Rail Building,” WSJ, February 13, 2008). “Their campaign is altering the corridors of American commerce, more so than any other development since interstate highways spread to the interior,” Machalaba noted. Since 2000, freight railroads have spent $10 billion to expand track, build freight yards and buy rolling stock and they have $12 billion more in upgrades planned. “It’s been a century since railroads embarked on a similar spate of capital investment,” Machalaba observed.

The catalyst for this burst of investment has been the rapid growth of international trade and its rising demands to move containers of finished goods from ports to major cities. Demand for rail service increased sharply when Asian imports intensified starting in 2003. While long-haul trucking continues to be the backbone of the nation’s land-based freight system, railroads are stepping in to supplement the goods carrying capacity in many corridors. Burlington Northern was the first to begin expanding the physical capacity of its rail network by adding a second set of tracks to portions of its Chicago-Los Angeles Transcon line, now nearing completion. Union Pacific followed with an upgrade of its Sunset Corridor from Los Angeles to El Paso, Texas. Norfolk Southern is improving access to the ports of New Orleans and Norfolk by expanding the capacity of its Crescent (New York- New Orleans) and Heartland (Chicago-Norfolk) rail corridors. CSX is doing the same in its Chicago-to-Florida Southeast Corridor.

What is remarkable, is that this massive expansion and modernization of freight rail infrastructure has been accomplished without the help of any public funds. From 1980, when the Staggers Rail Act partially deregulated railroads, through 2006, railroads have invested some $400 billion of private capital in their systems according to the Association of American Railroads (AAR). Currently, railroad companies are investing 18 percent of their revenue in new infrastructure, more than any other industry, says AAR. They are able to do so because dramatic increases in freight volume due to booming international trade have led to record earnings. Forecasts are for continued profitability, with railroads prepared to continue funding internally the vast majority of its planned rail infrastructure investment.

Could highways become more like freight railroads? Could future highway infrastructure be financed with user fees and private capital, just like rail infrastructure? Or is the notion that highways are a public good to be supported primarily by taxpayers too deeply ingrained to allow for such a radical change in approach? The debate on this score has just begun and its eventual outcome is uncertain. Ultimately, the answer may hinge less on how Congress decides to fund the federal contribution to the surface transportation program than on how governors, state legislatures and local governments across the nation decide to approach the long term challenge of financing new road infrastructure. The signals from many state capitals suggest that user fees in the form of tolls are increasingly being considered as the principal means of financing future highways and bridges. Governors and legislative committees in as many as 14 states are contemplating adding tolls to their arsenal of revenue measures. This does not mean that the need for fuel taxes will disappear. The gas tax will continue to be needed to fund the ever-growing requirements to preserve and modernize the nation’s aging road facilities. However, finding the resources to pay for new capacity will require a more entrepreneurial approach, with the freight railroads serving as a possible financing model. User fees in the form of tolls may turn out to be the most sensible way to ensure the long-term integrity of the highway system without imposing an unacceptable tax burden on the American people.

Please feel free to forward or reprint this item with appropriate citation. All correspondence, including requests to subscribe and unsubscribe, should be addressed to: C. Kenneth Orski, Editor/Publisher; email: korski@verizon.net; tel: 301.299.1996; fax: 301.299.4425

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©2007 Coalition On Sustainable Transportation