(The following story by Gregory Richards appeared on The Virginian-Pilot website on April 6.)
NORFOLK, Va. — America’s railroads are back to laying track.
For decades, freight railroads tore up or sold stretches of rail as they lost cargo to trucking companies. But that downsizing has reversed itself in the past few years. Freight has flowed back to railroads amid the confluence of congested highways, a truck driver shortage and high fuel costs – problems not expected to fade away anytime soon.
Railroads, including Norfolk-based Norfolk Southern Corp., have been scrambling to accommodate all the freight on their pared-down networks.
“We see a lot of factors coming into play that are going to make rail transportation a more and more desirable alternative for shippers all across the country,” Wick Moorman, Norfolk Southern’s chairman and chief executive, said recently on CNBC.
The railroads’ solution? Spending billions of dollars to bolster their web of rail lines across the country, resulting in the biggest railroad building boom since World War I.
Yet despite record profits and recent soaring stock prices, railroads are increasingly looking to states and the federal government to help pay for expansion projects. Their argument is that by adding tracks, less freight moves by trucks on nearby roads, creating public benefits such as reduced highway congestion and less air emissions. The public should pay for those benefits, railroad officials say.
For Norfolk Southern, that work includes its roughly $260 million Heartland Corridor project to speed shipments of cargo containers stacked two high from the port of Hampton Roads to the Midwest; and the $2 billion-to-$3 billion I-81 Crescent Corridor project to smooth the flow of cargo containers between the county’s southeastern and northeastern reaches.
The Heartland Corridor, for instance, has the federal government pumping in $125 million, and the states of Virginia, West Virginia and Ohio contributing at least another $38 million, according to Norfolk Southern figures. That means, at a minimum, public funds will pay for 63 percent of the project’s cost, with Norfolk Southern picking up the rest of the tab.
But some question the wisdom of the public investments, given that the biggest railroads are highly profitable right now – attracting hedge funds and investors such as Warren Buffett, considered the richest man on the planet, with a fortune topping $62 billion. The railroads also have been spending hundreds of millions of dollars annually on stock repurchases, aimed at boosting the price of individual shares. Norfolk Southern, for instance, spent $1.2 billion buying stock back in 2007 and $964 million in 2006, according to company documents.
“If you truly believe in capitalism, this smacks of socialism,” said Frank Wilner, a spokesman for the United Transportation Union, which represents conductors and brakemen.
The argument for public support has drawn a strong contingent of U.S. lawmakers, railroad interests, state government officials and others concerned about jammed highways and the speedy movement of commerce.
Virginia, for instance, set up a dedicated source of rail funding, the Rail Enhancement Fund, in 2005 to pay for freight and passenger rail improvements. Funded primarily by car rental taxes, it will provide $76.9 million for projects this fiscal year, an amount boosted by a special $65 million appropriation, according to state officials.
Railroads are also looking beyond state and federal direct funding sources. They advocate a federal tax credit for 25 percent of the cost of new rail infrastructure, such as tracks and terminals. Any company that invests in rail infrastructure, such as a factory adding a rail spur, would receive the credit. The benefit would terminate after five years.
“It’s a public investment in a public goal of reducing road congestion, reducing air pollution and being able to move more cargo quicker, which is a benefit to all of us,” said U.S. Rep. Thelma Drake, R-Virginia Beach, a co-sponsor of a bill granting the tax credit.
Norfolk Southern and the other three large U.S. railroads are not leaving their effort to words alone. Together, they spent at least $19.1 million lobbying the federal government last year on this legislation and other issues, according to news reports.
A 25 percent tax credit could produce a windfall for Norfolk Southern, which had $2.6 billion in operating income in 2007. James A. Hixon, its executive vice president of law and corporate relations, said a 25 percent tax credit over five years could pay for most of the I-81 Crescent Corridor.
As Hixon explains it, Norfolk Southern looks to public funding to fill any gaps between the cost of a project and what it is willing to invest, determined by its economic analysis. The financial return on Norfolk Southern’s projects has to exceed the cost of the financing to pay for them, Hixon said.
The railroad mainly looks for public contributions on projects designed around so-called intermodal freight, referring to the large cargo containers switched among trains, trucks and ships. Those promise the most public benefits because of the truck trips that can be eliminated, Hixon said.
With no public money, it would take Norfolk Southern much longer to undertake the Heartland Corridor work, he said. When such projects are completed, Norfolk Southern would gain more capacity to haul freight and run its trains faster.
“You have two different types of benefits that come from one project,” Hixon said. “All we’re saying is let us pay for the private benefits that we think we get out of it, but that’s often not enough money to justify the project. However, if you pay for part of the public benefits that come from this project, then it makes it worthwhile to make that investment.”
A recent report by the investment bank Bear Stearns said Norfolk Southern was trying to arrange between $1 billion and $1.5 billion in public funding for the Crescent Corridor – potentially more than half its expected cost. Hixon said such figures are “in the ballpark,” though the precise amount has not been determined because the railroad’s analysis of the project is ongoing.
Work is set to begin this month on a $57 million section of the Crescent Corridor between Manassas and Front Royal, with the state contributing $40 million to eliminate a projected 597,000 truck trips from Virginia’s highways over 15 years. Also, Norfolk Southern has asked the state for $41.5 million for another section of the project valued at $59.2 million.
Norfolk Southern, the nation’s fourth-largest railroad, has company in asking for public help – even for local projects. CSX Corp.’s National Gateway, a $700 million project, would clear the way for double-stacked container trains to move to the Midwest from the ports of Hampton Roads, Baltimore and Wilmington, N.C. The project is in its preliminary stages, said Gary Sease, a spokesman for the Jacksonville, Fla.-based railroad.
Some economists embrace public investment in rail projects, given roads and airports also get public subsidies. The idea is that reducing tractor-trailer traffic would reduce congestion, help make the interstate highway system safer and cut down on the cost of moving goods.
James V. Koch, an economics professor at Old Dominion University, offers another reason closer to home: Rail transportation is a key component of the local port, which constitutes between 10 and 15 percent of Hampton Roads’ economy.
“This,” Koch said, “is almost an economic survival issue for Hampton Roads.”
So why not help railroads like Norfolk Southern build out their infrastructure?
“This is not an industry that’s limping along,” said Robert G. Szabo, executive director of Consumers United for Rail Equity, a shippers advocacy group.
Not all of the big rail projects have relied on public funds.
Burlington Northern Santa Fe Corp., the second-largest U.S. railroad, spent $1.4 billion between 1996 and 2007 adding a second set of tracks between Los Angeles and Chicago, said company spokesman Pat Hiatte. Burlington Northern paid for that work after no opportunities emerged to partner with governments, he said.
Steve Ellis, vice president of Taxpayers for Common Sense, said the strong demand now for moving freight, coupled with limited capacity, provides a strong market incentive for railroads to make improvements on their own. Providing a tax credit, for example, for something the railroads are going to do anyway is a “wasted opportunity” and represents “a big sweetheart deal for the railroads.”
Ellis, whose Washington-based group is a nonpartisan budget watchdog, said the tax-credit legislation should be limited to projects that would increase safety or take trucks off highways. As of now, he said, it applies to all projects that increase rail capacity.
“It’s not really a smart business decision for Uncle Sam,” Ellis said of the legislation.
For some interests groups, it is a complicated issue to address.
Take the American Trucking Associations, for example. Trucking companies are among the railroads’ biggest customers; they move long-distan ce freight with trains. On one hand, many will benefit from more efficient rail service. On the other, these projects are intended to reduce the number of trucks on the road, and the group does not want funding for highways to be reduced.
“We’re their No. 1 customer,” said Tim Lynch, senior vice president of the trucking group. “We want to see them be efficient and be able to move the freight.”
Szabo’s shippers advocacy organization is in a similar situation. It is not against tax credits per se, but it wants certain issues to be met at the same time. That includes addressing the monopoly pricing power the group contends the railroads have in some areas of the country.
Wilner, of the transportation union, adopts a more practical argument when it comes to public support for rail improvement. He said his group supports the concept of tax credits. But he said he thinks it is unlikely, despite the lobbying efforts of the railroads, that the legislation will pass the Democratic-controlled Congress this year.
“The railroad industry… is realizing greater profitability than it has in decades,” Wilner said. “To suggest that with a war going on, with a domestic housing crisis, 47 million Americans without health care insurance, that a profitable industry should pay fewer taxes with such significant needs in the community is being seen as outrageous.”