Railroad shipping: Heartland report examines how U.S. freight rail bottlenecks may be prevented

Jeff Berman, Senior Editor -- Logistics Management, 12/19/2007

CHICAGO and WASHINGTON—It has been well-documented that United States railroads are likely going to need significant infrastructure improvements in order to meet the projected increase in railroad freight demand.

This point is fully supported by a report released in September by the Association of American Railroads in conjunction with Cambridge Systematics, which concluded that approximately $148 billion needs to be invested to expand the nation’s freight railroad infrastructure over the next 30 years to ensure that adequate rail capacity is in place to meet that demand. The report added that this investment in infrastructure would help to ease highway congestion, and reduce stress on highways and bridges, among other factors.

While the AAR’s findings are resonating in railroad circles, a new report from The Heartland Institute, a Chicago-based national nonprofit research and education organization, examines other ways in which freight rail bottlenecks in the U.S. may be prevented. Railroad industry experts told Logistics Management that some of the findings of the Heartland Report, entitled “Solving the Freight Rail Transportation Bottleneck,” are feasible, while others may not be entirely applicable given the current state of affairs on the rails.

One of the report’s main findings, writes author Wendell Cox, a senior fellow at the Heartland Institute and also a Department of Transportation consultant, is that “with sufficient funding, the railroad industry could add the capacity it needs to handle much larger freight volumes,” which would cut back on congestion and highway bottlenecks by reducing the need to use trucks for longer hauls. And Cox adds that it would also result in shorter drive times for commuters, too.

“You can draw the conclusion at a high level that this is not false, but if you look at what is going on, there is a disconnect,” said Brooks Bentz, a partner in Accenture’s supply chain practice. “The trucks that railroads are taking off the road are long-haul carriers moving 500-600 miles, which is more likely to move by rail already. But a regional run from New Jersey to Boston will never go on rail ever in our lifetime.”

Bentz added that this finding is somewhat misleading due to the fact that trucking’s demographics comprise a lot of short haul business that is not convertible to rail, and he said even if railroad capacity were to be expanded on these short haul routes, day to day business would not be impacted whatsoever.

Other recommendations cited in the Heartland report call for various market approaches, including: granting railroads investment tax credits and accelerated depreciation allowances for their choice of infrastructure improvements; removing the requirement that Amtrak trains be given priority over freight trains and allow freight railroads to charge Amtrak the fully allocated costs for its use of rail infrastructure; and reducing existing barriers to new investment.

In terms of accelerated depreciation allowances for certain railroad investments, Tom O’Connor, vice president of Snavely King Majoros O’Connor & Lee Inc., an economic and management consultancy, noted that this is an area that may be better served from an independent review.

“Before accelerating the existing depreciation it would be advisable to conduct an independent review of this source of cash flow, including depreciation rates, service lives, salvage values and dismantling and removal costs,” said O’Connor.

Investment tax credits: In this report, author Cox fully supports the concept of granting railroads investment tax credits, which would be put toward infrastructure investments and improvements. This is in line with H.R. 2116: The Freight Rail Infrastructure Capacity Expansion Act of 2007 introduced in May, which focuses on improving railroad freight infrastructure by providing a 25 percent tax credit for businesses making investments in new rail infrastructure.

This tax credit would, in turn, be available to any shipper or carrier that makes a “qualified” expenditure, such as track, grading, tunnels, signals, certain locomotives, bridges, yards, terminals, and intermodal transfer and transload facilities.

“Leveraging private sector investments that are offered out of the public policy arena is the way to go,” said William J. Rennicke, director of Oliver Wyman, a Boston-based management consultancy. “But the suggestion for government involvement beyond incentives is something I would be concerned about, because it is not that efficient.”

And although the study calls for removing existing government policies and programs that interfere with market processes, Snavely King’s O’Connor said that many observers would cite the government policy granting rail anti-trust immunities as an unproductive holdover from an earlier era when dozens of railroads competed in the transportation marketplace. 

To view an executive summary of the report, click here.