House T&I Committee hearing focuses on railroad investment

Jeff Berman, Senior Editor -- Logistics Management, 3/5/2008

WASHINGTON—The amount of money being spent by Class I railroad carriers for infrastructure improvements continues to rise every year, as evidenced by yearly totals compiled by the Association of American Railroads.

As an example, the AAR reported last April that Class I freight railroads would invest 9.4 billion in 2007 for various initiatives designed to increase capacity, improve service for shippers and rail customers, and augment existing track and equipment. In 2006, the AAR said these same railroads invested $8.6 billion on these items.

While this type of investment benefits the industry and is being put towards projected freight expansion totals, there is a feeling in Washington that investments into Class I railroads made by hedge funds and other private equity groups are doing more harm than good for the industry. This was the general consensus at a hearing held today by the United States House Committee on Transportation and Infrastructure, entitled “Investment in the Rail Industry.”

Speakers at the hearing highlighted the fact that many hedge funds and private equity groups do not have the railroad’s financial health long-term health at the top of their priority list. Instead, they said, these concerns are more focused on demanding capital expenditure cuts and large rate increases that will slow capacity growth, hurt the industry, and economy, said Corrine Brown, D-Fla., Chairwoman of the House Subcommittee on Railroads, Pipelines, and Hazardous Materials, at today’s hearing.

A contentious issue cited at the hearing is the relationship between The Children’s Investment Fund (TCI), a Caymans Island-based hedge fund, and Class I freight rail carrier CSX. As an owner of nearly 20 percent of CSX stock, TCI, said House Transportation and Infrastructure Committee Chairman James B. Oberstar (D-Minn.), would like to see CSX “take a number of disconcerting steps, such as diverting capital expenditure for stock buybacks or freezing capital spending in the face of an uncertain regulatory environment.” Oberstar added that these types of investment groups often hold different priorities than a railroad and sometimes these priorities “conflict with the long-term viability of a railroad.”

Although Oberstar would like to see TCI focus on CSX’ core focus, another railroad industry expert has a different take.

"CSX would better serve its customers by devoting [resources] to improving its metrics, which are in the cellar compared with other railroads, rather than using its lobbying strength with the Chairwoman of the House Railroad Subcommittee from CSX's [Jacksonville headquarters] to trash one of its largest investors," said Frank N. Wilner, an economist and a former chief of staff at the Surface Transportation Board, who currently is director of public relations for the United Transportation Union, in an interview with LM.

Regardless of the TCI/CSX quarrel, one theme continually addressed today was that although railroad infrastructure is critical to the U.S. economy, much of it is “up for grabs to the highest bidder,” noted John L. Mica (R-Fla.), Republican Leader on the House Transportation and Infrastructure Committee.

Mica stressed that more attention needs to be paid to rail and related infrastructure projects, and he added that Congress needs to decide on terms for private investment in railroads to protect public interests. He added that railroads require huge capital investments and face an uphill battle, because the railroad industry does not have the same pattern of competitiveness as other U.S. industries.