The North American freight railroad business is chugging along very nicely, reports the Wall Street Journal, and railroad companies are engaged in a building boom surpassing anything seen since the industry’s 19th century golden age. Major rail lines are spending $14 billion this year on rail yards, refueling stations, additional track and upgrades to old track — more than double what they spent a decade ago.
What’s going on? Does this reflect a booming economy? Not really, although the shale/oil gas revolution clearly is helping. What’s happening is that America’s freight railroads are gaining market share.
Rail companies have become far more efficient than in the days when they struggled under the dead hand of federal government regulation. U.S. freight rail rates are nearly half of what they were three decades ago. On-time performance has improved dramatically — almost to the point where delivery by train is almost as reliable as by truck. Rising fuel prices are a help, too. Freight rail more energy efficient than trucks over long distances — trains can move one ton of freight about 500 miles on a gallon of fuel, making them three to four times as energy efficient as trucks.
The U.S. freight rail system is even becoming a source of national competitive advantage in manufacturing. If not for rail, Yossi Sheffi, director of MIT’s Center for Transportation and Logistics, told the Journal, “We wouldn’t have as many companies considering moving back to the U.S. or near-shoring.”
Bacon’s bottom line: Fascinating, isn’t it, how the sub-sector of the transportation economy with the least government involvement, seems to be the healthiest. Roads and highways are built overwhelmingly with public funds and investments are guided by politicians… and the sector is in perennial crisis. Freight railroads are built overwhelmingly with private funds and investments are subject to rigorous ROI analysis… and the rail sector is thriving.
The Commonwealth of Virginia has no established methodology for determining whether or not the money spent on roads, bridges and highways yields a positive economic return. Thus, the state can spend $244 million on a project like the Charlottesville Bypass without the faintest clue as to its economic return on investment. (By my calculations, which no one has disputed, the Bypass likely will generate an ROI less than the state’s tax-subsidized cost of capital, which represents a net destruction of wealth.) Rail companies, by contrast, have rigorous investment guidelines. Typically, large private corporations won’t invest in a project unless it provides a ROI of 15% to 20% — or even higher, if the projects are risky.
Investment in transportation infrastructure is necessary for any state, region or locality that wants to grow and prosper. But that doesn’t mean that every transportation investment is economically justified. Here in Virginia, like most everywhere else in the U.S., we are flying blind. We are throwing around billions of dollars with no idea whether we are creating economic value or destroying it. We cannot hope to survive the fiscal hard times to come if we do not mend our ways.
— JAB
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