Infrastructure Investment, Congestion and Rail

Interview with BNSF Railroads' Matthew Rose

Matthew Rose is the CEO of BNSF Railroads and was appointed to the National Surface Transportation Policy and Revenue Commission, which is “working to examine not only the condition and future needs of the nation’s surface transportation system, but also short and long-term alternatives to replace or supplement the fuel tax as the principal revenue source to support the Highway Trust Fund over the next 30 years.” Rose addressed the Transportation Research Forum at a recent luncheon. Reason Foundation’s Amanda Kathryn Hydro conducted an interview with him shortly thereafter to discuss his views on transportation public policy.

Hydro: “Transportation is at a crossroads,” is how you began your address. You emphasized bringing everything up to good working order – do you see that or something else, as the next step the transportation public policy community must take?

Rose: Public policy should aim to bring our transportation system up to a state of good repair, expand capacity where it is possible, offer transportation alternatives where it is not, and endeavor to reduce VMT (vehicle miles traveled) and emissions in the process. Additionally, public policy must create an incentive for private companies to invest in infrastructure and to bring good investments up sooner in their cycles.

Hydro: In your presentation, you used Transportation Secretary Mary Peters’ quote on how we have increased transportation funding 100 percent while congestion has increased by 300 percent. Being in the transportation business, how do you think that occurred?

Rose: Congestion is caused by people – you and me. Our population has grown faster than we can build the infrastructure to support it. In 2005, vehicle miles traveled (VMT) on the nation’s highways reached 3 trillion miles for the first time ever, five times the level experienced in 1955. Also, highways have expanded miles by 7 percent, yet vehicle miles traveled have increased 96 percent.

Additionally, we have seen our economy transition from a production-based one to a consumption-based one; therefore, we are importing more consumer goods from Asia. While the number of rail track miles has decreased 39 percent, rail gross ton miles have increased 65 percent. While the congestion on the rail side is relatively uncongested in contrast to the highway system, if we look at the future population projections over the next three decades, growing volumes of cargo are expected to lead to a significant deterioration on the rail network if we do not bring capacity improvements on sooner in their cycle.

As I mentioned in my presentation, we are at a crossroads where excess capacity just doesn’t exist. This has resulted in a tipping point where many of our facilities are experiencing congestion costs. Demand is outstripping available capacity.

Hydro: : You repeatedly said that we need to build more infrastructure. What is your opinion on utilizing public-private partnerships to do this?

Rose: My comments are aimed at what is now a relatively well-established freight railroad public funding paradigm for projects that have both private benefits (such as capacity increases) and public benefits (such as emissions reductions and highway congestion relief). Projects of national significance, such as the Alameda Corridor or CREATE.

Going forward, to create a successful freight PPP program, we need standardize the public benefit return of investment methodology for evaluating and negotiating public private partnerships between railroads, state, local and federal interests to ensure that the public and private sectors pay for their own benefits.

We need to ensure no misallocation of public funding to projects which would require non-economic private investment. And we need to ensure that grants/loans/public financing for rail-related projects do not supplant or diminish private investment.

While public private partnerships have the ability to bring great benefits to both parties, we do need to ensure these projects make sense from both a public benefit standpoint, as well as improving the goods movement system.

At BNSF, public-private partnerships must go through the same cost-benefit analysis as any other capital project on our network. We have to ensure these projects meet an adequate return on investment. We also believe that the public sector must make the same analysis when allocating scarce public dollars appropriately.

PPPs take a number of forms, including mixed public and private investments or government policy incentives that spur private investment, such as an investment tax credit. All of these tools should be utilized by policymakers to create more capacity.

Hydro: At the luncheon, you spoke very convincingly about how you believe in the benefits of global trade and bringing foreign investment to the table to fund infrastructure – would you recap that for the readers of this interview?

Rose: If an investor is sound, transparent and plays by the rules, there should be no discrimination against those dollars per se because the U.S. will lose out on strong capitalization opportunities.

With regard to privatization in the transportation industry, the threshold question ought to be whether there is privatization of a certain facility. The Commission believes that PPPs should play an important role in financing and managing national surface transportation systems. It can be another important financing tool for state and local governments and the decision of when and how to use private financing of transportation systems largely is in the hands of those officials. Once the decision that private sector financing or concessioning provides value has been determined, there shouldn’t be discrimination against foreign capital without a demonstrated security reason.

Hydro: How has competition shaped the U.S. freight rail industry and its ability to compete in the global economy?

Rose: U.S. infrastructure and regulatory policies have put freight rail at a disadvantage for decades. The U.S. has had a myriad of surface transportation policies that over time, have worked to direct freight toward the highway. For example, the largest trucks do not pay their fully allocated costs of the wear and tear on the bridges and roads they use. Other payors of the gas tax cross subsidize these highway users. If forced to pay their actual usage, the economic of truck usage would have been different and much less beneficial. Nonetheless, railroads have still been able to grow volumes with increases in global trade and should continue to do so. If policy makers “leveled the playing field” by making policy truly mode-neutral (i.e., trucks pay their full usage of wear and tear), rail would be even more competitive.

Hydro: Where do you see freight rail providing value added in the U.S. transportation system?

Rose: Freight rail provides tremendous value to the U.S. transportation system. Freight rail demand, will continue to grow because it’s cleaner, safer and more efficient. Rail gross ton miles are expected to be 1.82 trillion, or to grow at a compound annual growth rate of 1.94 percent by 2020.

Today, American railroads move 40 percent of our nation’s freight, but account for just 2 percent of all transportation-related greenhouse gas emissions, and just 0.6 percent of total U.S. greenhouse gas emissions.

In addition, the freight rail networks are private systems that are owned, operated and maintained by our shareholders and not the public. Not only are we a key part of the U.S. transportation network that should grow, we can do it with minimal public investment.

We have already seen that the nation’s trucking companies are using more freight rail intermodal because of escalating fuel prices and driver shortages and retention. You can reasonably assume that if the highway system is not able to accommodate its share of the growth, more and more freight will be shifted to rail. This is why a National Freight Program is important. We need to look at the transportation system holistically because each piece impacts the other.

Hydro: Are freight railroads concerned about encroachment from passenger rail, particularly commuter rail, on their tracks and rights of way?

Rose: Passenger rail-intercity and commuter-will need to grow to supplant VMTs and give Americans more affordable, sustainable choices in light of higher fuel prices, growing transportation congestion and related environmental concerns. However, passenger rail cannot be achieved at the expense of freight rail operations-the most fuel efficient and sustainable mode of freight transportation.

I do support the Commissions recommendations for the separation of freight and passenger rights of way in dense corridors, which would allow freight and passenger to achieve their full potential and is consistent with passenger rail networks in other countries.

Hydro: Switching gears a bit. In your address, you talked about toll roads. You said, “Money brought in from toll roads needs to be put back into the roads, not some other feel good social program.” Why is this important?

Rose: Because it establishes a direct connection between the use of the road and the payment for that use. Given the infrastructure crisis this country is facing, it is important to maintain a link for taxpayers between the taxes they pay and the infrastructure it supports.

Hydro: Here at Reason Foundation, we are strong advocates for accountability and performance reviews; you also talked about these. What do you believe it is about accountability and performance reviews that will help steer this country down the right path at this crossroads?

Rose: Current programs rarely link project performance to funding, and the economic justification for projects is seldom fully evaluated either before or after the projects are implemented. Performance standards and economic justification would do more than just restore public confidence in the transportation decision-making process, it would allow for Congress and the public to be more amendable to agreeing to invest, whether through taxes or other user fees, to meet the Nation’s transportation investment needs.

Hydro: In recent years, we have heard a pretty big rallying cry for earmark reform. In fact, just yesterday, the Senate’s Fiscal Reform Working Group presented their recommendations for even greater earmark reform. In your speech you also spoke out against earmarks – can you tell us how you see earmarks affecting the transportation policy sphere?

Rose: I believe earmarks are usually a response to scarce funding; Members resort to earmarks when it appears priority projects are not going to get attention in the regular order of programmatic funding because the backlog of projects. Thus, usually, there is nothing “suspect” about earmarks. I believe a better alternative is for Congress and the public to put a premium on programmatic funding established on the basis of objective needs, determined by planning processes and cost benefit analysis. When combined with adequate and appropriate funding levels, more often than not, such a policy would yield the best projects and reduce the political imperative to earmark. To the extent that non-priority projects – those which do not advance a federal transportation objective – continue to get earmarked, there ought to be a political price for failing to be a steward of public assets; however, that should be a matter between a Member and the voter.

Hydro: What do you think the federal government’s role is in transportation; you spoke about how its role should be limited, but how?

Rose: There is still a federal role in transportation, particularly standards, planning and commerce-related transportation. Obviously, the states and local governments have become quite sophisticated in their ability to develop and manage surface transportation systems; their funding contribution to their transportation system has, by necessity, grown as well. However, the federal government should continue to oversee uniform standards, require uniformity and meeting federal standards and I believe having a continued, financially meaningful federal program assists in this role.

With regard to freight rail regulation, while more rail capacity is clearly needed, at BNSF, we do believe the regulatory model is working as intended. A return to rate and service regulation will only stifle our ability to invest in capacity expansion.