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Guidelines for Public-Private Dialogue G-61 Land Use Actions Land use represents a different kind of institutional issue. Some planners argue that there are ways in which congestion is not a transportation matter at all and that it results from policies shaping where and how densely the population lives, how industry is encouraged and zoned to locate, the mixture of activities permitted to come about, and other factors often concerned with the use of land. Transportation agencies normally influence, but do not determine, these policies. However, their use of institutional influence--with economic development commissions, zoning boards, and others--is important to the success of rail investment. Siting decisions and procedures affect rail's integration with other parts of the transportation network, its fit with the community, its popularity with citizens, and the willingness of carriers to accept development time frames. Proactive cooperation, by the railroads with the transport planners and by the planners with land control groups, can make rail ventures more productive in relief of the high- way system. Collaborative steps that can be taken by carriers and public agencies include these: States can offer incentives to local communities (such as infrastructure grants or tax incen- tives) to help carriers overcome the not-in-my-backyard issues that surround development of truck-generating nodes like intermodal terminals. The geographic perspective of state agencies (versus MPOs or local communities) permits a more reasoned trade-off between the challenges of freight flow concentration and reduced overall truck-miles on a state's highway network. Carriers can (and do) provide incentives to develop client clusters where a large number of carload rail customers can receive regular switching service in proximity to a terminal. Such concentration improves service reliability by supporting more frequent service and keeps down travel distances to the client sites. Public officials can facilitate the organization of client clusters through supportive zoning and roadway planning. Urban brownfield sites situated near rail terminals can be particularly attractive for such use because of the decontamination costs associated with retail or residen- tial redevelopment of the land. The evolution of institutions is one of the primary means by which maturation of public- private partnerships in rail will occur. The six steps outlined in this section can lead to stronger organizations and more vigorous and better sustained programs of activity. They extend and reinforce the framework wherein transactions are designed, which move these programs to implementation. 4.5 Designing Transactions Transactions are the commercial structures for projects. They reflect the project's principles and the agreement between its participants. Ultimately, they will be reduced to contracts, but this discussion will focus earlier in the process and discuss the factors and considerations that affect the principles and shape the agreement. It is useful to distinguish between two categories of public rail projects, because they establish different areas of emphasis. The first category is network improvements that accommodate the current progress of rail operations, including indigenous growth; the second category is improvements that stimulate greater traffic growth by opening new markets. First-category proj- ects augment the present service offerings and conform to the regular market focus of carriers. Their familiarity makes them simpler to sell and execute, although their difficulty becomes greater with size and with jurisdictional and participatory scope. Second-category projects have

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G-62 Guidebook for Assessing Rail Freight Solutions to Roadway Congestion a larger measure of uncertainty. They aim for new business and may require changes in the con- figuration of service, such as higher train speeds or service frequency. These features make them more challenging to develop, but they are attractive to some carriers in some places, and at times strongly so. The public interest lies with both types, because both influence capacity and the contribution of truck traffic to congestion. The two categories are presented separately in this section. More of the common elements for the design of transactions are listed with the first group, but shared factors appear in each. For example, the assurance of traffic volumes is critical for any initiative, yet because there is more uncertainty surrounding it in second-category projects, it is discussed under group two. The elements are summarized in Exhibit 4-4. Category 1: Progress Improvements First-category projects support conventional markets by adding capacity or lifting operating constraints. Their significance may be local or widespread if they treat bottlenecks at the top of the network like hubs, ports, or mainline connections. Investor risk is moderated because the initiatives build on existing traffic, but the growth they accommodate and the roadway volumes they avert can be major. Development of public-private transactions for such projects should incorporate the following practical steps: Identify Potential Beneficiaries. A broad range of stakeholders in the success of the project should be identified. Benefits accruing to these groups should be quantified and then trans- lated for easy comprehension by lay audiences. Similarly, the parties to the transaction need to understand their effect on one another. For example, the contribution of public capital can reorder a railroad's resource priorities. Identifying the carrier's internal incentives will help to cement their commitment to the public process. Build a Broad Political Structure to organize stakeholder involvement and to address the embedded limitations of public programs. The support of the local freight interests is essential, and the influence of beneficiaries must be harnessed. For example, special corporations can be formed to overcome prohibitions on public funding of rail, provided there is a mobilized will to do so. Also, once a coalition is formed to identify, finance, and implement projects that fulfill clear needs, that coalition can quickly move to additional projects. Carefully Consider Scale in a project. The scope should be large enough to achieve a critical mass of benefits, supporters, and operating volume, but will grow in complexity as the number of political jurisdictions grows. Participants can favor single-jurisdiction projects until funding and management solutions mature for the wider programs. Exhibit 4-4. Transaction Factors and Considerations.

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Guidelines for Public-Private Dialogue G-63 Consider Network Strategy. Network strategy may determine the value of a project for rail carriers and can enlarge its value for the public. In a network business like railroading, the productivity of an improvement can depend on or be enhanced by conditions and parallel actions in other localities, and beneficiaries can be well outside the immediate geographic lim- its of the project. Railroads will have a strategy for this and states should consider preparing one, because it establishes a context for projects, helps identify initiatives where the benefits and traffic attraction are broader, and supplies a systems approach to development of infra- structure. This implies that public authorities should examine harmonization of their efforts with external jurisdictions. Although they cannot become hostage to an external set of political approvals, coordinated parallel development is another method for agencies to treat project scale. Adjust for Benefits. Incorporation of public benefits should cause the revision of some private plans for freight investment. Railroads ordinarily will invest in equipment and facilities based on a financial analysis that includes costs and benefits to themselves and their customers. They do not ordinarily consider the effects (either way) of their decisions on congestion, the envi- ronment, communities, or regional economic development. Adding in these public benefits could result in different sizes and locations of terminals, different routings of through traffic across cities, higher capacity mainlines, and further rationalization of the rail network in metropolitan areas. The public contribution to investment should consider the cost of these additions. Take Care of the Community. Well-designed rail projects give advantages to surrounding communities that do not depend just on freight shipping factors. Commuter rail improve- ments, grade crossing safety, and community re-development opportunities help gain accept- ance for a freight mobility program. Transit and passenger rail authorities often enjoy deeper or different political support within a metropolitan area than do freight stakeholders, which can strengthen a freight coalition. Segregation of freight traffic from neighborhoods--through grade separation or route arrangement--produces benefits by improving popular perceptions of safety, reducing congestion, and softening community impacts. Minimizing the detrimen- tal effect of construction also is important. One project did this by (1) preserving the histori- cal character of improvements; (2) smoothly handling problems and concerns as they came up; and (3) closely coordinating between agencies so that improvements were accelerated. Seek Balance. The willingness of various railroads to work together and to negotiate ways to distribute costs is essential in a project with multiple entities. Competitive concerns between rail carriers, or between motor carrier and rail interests, can stymie a project and should be addressed in its design. The organizing agency should have the scope to attend to these concerns, and it can tackle them by devising a program of improvements that benefits multi- ple groups. For instance, multiple projects or separate phases of a project can be packaged to deliver investment opportunities for different parts of the surface transportation network and for different stakeholders in turn. Third-party rail operators can provide balance at joint facil- ities whose operation is important to more than one carrier. Shortline railways and switching roads supply a neutral and often lower cost form of common access to many ports and terminal areas today. They can be a satisfactory solution for managing infrastructure whose function is vital to the public and where there is a need to support rival rail networks. Ensure Role Clarity. For the sake of efficiency and accurate expectations, the roles of public- and private-sector participants require clarity from the beginning of a project. To that end, full responsibility for certain categories of capital and expense items should be allocated to specific participants, as distinct from cost-sharing schemes that would entail complex recon- ciliation of public and private financial accounts. As an example, public agencies could take on the financing role for specific net additions to line capacity in a given location, while the railroad would be responsible for replacement in kind of existing capacity, as well as capital renewals going forward.

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G-64 Guidebook for Assessing Rail Freight Solutions to Roadway Congestion Ensure Equity. The contributions from each party to a project should be scaled to its bene- fits, in order to relate investment to return. This may not be strictly practicable if the parties are operating under resource constraints, and it is reasonable for one to supply funds that another reimburses. However, no party should be expected to pay for advantages it does not seek, all should be satisfied that their results are worth their investment, and contributions need not and will not be all financial. Expedite. The long ripening time of projects in the public sector and the sometimes byzan- tine approval process are recognized obstacles to investment for railroads, whether they proceed alone or in partnership. Fast-track procedures, go-between services, cushioning with citizenry, and political cover for nailing down agreements are ways that public agencies can simplify and expedite requirements for their rail counterparts. These steps raise efficiency, and they also make public collaboration more attractive to railroads as a means of doing business. Plan for Tolls. Plans for road pricing are intensifying in the United States, with a particular emphasis on truck tolling. Truck traffic that seeks to avoid these charges will move to alter- nate highways or secondary roads, and some may be picked up by rail. In Europe, road pric- ing is used in conjunction with rail programs to encourage their success. It is improbable that this would develop in the United States, but it is appropriate for U.S. agencies to anticipate the effect of road pricing on rail capacity requirements and build into project designs the recog- nition that road tolls are a stimulus to rail. Utilize Variable Compensation schemes with carriers. Financing systems will be attractive to railways that replace up-front capital investment with contributions linked to use, essentially turning fixed costs into variable costs. In some projects arranged this way, rail carriers found their direct operating cost savings on existing traffic were sufficient to cover the usage charges, which compensated the public for new or improved facilities. The repayments from this method of financing also can be placed in trust, replenishing the public fund for development of further rail system improvements as volumes grow. Employ Performance Measures. Freight performance measures are being introduced gener- ally in statewide plans, for the rail and the highway modes. Rail measures can reveal the fitness of carriers to attract new volume and the sections of the network requiring improvement, and thus suggest market and investment opportunities. For project applications, performance tracking is a vital part of sound and sustained investment. Because railroading is a service, investments in plant have to be protected with competitive operations sustained through time. Thus, it is important to know not only the volume change across a facility versus the invest- ment plan, but also whether it is being operated according to the service plan and will continue to fulfill its purpose. Public-private initiatives can be judged to have been successful when (1) the public investment or support is sufficient for the private carriers and customers to justify greater use of rail and less use of highway transport; (2) the public benefits are sufficient to justify the public portion of the investment; and (3) there were no clearly superior means of achieving similar results. Performance measures are critical to determine this success and earn the continuance of funds. They should be integrated in the project undertaking and expressed in covenants between the parties. Category 2: New Market Improvements Second-category projects pursue the diversion of truck traffic from new lanes and markets. They may offer standard services for new places and customers, but typically they draw on higher performance, expanded capacity, better routes, fresh equipment, or other improvements to attract business. The standards for cost, speed, and reliability in these markets are set by motor carriage, and they have to be matched. This will be done most often, but not exclusively, with intermodal service.

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Guidelines for Public-Private Dialogue G-65 There must be room--available or feasible physically--for the new traffic; it must fit with other operations on the network; and it must be more attractive than alternatives. Then, the key dynamic in traffic diversion is an investment that supports the introduction of new train service with competitive performance characteristics and costs of operation reduced to the point where the modal balance shifts. Because the performance is unproven and the traffic must be captured, there is significant uncertainty for the railroad and other investors. Railroads accept this risk selectively, with projects small and large. However, it is a normal business risk; it is the way that a business grows and the way that roadway relief will grow. Development of public-private trans- actions for these projects should begin with traffic assurance, and proceed from there with a series of general steps. Traffic Assurance No traffic diverts without a change to stimulate it, and new rail services introduce this change. Adequate use of new services by transportation buyers is one of the central concerns for second- category project investments. Transactions that create these investments can attack this concern in three ways: Understand motivations to begin with. For intermodal products particularly, there are sev- eral kinds of buyers with different sets of needs. Shippers want on-time performance in specified transit windows, competitive costs door- to-door, and shipment visibility. So long as carrier performance reaches a threshold level of service, cost is the primary issue. Ocean container lines want capacity at an aggressive price point. Service times are impor- tant but less crucial; the key factor is that inland transportation typically is embedded in a commoditized international price, and the objective is to get it done very economically in shipload volumes. Motor carriers with national fleets and a serious interest in intermodal products want two things. First, intermodal linehaul is more profitable than highway, provided service will sat- isfy shippers and charges remain competitive. In this respect, their specifications are like the shippers, but what truck lines want is more business and a bigger, high-service rail network to carry it. Second, rail allows more truck shipments to be handled per unit of manned motive power. Since tractors are expensive and drivers perennially in short supply, motor carriers want the higher use of resources that intermodal linehaul allows. Engage buyers in face-to-face discussion. Preference surveys and similar marketing devices are sensible ways to gauge the general demand for new services. However, the deeper ques- tions--about how the service should be constructed, where the tipping points lie, how long conversion may take, and how to address the buyer's reservations--are best answered in a probing, interactive format that is not tightly time-limited. Focus groups and in-depth inter- views, conducted in person, are the best methods for this; public forums are less productive because information is not confidential and the venue attracts posturing. FACs also are effec- tive in this role, if their discussions are directed in the structured fashion of a focus group. They can be conduits for the recruitment of interview prospects, particularly those who are not local, and councils have the additional virtue that their viewpoints can be sought at suc- cessive stages of a project. In this sense, they may serve in the manner of an independent Board of Directors to a project. Hedge Risk from three directions: Appoint a Devil's Advocate. Recognition of risk is the starting point for treating it. An old and promising method for doing this well is the appointment of a Devil's Advocate. This is meant in the original sense of a kind of lawyer for the opposition, who is attached to the project staff with the formal charge of uncovering defects. Planners may step into this func- tion informally, and it is an easy precaution to take.

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G-66 Guidebook for Assessing Rail Freight Solutions to Roadway Congestion Secure a Baseload. For volume risk, the usual answer is to secure a baseload. First-category projects have one in place; if existing traffic is to be rerouted or upgraded in service, a ready baseload can be available in the second category as well. Without this, volume for the proj- ect launch has to be assembled from a group of buyers. Ship lines, large motor carriers, and Fortune 500 companies are possible candidates. Railroads and advisory councils should identify them, although prominent local industries should be obvious to planners. Buyers with a firm interest in new service should be able to quantify the business they would con- sider tendering, but they should not be expected to offer a definitive commitment unless they are investors in the project or special beneficiaries of a segment of construction. The strongest response that is reasonable to seek is a non-binding letter of buyer support, akin to the instruments that railways secure to buttress a merger application. Even so, refusal to provide a letter is not proof of negative intention, because buyers can be cautious of pub- lic pronouncements or unwilling to reveal traffic information. Establish Covenants. A competitive service that (1) performs as promised, (2) is offered at a compelling price, and (3) makes economic sense to begin with is going to win traffic. Given a good product design and free market pricing, the risk lies in the performance, and covenants associated with financing are a reasonable remedy. In exchange for public money, these are binding commitments by the railroad to provide service of some mini- mum frequency and configuration for a minimum period of time. Service incentives can be incorporated as well. A critical railway concern is the obligation to run trains despite inadequate volume; the public concern should be that compromise of service will prevent volume from growing. This is the common problem of start-up risk. Some solutions to it are (1) a public guarantee of minimum rail revenue or outright purchase of train starts; (2) a public investment in such train assets as locomotives, aimed at reducing the railroad's financial exposure; and (3) investment in train starts by independent third parties (dis- cussed below in the section on Winning Support). General Steps Several further steps should be taken in designing transactions for new market improvements: Respect the Management Prerogatives of railroads to select clients and manage their fran- chises as they see fit. Carriers will not be convinced to compete for new markets or service low-margin business because of public benefit objectives. What will convince them is public investment that changes their margins. A related dilemma is the allocation of added capacity, because the expense of successive addi- tions frequently will climb, and this opens the question of which users should be expected to pay for each. For joint facilities, or facilities shared between passenger and freight activity, the prerogatives of individual players can come into conflict, and the difficulties posed need a clear and collaborative resolution early in the project. Examine Unconventional Solutions and Structures. Rail service applications to certain mar- kets may not fit the business priorities and service design of standard carrier operations. Part- nership with carriers can adjust to this by taking various forms: In a condominium approach the public purchases an easement to build and operate rail service that is physically and operationally separate from that of the existing carrier. This method, while expensive, can be used to create new services and to control the quality of a corridor-specific operation. Ongoing involvement by the railroad is minimized, but the public becomes a carrier, or contracts with one. (The Alameda Corridor followed this form.) In an apartment approach specific units of service capacity are leased or bought from a car- rier to serve a given market under specified terms and conditions. The public agency nego- tiates a slate of capital or expense contributions to support the service. Traditional and new

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Guidelines for Public-Private Dialogue G-67 train operations take place under an integrated structure, but the railroad exits certain responsibilities such as supply of rolling stock, terminals or administrative support. In an REIT approach the public is an investor in railroad development. It contributes funds or incentives that the railroad uses to build new capacity, or otherwise cover the capital requirements for serving new business. Public money becomes part of the overall capital structure of the carrier. The public interest is in project performance instead of functional management, and the railway retains traditional roles in marketing, service quality and operating control. This approach imposes less disruption on existing carrier practices but requires accountability to the public investor, and the demonstration of benefits the investor expects. Tailor Investment to Diversion. The dominant components of rail operating costs vary by length of haul. For intermodal freight services, the majority of costs at distances below about 900 miles are taken up by terminal expense and drayage in other words, by transloading, and the pickup and delivery operation. As mileage climbs, the balance shifts toward the costs for line and for operation of trains. Tailoring of public investment toward the sensitive cost factors, according to the profile of traffic lanes in a project, is a sensible way to support its truck diversion objectives. For example, tax incentives for drayage could make sense at the medium and short haul end, as could investment in transload facilities. Time elements, too, become more sensitive as linehaul distance declines, so that reduction of crossing delays can be an appropriate way to aid diversion in the lower mileage ranges. Allow for Interoperability. The free flow of intermodal shipments between rail and non-rail operations creates efficiency and a larger effective network. Compatible equipment is a nec- essary component of this interoperability, which is well developed between railroads and marine container lines, but much less so with domestic trucking. The rail intermodal business has emphasized stack containers over domestic trailer service for many valid reasons, includ- ing better capacity utilization; however, it is domestic trailers that fill the highways. The result is that motor carriers using rail are encouraged to do so with a specialized container opera- tion, while the trailer fleets cannot make rail a broad extension of their over-the-road networks. This produces a robust international intermodal system and a smaller effective domestic system. For public planning, the useful step is to allow for interoperability in proj- ect design. If the goal is to appeal to international shipping, capacity for container trains will suffice. If the goal includes domestic truck diversion, containers will capture some, but the interoperability of motor carriage with rail will become a consideration, and added capacity for trailer service may be desirable. Encourage Carload Freight. General merchandise carload freight is not the engine for rail industry growth that the intermodal business may be, but it is a valuable part of the rail port- folio for public planning. Rail retention of carload traffic keeps heavy-loading goods off the highways, and, when new traffic is captured, it often is done with direct-to-door service at one or both ends of the journey--in other words, no drayage truck is involved. Diversion effects on local roads can be quite significant when an industrial plant shifts volume to direct rail, and the shortline sector tries to specialize in this kind of conversion. Apart from proactive inclusion of carload freight in rail programs and partnerships, many of the key steps for government are in complementary land use and zoning regimes at the city or MPO level. The encouragement and retention of sidings, the provision of rail spurs into new commercial sites, industrial develop- ment in proximity to rail lines, and financial mechanisms to support these things are some steps to improve carload access. Joint investment or just local approvals for bulk or breakbulk transload facilities are appropriate when direct service is impractical. Manage Expectations. The success of any project is shaped by what its constituents expect it to do. Careful forming of those expectations is important in first-category projects and more so in the second, where citizens may be hoping to see fewer trucks in their daily travel. The fact may be that even large diversions of truck volume will be overwhelmed by the overall growth