Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects

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23 3.1 Rail Project Costs Costs are involved in every stage of a typical rail project’s lifecycle. Figure 3-1 illustrates the typical steps in the railroad project (blue arrows) and the relative cost of each stage (orange columns). The most significant costs, and by extension the major funding and financing require- ments, occur during the construction and operating phases of the project. The funding and financing approaches and mechanisms in this Guidebook focus on these two key project phases. 3.2 Capital Expenditures (Capex) Depending on the project, a rail project’s design can involve the detailed design of the rail- road alignment and supporting infrastructure (e.g., bridges/culverts and signaling systems) as well as rolling stock design. A very rough rule of thumb is that detailed design represents 10% of a project’s total capital costs. The construction of a rail project accounts for the largest share of a project’s costs. Additional costs include purchase of (or securing access to) land for the rail project, including the right of way and associated facilities (e.g., stations, yards, and maintenance facilities). In broad terms, the capital cost of rail projects can be grouped into two categories: rail infrastructure and rolling stock. 3.2.1 Rail Infrastructure Rail infrastructure consists of two primary components: land (right of way) and rail infrastructure. Land (Right of Way) Rail infrastructure is constructed on what is known as the right of way. Ownership, possession, or guaranteed access to the right of way is a necessary precondition for any rail project implementa- tion and for securing financing. Two key characteristics of the right of way are its control (e.g., who controls it and owns the right to sub-lease or allow other rail operators to use it) and whether access to the full right of way is restricted or limited in any way (e.g., is access limited to conducting rail transport or does access extend to allowing other uses, or include air rights, or sub-surface rights). Generally, private freight railroads own and control most rail rights of way in the United States. Many railroad operators have reciprocal arrangements to access each other’s right of way. Approximately 27% of the freight line-miles in the United States include more than one freight operator. In some cases, the ability to use another railroad’s lines is simply a commercial trans- action (e.g., a trackage rights agreement allows Railroad Company A to operate on a specific section of Railroad Company B’s network for a fee, usually based on gross-ton-miles but also sometimes on trains, train-miles, or car-miles). The right for one rail company to use the right C H A P T E R 3 Rail Project Costs and Financial Considerations

24 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects of way of another rail company may also be imposed by a court or regulatory authority (e.g., STB) as a condition of a merger or as a condition of a use agreement from a third party. Class I freight railroads in the United States and Canada are required to allow intercity passenger opera- tors Amtrak and VIA Rail, respectively, to operate on certain parts of their network (for a fee). The right to use the land over or under the right of way is also a valuable asset. Both public and private rail companies have developed property over and under their right of way or sold the rights for such development to others outside of the railroads sector (e.g., property development, access for fiber-optics, pipelines, and electrical power distribution). Few people are aware that much of downtown Chicago is built on the air rights over private rail rights of way. These rights can represent a significant asset value in financing rail projects. Rail Infrastructure Components Rail infrastructure components typically include • Basic rail system components such as the rail, crossties (also called sleepers in the international rail community), ballast, and the fastening systems that connect rail and crossties. • Supporting rail infrastructure, including bridges, tunnels, power stations and sub-stations, track switches and crossovers that allow trains to change tracks, maintenance depots, workshops, and storage or marshalling yards. These components add cost and complexity and many of them have their own financing possibilities. For example, rolling stock manufacturing companies have financed maintenance depots and workshops in exchange for equipment sales and long-term maintenance contracts. • Passenger stations, office buildings and other facilities such as parking lots. Each of these assets has financing mechanisms dependent on the revenue they are expected to generate. Sometimes passenger rail operators sell the development rights over and around stations in exchange for the developer building and maintaining the station to the specification of the rail company. Source: CPCS Figure 3-1. Rail project lifecycle costs (conceptual).

Rail Project Costs and Financial Considerations 25 • Signal and train control systems, such as display systems, signal boxes, some wayside sen- sors on the rail line, communications cables connecting the local signals with the rest of the network, and power distribution systems providing power to operate the systems. Some rail lines are electrified—using electric locomotives or trains—so the infrastructure may include a means to distribute electrical power including an overhead catenary or third-rail system. The per-mile cost of constructing and maintaining railroad infrastructure varies greatly depending on the type of railroad, taking into consideration a whole range of factors, including • Population density in the area, with more densely populated urban areas possibly requiring additional investment (e.g., underground or elevated tracks, among other options); • Geography/topography (e.g., bridges, tunnels, and urban construction); • Type and number of tracks required, and acceptable gradients and curvatures (e.g., a single- track line used by occasional slow diesel freight trains can be built to much lower standards than a heavy haul freight line or a line used by frequent high-speed electric trains); • Price and access to equipment (e.g., locomotives and signaling equipment); • Climate (e.g., humidity, cold, sand, and snow); and • Access to labor and cost of labor (e.g., expensive workers or lack of trained workers). Very generally, rail infrastructure construction costs can range from $2 million per mile in flat rural areas to $300 million per mile or more in urban areas. 3.2.2 Rolling Stock The other major category of rail asset is rolling stock. Examples of rolling stock are presented in Figure 3-2. Freight Rail Rolling Stock For freight railroads, rolling stock includes locomotives and freight cars of various types. Most freight locomotives operated in the United States are diesel-electric and use diesel for fuel, although some Class I companies are testing locomotive technology powered by liquefied natural gas (LNG). Freight cars are often designed specifically for the commodity to be carried (e.g., automobiles, lumber, coal, steel, intermodal containers, and liquid tank cars or grain hop- pers). Freight rail cars in the United States are owned by various companies—shippers, leasing companies, financial institutions and, of course, railroads. Freight locomotives generally cost in the range of $3 to $4 million each. The cost of freight cars is in the range of $50,000 to $100,000 each, depending on the car. Financing and Leasing Freight Rolling Stock In North America, rail freight cars and locomotives are generally easy to finance. Because freight rolling stock (both locomotives and freight cars) can be used on any North American rail system, it is considered fungible—if it must be repossessed, there is a large resale market providing underlying security to the equipment owner. This natural market security allows financing methods wherein the equip- ment is its own security, as in a mortgage instrument. This allows low-cost types of debt financing. For example, to finance rolling stock purchases, some railroads use equipment trust certificates, a type of bond issued by the railway to a financing entity (a bank). Equipment trust certificates are described in detail in Chapter 6.

26 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Passenger Rail Rolling Stock For passenger rail, rolling stock includes locomotives and passenger cars. The cost of passenger rail rolling stock can vary greatly, depending on their specifications. For example, bi-level cars with toilet facilities typically cost much more than a single-level coach with seats separated by a center aisle. Some passenger trains do not use a locomotive but have electric traction motors distributed among passenger cars that can be coupled together in trains of various sizes and operated from one end of the train or the other. These trains that use an electrical power supply are called elec- tric multiple unit trains (EMUs). Trains that use diesel engines to generate distributed traction power are called diesel multiple unit trains (DMUs). Many high-speed trains found worldwide are EMUs with traction motors distributed throughout the train. EMUs and DMUs are more specialized than locomotive-hauled passenger trains—with power supply, speed, and car size and shape often designed for a specific application. Passenger train locomotives typically cost about $5 million each.26 The cost of typical pas- senger cars generally ranges from $1 to $3 million each, depending on complexity. The cost of EMUs and DMUs vary but is generally between $2 million and $10 million per car. For example, the current Eurostar trainset is a 16-car EMU costing about $100 million. 26 Passenger locomotives are usually more expensive than freight locomotives because they have head-end-power systems and more sophisticated train control systems, more safety and environmental equipment, and more stringent crash standards. Freight Train (CSX) Source: Wikipedia (Various) Locomotive-Hauled Passenger Train (Amtrak) Diesel-electric locomotives (Metro North) Electric multiple-unit (EMU) train (Australian OSCAR) Figure 3-2. Examples of rolling stock.

Rail Project Costs and Financial Considerations 27 3.3 Operating Expenditures (Opex) Ongoing operations and maintenance are carried out to provide transport services safely and for using the infrastructure, rolling stock, and other facilities, for a prolonged period. Operating costs (opex) include labor costs, fuel costs, track access charges (as applicable), as well as any administrative or overhead cost associated with the rail service. Maintenance costs are the costs associated with keeping the rail infrastructure and rolling stock in a good state of repair. This may involve repairing or replacing track, bridges, and other infrastructure components, as well as routine periodic maintenance of the rolling stock and so forth. Financing Passenger Rolling Stock Passenger cars are generally more specialized for the services to be provided. Partly because of this specialization, they are slightly more difficult to finance than freight cars. In the United States, such equipment is most often purchased by a public body and is rarely leased or rented for short terms. Private financ- ing of public rolling stock is generally constrained by tax laws. Private financing, quite prevalent in the past, is no longer used except in the form of municipal bonds and similar instruments. Sometimes builders will finance passenger roll- ing stock, but public financing is almost always less expensive. Private passenger equipment (e.g., owned by private contractors who may be contracted to provide public passenger services) can be financed in the same way as freight equipment, but this is often more expensive because such stock is generally more specialized and less fungible in secondary markets. Railroads are a very capital-intensive business. They can function for years with minimal new investment due to the long lifespan of railroad assets. However, although trains can continue to run without regular investment, costs rise for materials and maintenance, and service quality and asset values decline. A rail- road that is not regularly investing is “eating” its assets. Over the longer term, the railroad becomes unsustainable. Source: World Bank “Railway Reform Toolkit,” 2011.

Companies that transport dry and liquid commodities utilize the modes of truck, rail, barge, ocean and pipeline. Some shippers are fortunate enough to be able to utilize barge, ocean and pipeline that can provide significant cost savings. However, most shippers rely on truck, rail, or a combination of the two. When comparing the costs of rail vs truck, rail offers significant advantages. Multimodal rail and truck shipping allows shippers to take advantage of cost savings even when receivers are not located on rail. Optimizing your shipping strategy to maximize the cost savings of rail transit can significantly reduce your logistics spend. We’ve updated this blog post in 2024 to help you compare the costs of rail shipping vs truck more easily.

Comparing Modes of Transportation

Where pipelines and waterways are available, shipping via these modes can significantly reduce costs. However, these two options are limited by infrastructure and geography. Rail and truck however provide more versatile shipping options, especially when combined in multimodal transport. Comparing costs per ton-mile of each mode, you can see the advantages of each. Though these differences are small at first, cost savings add up quickly over longer distances and volume.

Trucking is the universal mode of transportation; every shipper can load and receive materials by truck. Rail, on the other hand, requires that both the shipper and consignee have the ability to load and unload rail directly. By comparison, the differential in cost between the two modes is $ 0.105 per ton-mile. Reducing truck transit and choosing the optimal rail transload facility will help to maximize cost-savings through rail.

Comparing Truck vs Rail Shipping: Example

To compare the costs of rail vs truck shipping, consider the movement of a bulk commodity from Houston, TX to Cleveland, OH. The truck cost in this example lane is approximately $ 5,159 per load, whereas rail would be $ 6,676 per car. However, when comparing the costs of rail vs truck shipping, you must apply a ratio of 1:4, since one railcar equates to four truck loads.

Utilizing Multi-Modal Shipping

Many shippers understand the savings potential in shipping rail versus truck, but, in many cases, receivers may only be able to receive material by truck. To take advantage of the economies of long-haul rail transportation and the speed and flexibility of local truck delivery, shippers rely on North America’s extensive bulk terminal network.

Many shippers understand the savings potential in shipping rail versus truck, but, in many cases, receivers may only be able to receive material by truck. To take advantage of the economies of long-haul rail transportation and the speed and flexibility of local truck delivery, shippers rely on North America’s extensive bulk terminal network. The cost to combine rail and truck using a bulk transfer terminal is approximately $95.54 per net ton. By comparison, rail direct is $70.27 per net ton, and over-the-road truck is $214.96 per net ton. Using multi-modal rail and truck transit compared to truck alone, you can cut transportation costs by more than half.

Railcar Equipment Costs

In addition to transit costs, it is also important to consider the cost of railcar equipment when using rail or multi-modal transit. This equipment cost adds about $900 per railcar shipment. However, these costs only slightly increase variable costs per net ton. Using multi-modal transit, the cost per net ton increases to $105.01. Compared to over-the-road trucking’s $214.96 per net ton, the savings for multi-modal transport remains significant.

Comparing Additional Costs

When comparing the costs of rail shipping vs truck, it’s also important to consider additional costs that might not be on your balance sheet. For example, the stability of rail networks can give shippers and customers more confidence, and make it easier to make long-term plans. By contrast, driver shortages, gas prices, weather events, and other issues can affect the prices and timelines for truck shipping. It’s also important to consider the environmental costs of each mode. Since railcars can ship a much greater volume of goods, railcars can reduce total carbon emissions substantially. In general, since rail cars and rail yards are monitored 24/7, rail cars are also a safer way to ship goods, and can help to reduce losses to theft or damage.

The easiest or most direct shipping route is not always the most efficient, nor the most cost-effective. You can take advantage of cost-savings via rail shipping even when receivers are not located directly on rail routes. Use multi-modal strategies to reduce shipping costs, and assess your transloading facilities carefully to optimize cost-savings. With this strategy, you can keep your shipments on-time and on-schedule, while dramatically reducing costs. Want to learn more about the differences between rail and truck shipping? Check out our blog on The Advantages of Rail Shipping vs Truck Shipping.