The Challenge of Meeting Freight Infrastructure Demands: Public-Private Partnerships the Answer?

1. The Challenge of MeetingFreight Infrastructure Demands: Public-Private Partnerships the Answer? Jim Hixon Exec. Vice President Law & Corporate Relations Norfolk Southern Corporation June 2007

2. Overview • Freight Capacity Constraints and the Need for New Rail Infrastructure • Rail Infrastructure Economics – An Overview • Two PPP Models • Public Benefits of Rail

3. Summary • Freight demand growing rapidly; more rail infrastructure needed • Both public and private investment will be required to meet future rail infrastructure needs • Federal incentives would increase private investment in rail infrastructure • More rail infrastructure would produce substantial public benefits

4. Major Freight Growth Projected(Domestic Tons All Modes) AASHTO* DOT ATA All figures indexed with each source’s 2005 traffic levels equal to 100 percent *AASHTO: American Association of State Highway and Transportation Officials

5. Highway Capacity Already Strained Interstate traffic has grown much faster than lane miles Vehicle MilesTraveled (VMT) VMT perLane Mile Lane Miles Source: Dept. of Transportation, National Transportation Statistics

6. More Highway Gridlock Coming Truck Traffic 1998 2020 Source: Dept. of Transportation, FHWA Freight Analysis Framework

7. Rail Capacity Already Strained Class I Rail ton-miles have increased dramatically without growth in track miles Ton Miles perMile of Track Ton Miles Track Miles Source: Dept. of Transportation, National Transportation Statistics

8. Variety of Forces Pushing More Freight to Railroads

9. Railroads Are Highly Capital Intensive Capital Investment as a % of Revenue Source: Census Bureau, STB All figures based on 2002 economic census except railroads and trucking All transportation includes NAICS 48 industries including: air, rail, trucking, water and pipeline transportation Trucking figures are 1999-2005 average for NAICS 484 based on Census Services Annual Survey Railroad figures are 1999-2005 average based on STB R-1 filings (Class I railroads cash capital)

10. U.S. Freight Railroad Performance Since Staggers Index 1981=100 Productivity Volume Staggers Act Passed Oct. 1980 Revenue Price Source: AAR

11. Freight Rail Investment Challenge • AASHTO (American Association of State Highway and Transportation Officials) • issued a study in 2003 analyzing the state of freight rail capacity • concluded that freight railroad investment must grow sharply over next 20 years to maintain railroads’ share of growing freight traffic • also found that freight railroads may not be able to attract necessary investment to handle their share of growing freight demand

12. AASHTO Investment Goal Investment needed to… Based on averages of AASHTO estimates adjusted for inflation

13. Support for AASHTO Findings • Subsequently, similar concerns about the ability of the industry to attract necessary capital have been expressed by: • CBO • Transportation Research Board • Hudson Institute

14. Capital Investment Has Grown inTandem with Profitability… Historical nominal dollars invested based on STB R-1 filings (Class I railroads cash capital) Industry profits based on R-1 filings of Class I railroads

15. Yet Industry Capital Investment StillInsufficient to Meet AASHTO Goal Investment needed to… Based on averages of AASHTO estimates adjusted for inflation to nominal dollarsTrend in actual investment levels based on regression of historical nominal dollars invested (from STB R-1 filings, Class I railroads cash capital) Trend in industry profits based on regression of historical nominal profits excluding 1991 losses (from STB R-1 filings, Class I railroads)

16. Past Industry Capital Investment Shortfalls Will Require Even Higher Levels Than Projected Investment needed to… Based on averages of AASHTO estimates adjusted for inflation to nominal dollarsActual investment levels from STB R-1 filings (Class I railroads cash capital)

17. Past Industry Capital Investment Shortfalls Will Require Even Higher Levels Than Projected Investment needed to… Necessary investment levels based on averages of AASHTO estimates adjusted for inflationActual investment levels from STB R-1 filings (Class I railroads cash capital)

18. Rail Infrastructure Economics An Overview

19. The Fundamental Infrastructure Financing Issue • Issue is not whether capital exists – capital markets have effectively unlimited capital • Issue is the number of infrastructure projects where expected risk-adjusted investment returns meet or exceed capital costs • Much of infrastructure “need” being discussed are projects that have high returns to customers and for the country, but low returns to the railroad, at least at current pricing

20. Rail Infrastructure Economics Cost of Capital Market Return HIGHER RETURN PROJECTS LOWER RETURN PROJECTS

21. Rail Infrastructure Economics --Subsidies to competition -- Sector-specific government mandates (e.g., HAZMAT) -- Price regulation -- Risk of increased regulation Cost of Capital ACTUAL Market Return Depressed Return LOWER RETURN PROJECTS HIGHER RETURN PROJECTS

22. Rail Infrastructure Economics -- Less pollution -- Less transportation congestion -- Reduced energy consumption -- Increased safety Cost of Capital OPTIMAL ACTUAL Social Return Market Return Depressed Return LOWER RETURN PROJECTS LOWER RETURN PROJECTS HIGHER RETURN PROJECTS HIGHER RETURN PROJECTS

23. Rail Infrastructure Economics PPPs objective: Reduce gap by lowering cost of capital Cost of Capital …Proposed Social Return Market Return Depressed Return PROGRESS LOWER RETURN PROJECTS HIGHER RETURN PROJECTS

24. Two PPP Models • Direct Investment by BOTH the Public and the Private Sector • “Indirect” Support by the Public: Investment Tax Credits for Rail

25. Direct Federal Investment: Highway Bill Principal Sections • Section 1301 – Projects of National & Regional Significance • Track, Technology, Facilities • Section 1702 – High Priority Projects • Technology, Small Facilities • Section 11143 – Private Activity Bonds • Large Facilities • Other Mechanisms [CMAQ, TIFIA, RRIF]

26. L E G E N D 1. Central Corridor Double-Stack Initiative, and Roanoke and Pritchard Intermodal Facilities 2. Related Terminal Capacity 3. Western Freeway Rail Corridor 564 64 The Heartland Corridor Heartland Corridor 664 CIMT(Proposed) NIT CIDMMA Norfolk Maersk To Chicago, Detroit, and Points West OH PMT 16`4 Portsmouth 264 Columbus 664 264 Rickenbacker 464 Ashville Western Freeway Rail Corridor WV Washington, DC Portsmouth VA Huntington Kenova Prichard Richmond Williamson Welch KY Roanoke Petersburg Bluefield Christiansburg Portsmouth

27. Chicago’s Rail Corridors

28. Charlotte IM Terminal • Bring in the PAB leveraging effect!!

29. Indirect Federal Support • Investment Tax Incentive Legislation • Introduced Last Congress and this Congress • Provides for 25 % Credit for “new” capacity • Applies to track, technology, facilities, and locomotives • The rail industry has a number of corridor projects, like the I-81 Crescent Corridor on NS, that could be facilitated by this type of PPP

30. Why Are Tax Incentives Needed? • 2006 CBO Report recognizes that a variety of forces complicate railroads’ ability to attract capital: • Tax policies tilt infrastructure playing field in favor of competitors • Railroads bear complex risk on immobile investment • Continued government regulation imposes pricing and operational constraints and many industry- specific financial burdens

31. Tax Credit for Qualifying Property • 25% tax credit for investment in property that allows for an increase in the speed, weight, or volume of freight moved • “Star Trek” property • Bridge or tunnel expansion • Qualified new locomotives

32. Public Benefits ofFreight Rail Incentives A single intermodal train can remove up to 280 trucks from roadway travel … … saving lives and fuel; reducing congestion, pollution and greenhouse gases

33. Public Benefits of Freight Rail: Less Congestion Highway congestion caused by rail is minimal Rail Trucks Sources: FMCSA & FRA / DOT & DOE / U of Iowa & DOT / Texas Transportation Institute & Transportation Research Board

34. Public Benefits of Freight Rail: Less Pollution and Greenhouse Gas Ratio of Emissionsper ton-mile(2003) Rail Trucks Sources: FMCSA & FRA / DOT & DOE / U of Iowa & DOT / Texas Transportation Institute & Transportation Research Board

35. Public Benefits of Freight Rail: Fewer Fatalities Rail Trucks Sources: FMCSA & FRA / DOT & DOE / U of Iowa & DOT / Texas Transportation Institute & Transportation Research Board

36. Public Benefits of Freight Rail: Reduced Energy Consumption Rail Trucks Sources: FMCSA & FRA / DOT & DOE / U of Iowa & DOT / Texas Transportation Institute & Transportation Research Board

37. Public Benefits From Expanded Rail Capacity Projections based on costs of congestion, accidents, air pollution derived from FHWA, Texas Transportation Institute, EPA and other sources Toxic air pollution does not include the costs of carbon dioxide emissions

38. Public Benefits From Expanded Rail Capacity Social Cost Differential Between AASHTO Reduced Share and Increased Share Scenarios:Totals $200 Billion Over 20 Years Projections based on costs of congestion, accidents, air pollution derived from FHWA, Texas Transportation Institute, EPA and other sources Toxic air pollution does not include the costs of carbon dioxide emissions

39. The Challenge of MeetingFreight Infrastructure Demands Questions?