U.S., Andrew Selden: A Primer For Maximizing Return On Federal Investment Of New Passenger Rail Capital

By Andrew Selden, Guest Commentator; April 7, 2021

Occasionally, it is useful to go back to basics. A moment when the federal money fairy is considering dropping $80 billion in new capital into the lap of intercity rail passenger service (IRPS) is such a time. It would be good to get real value out of a windfall of that scale by allocating the money to projects that will drive the greatest achievable growth in usage of IRPS.

The dissipation of the $8 billion from the ARRA “high speed rail” stimulus spending of 13 years ago with no growth and no new service to show for it is not encouraging.

If one sets aside the exercise of raw political power, public capital for IRPS should be allocated to projects that maximize the growth, at the margin, of transportation output measured in annual revenue passenger miles (RPMs), and ticket revenue, per dollar invested. That is the only way to get the greatest return on investment of public, taxpayer-funded, capital allotted to IRPS.

IRPS isn’t anyone’s highest social welfare priority, and it follows that whether new capital is used to develop new usage (new corridors of any length) or to expand established markets (services in existing corridors), capital must be deployed in a manner designed to get the most output from it, per dollar invested. Anything less is merely squandering taxpayer money.

We can maximize return on investment in IRPS measured by output and revenue only by exploiting the principles of networks, and by objectively testing competing usages of capital.

Usage of any network, i.e., how much output it produces, is a function of the number of usable nodes in the network. This applies equally to telephone grids, urban freeways, populations of lawyers in a given community (one starves, two prosper, three or more flourish), and the internet. In passenger transport, it is the number of usable origin/destination station pairings in the network, multiplied by the number and suitability of services provided within the network.

Frequencies within the network must be inversely proportional to distance:  the shorter the stage length, the greater the frequency required to attract any usage in the face of suffocating competition from private automobiles on public roadways. Cars’ market share is the greatest in short to medium distances. To compete at all in short corridors, rail must be fast, reliable and frequent. (Over longer distances, rail need only be reliable; speed and frequency are far less important; rail’s market share of intercity passenger transport is greatest in its longest corridors.) And the greater the speed and number of frequencies, the larger the infrastructure needed to provide it.

Rail infrastructure costs real money (e.g., BNSF Railway invests around $3 billion of its own money every year into upkeep of its network infrastructure, and new 200+ MPH infrastructure in California’s central valley is headed towards costing a quarter of a billion dollars per mile for a single track single-purpose railroad). The infrastructure necessary to operate reliable multiple daily frequencies of fast passenger trains between nearby cities in new 100-300 mile corridors does not currently exist anywhere in the United States, and to develop it in eight to ten such corridors would consume most of the proposed new $80 billion.

We already know from investing $100+ billion (in 2021 constant dollars) in the Northeast Corridor—what its defenders regard as America’s most promising market for IRPS—shows convincingly that such short corridor schemes in their most promising markets are investment disasters. The $100+ billion invested in the NEC has “earned” a negative financial rate of return on capital, and produced Amtrak’s transportation segment with the smallest number of intercity passengers, the smallest or second smallest annual output of annual RPMs, and the smallest IRPS market share, at an annual financial loss of more than a billion and a half dollars (which has piled up to an astonishing current capital deficit of more than $33 billion). It has crowded out investment in Amtrak’s highest-yielding and most undercapitalized segment. As a model for investing new capital into IRPS, this demonstrated failure is clearly the model to avoid at all costs.

Meanwhile, the existing network of undercapitalized inter-regional services continues to substantially out-produce all of the shorter corridors combined. These are the only trains Amtrak has where demand consistently exceeds capacity, and organic growth is even possible. Capital invested into expanding the scale of the network of origin/destination pairs in this sector, unlike in the short corridors where capacity exceeds demand and organic growth in IRPS has proven difficult to achieve, is certain to earn substantial, positive, rates of return on the capital, even on the conservative assumption of achieving only constant levels of market penetration and share in the enlarged market, using constant service definition. Merely interlinking two of these existing long corridors creates a matrix of new origin/destination city pairs that dwarfs the market created by any all-new short corridor of any length, speed and frequency.

To illustrate, far more new output and revenue would come out of extending a single current Missouri River Runner beyond Kansas City to Omaha, interconnecting the Central and the Southwest Transcontinental Corridors, at comparatively tiny capital cost, than could be derived from developing an isolated multi-frequency fast St. Louis-Kansas City or Kansas City-Omaha short corridor at a capital cost ten times (or more) greater. “Spend less, get more” is a good formula for maximizing return on capital.

Better choices exist. The system’s aggregate output, measured in annual RPMs, can be grown rapidly by investing new capital into expanding the scale of the network in which IRPS services are offered. The empirical mathematics of the network show that its output is a function of nearly the square of the size of the network. Thus, modest expansions of the network produce exponential growth in output, provided the expanded service is well integrated into the national network. Isolated point-to-point short corridors can’t do that, regardless of speed or frequency.

Build a new corridor of say five stations that interact only with each other, and one can expect traffic proportional only to nearly the square of the potential of the five stations. But extend an existing national system route by five new stations, perhaps the same five stations, and provide usable connections with the national network, and the extension can be expected to add output and revenue that are orders of magnitude larger than the short corridor in isolation.

So, we can squander the new capital on hopeless isolated public works projects that in the best of cases cannot return very much on the investment (and, let us never forget that Amtrak’s vision is not to operate such losing commercial propositions itself, but to charge inflated prices to state sponsors to operate the services on the states’ behalf; the capital invested will be stranded and lost when state sponsors withdraw their support). Or we can do better and invest the capital, or at least a substantial share of the capital, into better interconnecting and then cautiously expanding our national network of inter-regional services where the new capital will drive massive growth in output and revenue.

We can invest a great deal to comparatively little effect, or we can invest much less and return much more incremental output and revenue, yielding a far greater return per dollar invested.

The choice need not be made speculatively. If significant new IRPS capital resources are available, it is incumbent upon the Federal Railroad Administration to develop demonstration projects in each segment. FRA should select one city pair 200-300 miles removed from each other and currently without passenger rail service, and develop the incremental track, signal, PTC, structure and station infrastructure required to operate multiple daily fast passenger trains safely and reliably, and carefully measure the results.

At the same time, FRA must also invest in a single project to interconnect two existing inter-regional routes, by means of establishing a new service between connecting points on the existing routes, or making a promising extension of an inter-regional route. Opportunities include the Kansas City-Omaha example cited above, or a La Junta-Denver-Cheyenne service, or an Atlanta-Jacksonville service, or a St. Paul-Kansas City-Dallas service, or extending the Silver Meteor to Montreal and Toronto (splitting it at Albany-Rensselaer).

The capital costs, annual revenues and passenger miles from each demonstration can be tallied objectively and compared to determine which model generated the greater return on invested capital, in revenue and RPMs, per dollar invested.

Only then will we have an objective and rational basis to deploy whatever new capital resources congress provides in order to maximize the amount of rail passenger service we can derive from each new capital dollar invested.

An irony of all this is that the traffic surge from better interconnecting inter-regional routes would soon force second and third daily frequencies, creating multi-frequency train service in many short corridors as a side effect of the expansion.

Andrew C. Selden is a former franchise attorney, who is a past Chair of the American Bar Association’s section on franchise law, called the ABA Forum on Franchising. He is currently the President of United Rail Passenger Alliance, based in Minneapolis, Minnesota.

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