By Andrew Selden, President, United Rail Passenger Alliance; September 30, 2017
Passenger trains, by themselves, cannot pay the full costs of a railroad. They simply do not generate enough revenue to cover their own direct costs, of fuel, labor, equipment acquisition and maintenance, etc., plus the rather high costs of the infrastructure they require, for track, bridges, signals, etc. Many passenger services make money on revenues less operating costs, but not when infrastructure costs are also subtracted. We have empirical proof of this in our own Northeast Corridor, lightly-used and mostly owned by Amtrak, but also used by several commuter agencies, which do not pay Amtrak enough to cover the full costs of the infrastructure that they use. The NEC railroad itself consumes about a billion dollars a year in costs over and above whatever the trains might earn on operations. The difference is made up by taxpayers.
From the 1830s through the nationalization of intercity passenger services in 1971, passenger trains made economic sense for most railroads as an incremental user of the infrastructure. What that means is simply that as long as the railroad was making money on its freight operations, it could afford to carry its own passenger trains as long as they at least broke even on operations, and didn’t disproportionately burden the infrastructure. That meant that the passenger service would be charged only for its incremental costs, costs that could be documented as being caused by the passenger trains over and above whatever the infrastructure costs were of the freight service. This was the basis of the mostly political deal that the railroads made with the federal government in 1970 to get out of the passenger business: the passenger trains operated by Amtrak would only be charged their incremental costs of using the host railroad’s track.
But incremental cost accounting for passenger trains had already begun to break down in the 1960s. As railroads began to lose interest in passenger service as its margins eroded, they had to justify discontinuance petitions to the Interstate Commerce Commission, which began the decade hostile to discontinuances. But soon the agency adopted what was called “ICC Form A” accounting. Form A was an ICC accounting system that allowed the railroads to assign much higher shares of the railroad’s costs to the passenger service, which made it easier in turn to claim that a given passenger train was losing money. This included charging allocated shares of full infrastructure costs beyond the identifiable, traceable, incremental costs of the passenger trains.
But there are other ways to underwrite the high capital cost of railway infrastructure necessary to support passenger service. In urban transit systems, where often there is no freight service to cover infrastructure costs and the passenger trains are therefore not the incremental users of the railroad but its main or only users, real estate development opportunities can sometimes be used to add revenues that cover infrastructure costs, at least in part. That is the core idea behind what is often called “Transit-Oriented Development.” Developers pay a transit agency for the opportunity to develop land owned by the agency but not needed for train operations. The Brightline service soon to start in Florida uses this approach—significant real estate development at and near stations on land owned by an affiliate of the train operator helps with the cost of the infrastructure required by the trains. This makes sense to the developer because the trains supply added value to the real estate, driving up its sale or lease value.
In Brightline’s case, while the train operator plans to make money (and easily so) on train operations, it is the associated real estate development that justifies the significant capital cost of starting up (and sustaining) the trains on the Florida East Coast Railroad’s tracks.
This is a technique that could be used in Minnesota to help underwrite the cost of starting up, and operating, Regional Rail passenger services free of, or at very much reduced, public subsidies. A municipality along a Regional Rail line could trade land (or tax benefits) to the rail operator in exchange for the operator developing a station facility in that town. The town would benefit by getting a new train service, and by the economic revitalization and net increase in property tax revenues resulting from having the train service at a new station, which anchors redevelopment of what likely started out as empty or blighted urban land. And the train operator would get a negotiated share of the commercial revenue from its redeveloped land to help cover its incremental infrastructure costs with the host railroad. Everyone comes out ahead so long as the trains themselves break even on operations, or nearly so, so that any needed public subsidy is modest.
Creative financing techniques such of these almost have to be part of any development scheme for Regional Rail services, so that states and the always reluctant federal government don’t have to contribute significant subsidies to allow passenger services to be developed outside core metropolitan areas.
Originally written for the Fall 2017 edition of the Minnesota Association of Railroad Passengers newsletter.