A Brief History of 
Railroad Development Corporation

by Henry Posner III

 
 
 
  In 1987 Henry Posner III left Conrail to join The Hawthorne Group with the intent of investing in the emerging regional and short line railroad industry.  The first half of the decade had seen significant growth in this business, one of the most highly visible results being L.B. Foster’s involvement in the creation of the Gulf & Mississippi and the Dakota Minnesota & Eastern.

At the same time, the principals of L.B. Foster’s regional railroad group were looking to leave the company and establish a stand-alone regional railroad development company.  This coincidence in history resulted in the formation of Railroad Development Corporation, a name selected after extensive market research that included rejection of the alternative name of “Railroads R Us”! Hawthorne’s investment in the business turned out to be with the people literally across the street, after a national search for opportunities.

Regrettably, the L.B. Foster model was quickly overtaken by both increased competition for deals and the more difficult environment for financing.  As a result, the one transaction brought from L.B. Foster, the Chicago & North Western lines north of Duck Creek, Wisconsin, never happened. Other transactions did not happen for fundamentally the same reasons.  The list is long – Transtar, the Wheeling & Lake Erie, and most visibly the Pittsburgh & Lake Erie (P&LE).  In the P&LE’s case, RDC was successful in renegotiating 14 labor agreements and had raised the financing to restructure the company as a going concern, but was undermined by incumbent management’s conclusion that RDC’s efforts could be kept for themselves.  The company was liquidated in stages, essentially ceasing to exist in 1993.

The above meant that from 1987 to 1991 RDC accomplished nothing.  Then in the spring of 1991 the Iowa Interstate Railroad (IAIS), having exhausted its prospects with would-be purchaser Chicago West Pullman, contacted RDC.   As a result, emergency financing was raised, Fred Yocum (who had left CSX to become President of the P&LE) moved to Iowa City to become President, and the company remained solvent as a result of the closing of RDC’s first transaction on August 22, 1991.

Concurrent with the closing of the IAIS transaction, a contact from Argentina resulted in RDC’s becoming involved in the international railway privatization movement, literally at the beginning.  Earlier in 1991, Argentine company IMPSA had been exploring prospects for a joint venture with U.S. interests to bid for the San Martín and Urquiza freight concessions.  Argentina’s were the first railways outside of North America to be privatized, and the response from RDC’s peers was, to put it mildly, skeptical.  As a result of RDC’s enthusiasm for the concept, and the fact that there were literally no other interested parties, RDC and IMPSA were able to quickly agree to work together.

As a result of the bidding for the San Martín concessions, the IMPSA consortium was initially disqualified on a fundamentally political basis, namely that in the judgment of the government RDC was not substantial enough to operate a railway whose annual tonnage was a fraction of Iowa Interstate’s.  This was overcome quickly through the willingness of Conrail to participate in a supplier role, thanks to the efforts of AVP-Transloading Bob Mortensen and Chairman Jim Hagen.  The San Martín was privatized in August of 1993 and the Urquiza in October of 1993.

RDC was thus established in the international arena, but still suffered from both size and financial capacity as competitors entered the market.  As a result, RDC lost in the bidding for New Zealand Rail and was unable to bid in Bolivia – and in Mexico and Brazil, RDC was unsuccessful in even finding local partners with whom to bid.

In 1995, an opportunity arose that was so small and so marginal that there was no competition, namely the privatization of Guatemala’s railway FEGUA.  Regrettably, the government’s privatization program became paralyzed and during this period FEGUA was closed, during which time it was damaged by floods, invaded by squatters, and in some cases suffered from theft of rails from its mainline.  When the privatization process resumed in 1997, it was felt that only the Atlantic could be saved and on this basis RDC’s noncompliant bid to reopen only the Atlantic (with the Pacific on a best-efforts basis) was accepted.  This is a saga which continues to this day – service to the Atlantic was restored in December 1999 and remains a daily struggle, while in the meantime prospects for financing the reopening of the Pacific are being explored.

In 1997, RDC was contacted by Peruvian entrepreneur Juan Olaechea with regard to bidding for Peru’s Central Railway, with a happier ending than Guatemala’s – a consortium was formed involving substantial companies from both Peru and the rest of the world; bids were submitted in mid 1999; and the railway was privatized in September of that year.  The railway (the world’s highest) has been profitable since its privatization, and has sustained growth sufficient to finance the purchase of rebuilt locomotives.

In 1997, RDC was also contacted by Washington entrepreneur Jack Edlow regarding investment in Africa’s Nacala Corridor, which consists of Mozambique’s Nacala port and railway and Malawi’s railway.  Not surprisingly, other U.S. railway companies had been contacted but had declined interest.  Once again, RDC’s position as the most substantial (i.e. only) private railway company interested in this concession opened many doors, the result being that in September 1999 RDC became the only private railway company to invest in Africa.  The result was different than expected, however; while it was anticipated that the initial investment would be in Mozambique, delays in the process there resulted in Malawi being the first, with Mozambique still to happen.  This has been a less-than-ideal result as what was intended to be an integrated corridor is now a private railway in Malawi and a public railway in Mozambique. To quote Samora Machel, Mozambique’s first President after independence, “A luta continua!” (“The struggle continues!”)

In the year 2000, RDC began working with former Wisconsin Central Chairman Ed Burkhardt’s company Rail World in the more treacherous territories of Europe and Australia.  After several unsuccessful bids (Poland’s tank car company DEC and Australia’s WestRail), a consortium was formed to bid for Estonia’s Eesti Raudtee (EVR).  A higher bid was offered by another U.S. led group, RailEstonia, but with the passage of time was revealed to be at best illusory and at worst fraudulent.  The end result was that the government of Estonia ultimately offered the transaction to the Rail World/RDC consortium, Baltic Rail Services.  Thus EVR was privatized in August of 2001, making it the first former Soviet railway to be privatized as well as the first on continent of Europe.  With the bankruptcy of the UK’s Railtrack it has also become the only solvent rail infrastructure company in Europe.

Events to date have left RDC with investments on four continents, managed by the equivalent of five people, suggesting that our business model may be stretched a bit thin.  Time will tell, but despite the difficulties we have encountered we have survived, if not prospered, for the following reasons:

 
 
  1. Each of our investments is structured as a joint venture, so both risk and management are both shared with other parties whose goals are similar if not identical.
 
 
  1. Our business discipline has prevented us from making any obviously major errors in terms of overpayment for investments.
 
 
  1. The business acumen of Henry Posner Jr. and Tom Wright have allowed the financial resources of The Hawthorne Group to provide us with the liquidity necessary to finance our way into transactions when needed, thus reducing our exposure to last-minute renegotiations or withdrawals by partners or lenders.
 
  Perhaps most important to RDC’s success has been the business acumen and discipline that its President Bob Pietrandrea has brought to the business.  His judgment of both people and structure is challenged on a daily basis and has withstood the test of time.  This is perhaps best reflected in the fact that he is the only graduate of Ellwood City High School to go on to become Chairman of a railroad in Africa.

 
 
 
 

February 17, 2002

 
     
 

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© 2002 Railroad Development Corporation