Henry Posner's remarks at Transp. Research Forum, NYC, 2002

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	I am truly honored to be here today as I know so many of you in the audience. I would like to give you my personal opinions about New York, which are also the official positions of Railroad Development Corporation (RDC). The agenda today is therefore to provide some background on RDC; the U.S. short line industry; the overseas rail privatization industry; case studies concerning overseas railways and New York City; and to draw some conclusions. Let me first apologize for the extremely pretentious title of this presentation. I really tried to think up something that would be less pretentious. The idea is not to pompously shove any out-of-town opinions down anyone’s throat; but rather to raise people’s consciousness as to how rail freight in New York stacks up against the world on the other side of the Hudson River and also the world on the other side of the Atlantic Ocean.
	Background on RDC
	RDC is a small company and one could say that we are probably among the least successful of the short line companies, at least in the USA. We are a privately held company and, while we have not been particularly successful in the USA, we have found a niche for ourselves in what we describe as Emerging Corridors in Emerging Markets – rail privatizations with related businesses like ports, etc. in smaller countries, and in particular developing countries. All of our businesses are joint ventures, so nothing is “The RDC Show”. Our businesses always include local participation. We are a company with five and a half employees and we are active on four continents. Historically in the track department of the Class 1s, the rule of thumb was “one man, one mile.” In our case, it is 1.375 people per continent. Needless to say, we are not a highly centralized, control-oriented organization. And we are operating in some very interesting parts of the world – Argentina, Guatemala, Peru, Estonia, Malawi, and later on this year, Mozambique.
	USA Short Line Trends - Transactions
	Let’s discuss the short line industry in the USA, and in particular why RDC has not been competitive in this business. Basically the competition in the railroad acquisition business is not trucks, but rather other buyers. Historically there have been dozens of bidders, all of whom are Innovative, Aggressive, Market-Driven, Successful Entrepreneurs, and the only question is, “Who is going to offer the highest price?” The result has been that acquisition prices have been very high even in today’s slightly depressed market. It has been for the most part a controlled auction process where the Class 1s or even downsizing short line companies have sold to the bidder who will pay the most cash for these deals. So while the labor costs may go down, they are substituted for by high debt costs in order to finance the acquisition price. We haven’t seen this practice changing in recent years; there has been some consolidation among the short line companies but there is always somebody who wants to enter the market for the first time with their vision of Innovative, Aggressive, Market-Driven, Successful Entrepreneurial Short Line Railroading.
	USA Short Line Trends - Structural
	Let’s discuss where the short line industry is headed. From a structural perspective we need to consider what short lines still bring to the table, one of which is that short lines are far more effective at marketing, especially to carload customers, than the Class 1s; the Class 1s will be the first ones to acknowledge this. The Class 1s have virtually eliminated their marketing departments and rely heavily on short lines for clusters of single carload traffic. Therefore the short line industry is getting stronger due to consolidation among short line companies i.e. RailAmerica, Genesee & Wyoming, etc. which bring efficiencies to the table in terms of having shared office functions, shared mechanical functions, etc. However, there are fundamental weaknesses in the short line industry. First of all, with labor shortages evolving it is no longer the case that Class 1s’ labor costs are higher than the short lines’. Short lines have to pay higher wages just to avoid having their employees hired back by the Class 1s. Secondly, mergers are not happening; therefore, the Class 1s do not need to rely on the short lines for political support. Finally, as the Class 1s have gotten bigger, any individual short line has gotten relatively smaller. Many of the Class 1s have doubled in size due to mergers, but if you are a single short line, it means you are half as important as you were before, relatively speaking. As stated before, the need for political support for mergers is past. There are still lots of people out there looking to buy, thus the competition is quite fierce. Interestingly, a recent trend is that while the public sector has historically been asked to finance the vision of short line entrepreneurs, now the public sector is being asked to finance the vision of Class 1s because now all of a sudden the Class 1s have found that they compete with trucks and that’s not fair.
	Overseas Trends - Structural
	The overseas business as we see it is basically rail privatization in Latin America, Africa and the Former Soviet Union. In the overseas business the competition is usually trucks as opposed to other railroads. For example, the Iowa Interstate is one of four railroads from Chicago and Omaha; but in the countries in which we operate, we are the only railroad. In Guatemala, we are the railroad “monopoly”, but the only problem is that the railroad was abandoned for three years; therefore, by definition there were no customers to monopolize. But at least in Guatemala we compete with trucks rather than other bidders. The overseas environment is a high cost environment, which leaves plenty of room for improvement, and this is a positive. In general, as long as the price is not too high, there is no fundamental reason why overseas railways cannot be as profitable as domestic railroads. As long as the price is right, every deal is a good deal. But in the overseas environment there are substantial negatives. There is a high risk in predicting revenue, especially where railways have not run for years. And in Open Access countries like the UK, I think people underestimated how bad Open Access was. What emerged in Open Access countries is that nobody can make a profit because if you ever develop a significant amount of traffic, you can bet that someone will show up and try to take that business away from you. The Brits are very happy with this model and they think it is a classic example of Dynamic Thrusting Private Sector Management. But if you are an investor in that environment, it has been a disaster. I believe that outside of the UK, people have generally come to the conclusion that Open Access is a fatally flawed model. In terms of financing these deals, it is extremely difficult to finance in a country that has never had a private sector railway. You basically have to start from scratch in terms of working with the local financial markets. Finally, overseas railways by definition are in another country, so you need to be prepared to bridge not only the gap of distance but also the gap of culture. Cultural gaps are the single biggest reason that these businesses have been difficult to manage. Unless you are prepared to become part of the local culture, you will not be successful. You are not going to make a railway work by trying to turn your employees into Americans, especially if all you do is send a few Americans over for one or two years. By the way, an interesting factor in doing business in Africa is that the competitors for these concessions are usually the national railways of South Africa or the national railways of France. I stand before you to confess that RDC does not have as much money as the government of South Africa nor the government of France. So when RDC sees this type of competition emerging, we are very quick to redirect our efforts.	Top

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Rail Freight in New York City: A Global View Transportation Research Forum New York City May 2002	Henry Posner III Chairman