Transforming Railroad Policy and Investment

The freight rail industry has a unique opportunity to address and overcome the systemic challenges that keep our immense contributions out of the spotlight and stifle significant capital investment waiting on the sidelines. Below is the transcript of Michael Sussman’s powerful address at Railway Interchange 2019.

Placing Railroads at the Center of North American

Economic and Environmental Revitalization

Railway Interchange 2019

Minneapolis, MN

Michael Sussman Speech Transcript

Good Morning, I am honored that Ted Hagemo, your Secretary-Treasurer of the International Association of Railway Operating Officers asked me to share our plans for transforming railroad investment in the United States, Canada, and Mexico. I appreciate your listening and your commitment to the rail industry and your respective countries.

We have a huge opportunity before us. The opportunity of turning railroading into a growth industry again.

The rail industry is not just another area of commercial activity. Rail transportation is the lifeblood of any society that expects to thrive sustainably in the midst of increasing population and industrial development. Rail transportation has proven to be the most energy-, capital-, and space efficient means of moving heavy weight over land. Even as we implement new solutions to global climate change, there are no technological replacements on the horizon for railroad’s unique ability to move goods and people efficiently.

We have, therefore, a greater responsibility than if we were gathering for a conference in other commercial arenas. Today, more than ever, we need straight talk, not happy talk. While we celebrate our successes, we must also engage in constructive observations and brainstorming for new possibilities. Yes, there is much to appreciate as railroad management successfully negotiates the ups and downs of a changing world. But our problems – a steadily shrinking rail network, increasing greenhouse gas emissions, inefficient use of space, more and more trucks to move goods to and from freight terminals – make the status quo unsustainable.

So, let’s get straight to it by asking a vital question…

Why would a nation underutilize trains and overutilize trucks?

My search for that answer and more importantly…what to do about it… has been the guiding purpose of my 25 years in transportation finance.

Again, why would a society invest so much more capital in a less efficient mode of transportation? Answering this question wisely tells us everything we need to know to return railroads to a growth industry. And, importantly what might the answer point to for solving other major issues from healthcare to climate change.

We can only grow railroads if we shine an honest light on these cultural dynamics, to see what has brought us to where we are… let’s make no mistake about it, we are increasingly building a truck-centric economy, even while looming congestion and air quality issues threaten our health and prosperity. This is not sustainable. It can’t continue.

While my firm has brought capital to rail projects in 45 states and Canadian provinces, there is no amount of money that will overcome this underlying drive toward inefficiency. What I want us to call into question, not just in the rail industry, but in our society as a whole, is the imbalance between competition and collaboration. And is that imbalance the source of many of our problems? To truly be of service to communities, healthy competition must allow for thoughtful collaboration. Can we quickly transition from a brutish enthrallment with competition and anti-trust, to a productive culture of collaboration and trust?

In many ways, we are still back in the days when competing track gangs shot at each other across the river to make it first through the pass. It was the 19th century when competition was adopted as the primary principle of interaction in business and governance, particularly in our United States and Canada. Our most successful business leaders, men like Rockefeller, Jay Cooke, Charles Crocker, of course, promoted the notion that we would all be better off if we just competed with each other. To our unending detriment, this has become not only the way of business, but the default mode for interactions between political parties, states, and countries. Competition runs rampant not only across the aisle, but across committees, agencies, associations, and even universities. At a time when we need coordination and collaboration to solve our multifaceted problems, we are mired in competition—competition for attention, competition for influence, competition for votes, and competition for funding. We are all rendered less effective. This will not do.

How has this turned out for the rail industry in North America? Yes, we have perhaps the most robust and safe freight rail system in the world. And in the three countries of Canada, United States, and Mexico, railroading is about a $95 billion a year industry. But trucking in these three countries is a $950 billion a year industry. No matter what measures we apply… SOMETHING is amiss. We ask again, why would a society invest so much capital and resources in a less efficient mode of freight transportation?

I began my thinking about these questions in 1995 when I was introduced to our first shortline railroad client, the Mass Central. After solving their finance challenge, I asked their general manager, Bob Bentley, if there were other businesses like his around the country. Of course, he responded, “yes, and since deregulation in 1980, the number of shortlines has grown from 190 to 600.” So, I asked him, “do they also have a shortage of access to capital?” “Oh yes”, he said, “it’s the bane of our existence.” That began my 25-year investigation of why railroads, which were THE biggest reason capital flowed into North America in the 19th century, now needed our help solving its finance challenges at the end of the 20th century. We found a large gap had evolved in the capitalization and vision for growth. My company has been bridging those gaps for railroads ever since.

After discovering that the rail industry was misunderstood on the finance side, we became curious what was going on in the rail industry’s relationship with government. That curiosity has led us to conduct thousands of meetings with staff and elected officials in every state, Congress, and the Executive Branch. In one four-year period from 1996 to 2000, we met with 68 United States Senate offices and 175 US House offices. Rather than advocating on behalf of a particular client or project, we have tapped into the power of communicating the value of railroads to the country. It’s all about education and enrollment in what we all already know to be true about our industry.

A continental investment in railroads is the smartest public policy choice we can make environmentally, socially, and financially. But we all know that North American railroads, governments, and communities have had a love-hate relationship for 180 years. We can turn that around. It is time for us as an industry to chart a different course… a systemwide growth business model. But not just an improvement on Return on Investment and Operating Ratio but a growth plan that truly serves the country.

Intermodalism as presently advancing is moving us away from transportation efficiency. Advocates for expanding the network of large intermodal container facilities are silent on the increasing use of trucks where we can least afford them… on local roads of small towns and large metropolitan regions that are increasingly suffering from congestion and air pollution. Pennsylvania, my state, has become a hotbed of warehouse and distribution facilities that are built, not only truck out, to cover the Baltimore to Boston market, but alarmingly truck in, forcing more and more truck traffic on our crowded highways and local roads. So even those goods that are carried long haul by the railroads are unloaded in the midst of large intermodal terminals in small town America, instead of being delivered directly to the customer.

Here is how that looks for one large urban logistics move. There is a Pepsi bottling plant in the industrial core of Brooklyn that receives 30 tractor -trailers a day of liquid sugars, even though there is a 4-track New York and Atlantic freight line right alongside the plant. Now for $1MM and an 18-month payback, the unloading and pumping equipment could be installed. But instead the sugars are transferred out of the railcars they came in from the Midwest and into trucks in eastern Pennsylvania and North Jersey and driven over highways, bridges, tunnels and local roads to deliver to the bottling plant. And they own three other bottling plants on the east coast with the same logistics gap. The changes can only be made through a collaborative effort between the supplier, the distributor, the customer and the railroads.

In our work with leading shortline operators, we have experienced the tremendous possibilities of local rail development. Rail leaders like Dan Sabin, Dave Fellon, Rick Webb, Powell Felix. These leaders and others, including some of you here today, buck the odds to revitalize deteriorated portions of our rail network and turn them into contributors to regional economies. We have to ask—if these rail entrepreneurs can turn a profit serving the community and the Class I’s, what does that say about the decisions that let these rail lines go fallow in the first place?

The growth of railroading requires more than high-volume customers and corridors. Projects of national significance are only possible with many projects of local significance. Strategic Rail Finance is currently advising on new shortline operations in five states, with two more in the pipeline. This process can be scaled up across the country.

With environmental degradation and transportation congestion looming as quite serious social challenges, our communities and businesses need more railroad service, not less.

This brings us to another fundamental question of our time… what is the responsibility of businesspeople to contribute to society?

Let’s just answer that question straight out. The primary responsibility of businesspeople is to contribute to the common good. That needs to live at the heart of all commercial activity in the 21st century. If we are not continually evolving how our businesses contribute to a sustainable future, then we have the responsibility to find a business or organization that is and work for them. It’s that simple. We no longer have time to argue about economic or political theory while the planet heats up, while the oceans rise, and while our infrastructure ages.

This is a time for real heroes, the kind of women and men that our grandchildren can reminisce with pride over what we did for our world. I am speaking to those of you in this room as well as those of you in the field, and in offices throughout North America.

What exactly does it mean to be the kind of real-life hero the children around us want us to be in our companies and organizations? They would say, please mom and dad, aunt or uncle, grand mom or grand dad, please put our family’s self-interest just enough to the side so you can consider what is in the best interests of the world. In other words, shift from profiting for profits sake to profiting from contribution.

I’ll share one of my early eye-opening experiences in DC of what I came to realize is the norm for how that dynamic impacts industry’s relations with government. It was 1996, during the 105th Congress when I read a piece of legislation resulting from a 5-year Presidential Blue Ribbon Commission meant to establish a mechanism for private-sector pension funds to be invested in national infrastructure projects. The bill listed every type of project including schools, water and sewer, and passenger rail but left out freight rail. It was a curious omission. So I reached out to the lead congressional sponsor, Congresswoman Rosa DeLauro. Her staff directed me to the Chairperson of the commission who worked at a DC lobbying firm. Within ten minutes of speaking to this fellow he told me the reason he was serving in this role. He had a contract with a French manufacturer of turbine engines for high speed TGV passenger trains and wanted to see the US invest in that technology. He wasn’t concerned about freight railroads. I got off the phone struck by how matter of fact he shared his narrow, vested interest, with me, a complete stranger, with no denial and no shame. This was my introduction to how policy and programs are informed or not informed by lobbyists. I worked with Representative DeLauro’s staff to draft a one-page letter for her to send to USDOT asking if there was just a simple oversight. The legislation was re-introduced in the 106th Congress with two words added–“and freight”. We accomplished that without representing any votes, or any campaign contributions… solely by attending to what was needed.

Railroad industry representatives can imbue their work and their communications with a higher purpose. There is no reason to shy away from talking passionately about railroad’s contribution to vibrant communities and the environment.

The organizational consultant Simon Sinek delivered one of the most respected Ted Talks of all

time when he delineated the approach of successful companies like Apple. He related the power of communicating first why you do business, then how, and then what you offer, rather than the other way around. The rail industry does itself a disservice when it leads with what it does, and hardly ever gets to the why. The crucial contribution of railroads to a well-working society is left out, or barely mentioned as an afterthought.

But why? We have found over and over again, that rail transportation, when communicated proudly, opens doors and minds in government and communities. Imagine this… we conducted a briefing about the railroad industry for 60 congressional transportation staff for 90 minutes with not one person leaving early. Not at the Washington Hilton or the Marriott, but right in the U.S. Capitol Building. Then we convened 35 industry and government leaders in a six-hour collaborative dialogue, again in the U.S. Capitol Building without contributing one dollar to a political campaign. Contrary to the pervasive myth people in government overwhelmingly work to serve the community and the country. We as an industry must embrace the value of close coordination with these stewards of our national interests and indeed our national infrastructure investment. The message of railroading inherently makes sense and therefore has power when communicated confidently.

We can deliver cascading benefits to our nations and our environment by master-minding a continental build-out of our rail network. That requires convening government, industry, and communities such that we capture the imagination and input of all stakeholders. The railroads and their shippers, and the community and its government stewards must align. Transforming the driving forces behind wasteful, vested-interest competition will allow us to create breakthrough approaches in the ways that railroads impact land use, energy, the environment, natural resources, industrial development, and finance. Railroads are critical to sustainability in all of these concerns. It’s time to re-invent the wheel.

Fortunately, all the capital needed for this build-out is already available. In the last six months, we have met with nine of the 20 largest infrastructure fund managers in the world with at least $500 billion who are poised to invest in North American rail development but can’t. Three things are needed to reset the landscape for profitable deployment of this ample private-sector capital: an industrywide growth business plan, supportive and stable public policies for rail development, and an environmentally intelligent relationship with communities. Capital will flow in record amounts from around the world into North American railroads when we align all stakeholders around a continental growth plan.

I don’t talk about matters like this unless I am walking the walk. Here are some of the things we are doing.

• We have co-founded the Western US Freight Connectivity Forum along with Daniel Elliott, former chair of the Surface Transportation Board under Presidents Obama and Trump. The orum is an innovation in multi-stakeholder interaction for addressing the most important issues in freight transportation and creating smart public policy.
• We have begun working on a rail action plan for the state of Nevada that will serve as a model for state rail planning throughout the country.
• In collaboration with Mike Koontz, the former long-time head of USDOT’s Congestion Mitigation and Air Quality Improvement Program we have developed a greatly expanded set of lifecycle benefits and costs with which to measure and plan transportation projects. Strategic Rail Finance continues to create capitalization strategies for major rail infrastructure projects as well as regional and local industrial development projects that improve and expand rail service for shippers and communities. We currently advise 17 North American ports, cities, and economic development agencies on rail infrastructure development.

From all of my experience meeting with so many folks I can report that we are not short of intelligent individuals. What we are lacking are the means for gathering that intelligence into smart policies and programs.

Intelligent whole systems thinking is common sense. There is nothing more timely right now than common sense.

That is why we have invented our IntelliConference methodology for online and in-person, facilitated large-group, multi-stakeholder dialogue. The North American Freight Forum utilizes the IntelliConference system.

Clearly everyone in this room is smart, committed, and passionate. We can think together. Now is the time, and you are the heroes. Let’s get to it, let’s grow railroads, and let’s create a world that works for everyone.

Thank you for your listening and your commitments. And now we’ll be happy to hear what you would like to say or ask.