Mr. Buffett, congratulations on your purchase of the BNSF Railway. It is a welcome investment in North America’s transportation system. It also provides a timely opening to address a systemic, long-standing problem—the incongruence between the inherent value of railroads to any well-functioning modern society and the shortfall in our investment of capital, energy, and land for rail freight and passenger transportation.
Only by understanding this shortcoming and seizing the opportunity to transform its causes can we bring North America out of its economic malaise and environmental jeopardy.
If we act wisely, your acquisition will become a watershed moment. However, to make the most of it, decision-making must evolve beyond moving money simply to where the investor receives the highest return on investment, and adopting a new principle that puts capital into industries and regions in a way that maximizes the benefit of those resources to those systems. From that shared benefit, investors receive their return.
Just a few more words, but they make all the difference in the depth of thinking, the sustainability of the system, and the long-term profitability of serving that market.
Even while new capital enters the rail industry, our network of freight lines is shrinking. Much like with the deforestation of the Amazon rain-forest, rational justifications abound for this depletion of resources. Almost every year, the U.S. abandons enough rail lines to stretch from Boston, MA, to Richmond, VA. Since 1990, 20% of our system has vanished.
Branch line segments are deemed “uneconomic” after years of downward pressure from a narrow economic lens and an incomplete policy perspective. The wider view of the larger system and the longer term is missing.
Your own reflections about BNSF have been well publicized. Your commitment to the country, environment, and shareholders has come shining through. While completely understandable for its business logic, one quote speaks to what is driving investment toward a diminished contribution to society. The New York Times quoted you as saying, “It’s a lot easier to make one $32 billion investment than ten $3 billion investments.”
It is easier to move capital in larger quantities, but the world’s smaller businesses and communities need access to money (and access to railroads) if we are going to sustain the systems that warrant the larger transactions. Unfortunately in the business and finance world, it is still said that “a small deal takes as much effort as a large deal, so why do the small ones?” There are many facets to the decrease in urban and rural freight and passenger rail systems over the last century, but this maxim is the least examined. The resulting gap in capital and attention is a prime contributor to rail line abandonment, leaving more and more cities, towns, and rural populations with a major challenge to revitalization, congestion relief, and job creation efforts.
Much energy within logistics and rail is directed toward consolidating freight between major terminals along high-volume corridors. While this contributes to efficiency in some ways, it fosters a devastating increase in regional truck traffic where we can least afford it—on local roads and highways of small towns and large metropolitan regions across the continent that are increasingly suffering from congestion and air pollution.
Pennsylvania, my state, has become a hotbed of warehousing and distribution facilities built, alarmingly, not only “truck out” to cover the Baltimore-to-Boston market, but also “truck in.” Consequently, goods carried long-haul by the railroads are unloaded in large intermodal terminals in small towns, instead of being delivered directly via branch line railroads.
In your home state of Nebraska, two articles in The Chadron Record spelled out yet another version of this problem. One described a bulk grain loading facility being built to consolidate shipments from small-town elevators around the region. Volume pricing is designed to redirect the grain movements from existing rail lines onto trucks traveling on local roads. The second relates local residents’ complaints about deplorable road and bridge conditions causing serious vehicle breakdowns, with the county out of funding for gravel and road repair. $14.5 million for this bulk grain loading facility was provided by federal stimulus funding, while the county’s budget struggles deepen. This can’t be what the American public expects from its tax dollars.
We are facing a systemwide drive toward consolidation fueled by the largest logistics and transportation providers—as well as by the financial community—which all thrive on bigger transactions. As a result, more branch lines are pushed into abandonment, even while state and local governments lose millions in futile attempts to preserve them. This is not a prescription for America’s economic vitality.
As C.K. Prahalad documents in Fortune at the Bottom of the Pyramid, companies around the world that serve large markets of smaller individual customers contribute to thriving communities and enjoy significant profits. Intermodal and unit train movements of high-volume freight can serve the continent well if parallel attention is dedicated to local, carload, short-haul, and direct rail service to small and large shippers alike.
Mr. Buffett, we invite you to study our work at OnTrackNorthAmerica and to collaborate with us toward building a more profitable rail system that supports the best interests of the continent by serving all size businesses and as many communities as possible.
President & Founder