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House transportation subcommittee analyzes private investors' influence on freight railroads


A number of public and private constituents — including Rep. John Mica (R-Fla.), The Children's Investment Fund L.L.P. (TCI) partner Snehal Amin and CSX Corp. head Michael Ward — testified yesterday during the House Transportation and Infrastructure Committee/Railroads, Pipelines and Hazardous Materials Subcommittee's hearing on private investment in the freight-rail industry.

The subcommittee held the hearing to address growing concerns over hedge funds' actions to change corporate governance and influence management decisions to maximize profitability at freight railroads — including TCI's recent wrangling with CSX — that could affect a railroad's long-term interests, subcommittee members believe.

"Unfortunately our nation's infrastructure is up for grabs to the highest bidder," said Mica, the Transportation and Infrastructure Committee's Republican leader, according to his testimony released by the committee. "With the weak dollar and cash-rich nations like China and some of the oil-producing countries, America's highways, railroads, and other key infrastructure can be purchased at deeply discounted prices."

The hearing addressed concerns about protecting the public interest in U.S. rail and infrastructure projects — currently, there are few restrictions on foreign investment in rail, he said.

"We do live in a global economy and will need to secure international sources of financing in the future to assist in building our nation's infrastructure," said Mica. "We need to sort out our national policy and establish the rules of the game. But rail, by its nature, requires huge capital investments and does not have the same pattern of competitiveness as other industries. Congress needs to review what is taking place, and decide what terms for investment should be in place to protect public interests. But we don't want to stop vital private-sector financial investment and capitalization."

TCI's Amin said, as a minority-stake investor, his firm hopes only to improve CSX's performance, which is "average or below average on nearly every metric," and not suggest the railroad cut spending on maintenance or safety-related items. TCI — which owns 4.1 percent of CSX shares and has been vocally critical of the Class I's corporate governance and management decisions — recently teamed up with 3G Capital Partners Ltd. to form a group owning about 11.8 percent of CSX shares and plans to nominate five directors with railroad experience to the railroad's board at the 2008 annual shareholders meeting.

TCI has advocated that CSX freeze capital expenditures only with respect to expanding capacity, Amin said.

CSX is "improving faster than the rest of the freight-rail industry on nearly every measure, including safety, customer service and financial performance,” and has "made tremendous strides in meeting customers' needs and creating significant value for all CSX shareholders," said Ward, CSX's chairman, president and chief executive officer, during his testimony.

"The value of CSX's stock has improved more than 150 percent in the last three years, which has provided shareholders with a return better than the rest of North America's Class I railroads and 94 percent of all Standard & Poor's 500 companies," he said.

Railroads, including CSX, will need to continue investing in their networks to meet increasing U.S. transportation demand, said Ward.

"[CSX has] a balanced and disciplined plan to invest for the future of our rail network — to add additional capacity, newer equipment and technology, and improved transportation infrastructure and security," he said.

At the end of the day, hedge funds are accountable to their bottom line and investors, but railroads are accountable to their shareholders and their common carrier obligations, said subcommittee ranking member Bill Shuster (R-Pa.).
"Railroads perform many vital public services, including serving national security interests," he said. "Our nation's economy depends on the free flow of capital, but it also depends on the efficient movement of freight."

Contact Progressive Railroading editorial staff.

More News from 3/6/2008