1. DARK TERRITORY
RDC’s Long, Strange Trip to the Fringes of the Regional Railroad Movement
Henry Posner III, Chairman Railroad Development Corp. (
Princeton University December 15, 2010

2. AGENDA RDC Today History of RDC The Future General
Businesses, Present & Past
History of RDC
Plan A: Initial Years
Plan B: P&LE
Plan C: IAIS
Plan D: International
The Future 2

3. RDC – General
Pittsburgh-based, privately held railway investment and management company
Focus: Emerging Corridors in Emerging Markets
Financial structure based on Joint Ventures 3

4. RDC – Businesses Overview
Country
Entity
Length Km (Miles)
Employees
Tons Y. 2009
(in millions)
CURRENT:
USA
Iowa Interstate
954 (592)
206
11.7
Argentina
ALL Central
5,690 (3,535)
1,200
2.3
ALL Mesopotamica
2,704 (1,680)
300
1.0
Guatemala
Ferrovias Guatemala
322 (200) 13
N/A
Peru
Ferrocarril Central Andino
535 (332)
431
1.8
PAST:
Tons Last Yr of Investment
Malawi
Central East African Railways
797 (495)
417
0.22 (2008)
Mozambique
Nacala Corridor
873 (542)
404 Rail
209 Port
0.2 Rail (2008)
0.9 Port (2008)
Estonia
Eesti Raudtee
693 (431)
2,345
44.4 (2006)
FUTURE:
France
Joint Venture with RFF for wagonload
Germany
Hamburg – Köln Express for intercity passenger 4

5. RDC Businesses: Iowa Interstate RR5

6. RDC Businesses: Iowa Interstate RR (cont.)
1,000 km of former Rock Island trackage between Chicago and Omaha
Rock Island liquidation in 1980 a major reason for deregulation
Abandoned as through route from 1980 to 1984; recapitalized 1991, 1997, 2005
Paralleled by BNSF, CN and UP
100% owned by RDC from January 2004 6

7. 7

8. RDC Businesses: Iowa Interstate RR (cont.)
Safety
Gold Harriman Award 2004 and 2008 for Safety Performance in Years 2003 and 2007 8

9. RDC Businesses: Iowa Interstate RR (cont.)
Traffic 9

10. RDC Businesses: Iowa Interstate RR (cont.)
Investment
New GE ES44ACs
Intermodal Facilities
Photo courtesy Tom McNair © 2010 10

11. RDC Businesses: Iowa Interstate RR (cont.)
Future Amtrak route Chicago-Iowa City…
…using formerly-abandoned Rock Island main line 11

12. RDC Businesses: Iowa Interstate RR (cont.)
HISTORY & CULTURE
October 18, 2008
Double-headed, record setting steam freight haul: 66 cars, 6,252 tons, CBBI
Photo courtesy Nathan Holmes © 2010 12

13. RDC Businesses: ALL Central13

14. RDC Businesses: ALL Meso14

15. RDC Businesses: ALL Central & ALL Meso
CONTENT
Argentina first country to “privatize” railways
Privatized 1993; recapitalized 1999
JOINT VENTURE originally with IMPSA
Conrail as Technical Advisor
Publicly traded as part of ALL
ALL CENTRAL
5,350 km between Buenos Aires and Mendoza
ALL MESOPOTÁMICA
2,740 km between Buenos Aires and Uruguay, Brazil and Paraguay 15

16. RDC Businesses: Ferrovias Guatemala16

17. RDC Businesses: Ferrovias Guatemala (cont.)
1996: Abandoned by public sector…
1999: Restored to operation by private sector…
2007: Put out of operation by public sector 17

18. RDC Businesses: Ferrovias Guatemala (cont.)
CONTENT
ONLY example of a national railway abandoned by public sector & restored by private sector
100% equity financing (including funds diverted by govt.)
“Right of Way” development a major piece of business plan: Electricity distribution, Pipelines, Lease of Stations, etc.
No Personal Injuries for 1.5 years, 2/05 – 8/06 18

19. RDC Businesses: Ferrovias Guatemala (cont.)
Traffic Base
All traffic was “intermodal” between Atlantic ports and Guatemala City.
Base traffic was steel, with spot intermodal as capacity permitted. 19

20. RDC Businesses: Ferrovias Guatemala (cont.)
Traffic Growth
DECLARATION OF LESIVO, AUGUST 2006
SERVICE SUSPENDED SEPTEMBER 2007 20

21. RDC Businesses: Ferrovias Guatemala (cont.)
Local Conditions
Garbage dump
Squatters 21

22. RDC Businesses: Ferrovias Guatemala (cont.)
SAFETY 22

23. RDC Businesses: Ferrovias Guatemala (cont.)
HISTORY & CULTURE
Steam Charter (Baldwin-Philadelphia, 1948) 23

24. RDC Businesses: Ferrovias Guatemala (cont.)
First-Ever Claim Under CAFTA Pending
The Arbitration Process:
Notice to Government March 2007
Claim filed with ICSID June 2007, accepted August 2007
Tribunal of 3 arbitrators constituted April 2008
Various government objections overruled and rebuffed
Tribunal hearing case throughout
Binding decision expected 2012
“Prensa Libre”, Guatemala, Mar. 14, 2007 24

25. RDC Businesses: Ferrovias Guatemala (cont.)
Rail service suspended September 2007 25

26. RDC Businesses: Ferrovias Guatemala (cont.)
A License to Steal
Rail (and right of way!) “stolen” on the Santo Tomas branch 26

27. RDC Businesses: Ferrovias Guatemala (cont.)
A License to Steal (cont.)
Theft of track material, bridge structural cross members (ties burnt to facilitate removal)
Theft of entire main line MP 138, South of El Rancho Station 27

28. 28

29. RDC Businesses: Central Andino29

30. RDC Businesses: Central Andino (cont.)
CONTENT
600 km between Lima/Callao and Cerro de Pasco and Huancayo
World’s 2nd Highest Railway (15,807 ft / 4,818 m)
Privatized September 1999
JOINT VENTURE with Juan Olaechea & Company; Minas Buenaventura; Cemento Andino; and others
Passenger Service inaugurated 2002, re- equipped 2006 30

31. RDC Businesses: Central Andino (cont.)
Monthly tourist operation on former “World’s Highest Railway”
No subsidy 31

32. RDC Businesses: Central Andino (cont.)
FCCA Profile 32

33. RDC Businesses: Central Andino (cont.)
Motor car ahead of train
Huayco 33

34. RDC Businesses: Central Andino (cont.)
HISTORY & CULTURE
New look for steam!!!
NYW&B MU at Callao 34

35. RDC “Past” Investments: Africa35

36. RDC “Past” Investments: Africa (cont.)
MALAWI:
800 km linking Lilongwe with Blantyre & Mozambique’s Nacala Railway
Privatized December 1999
First Private Sector rail investment in Africa
JOINT VENTURE with CFM (Mozambique); ERL (Bermuda); MANICA (Mozambique); and Mozambican investors
RDC, ERL interests sold to local investors September 2008 36

37. RDC “Past” Investments: Africa (cont.)
MOZAMBIQUE:
Mozambique’s Nacala Railway, which includes 872 km to Lichinga & Malawi’s border, plus Nacala Port
Transfer of concession in Jan & integrated with CEAR
First private sector integration of ports & railways
JOINT VENTURE with CFM (Mozambique); ERL (Bermuda); MANICA (Mozambique); and Mozambican investors
RDC, ERL interests sold to local investors September 2008 37

38. First private sector integration of Ports & Railways
RDC “Past” Investments: Africa (cont.)
First private sector integration of Ports & Railways 38

39. RDC “Past” Investments: Africa (cont.)
Traffic Base:
Highly diversified — carload freight, LCL freight, passengers
Main imports — fuel, cooking oil, fertilizer, food
Main exports — tobacco, food 39

40. RDC “Past” Investments: Africa (cont.)
CONTENT
The “new” look… 40

41. RDC “Past” Investments: Estonia41

42. RDC “Past” Investments: Estonia (cont.)
693 km linking the Estonian ports with Russia and Latvia
Only vertically-integrated privatization of a national railway in Europe (Aug. 2001)
JOINT VENTURE with Rail World Inc. (USA); Mid Europa Partners (UK); & Ganiger Invest (Estonia)
Traffic increased from 38.7 million tons in 2001 to 44.4 million tons in 2006
Personal injuries reduced 75% between 2001 and 2006 42

43. RDC “Past” Investments: Estonia (cont.)
CONTENT
Soviet-era road loco fleet completely replaced with regauged former CR GE C30-7s and former UP C36-7s.
Limited Open Access regime agreed to as condition of privatization.
New, highly punitive Open Access regime imposed in as result of corruption. 43

44. RDC “Past” Investments: Estonia (cont.)
Conflict with government over retroactive confiscation of value settled in 2007 with re-nationalization at mutually agreed price.
“A win for the politicians, a draw for the investors and a loss for the Estonian people.”
Subsequently, a loss for the politicians. 44

45. The Center Party’s View of Re-nationalization
“We bought the Railway back!” 45

46. The Press View of Re-nationalization
“We’ve brought the ESSR back!” 46

47. RDC Caption Contest – Entry #1
“Are you sure that Posner’s ‘never coming back’? There was a guy with a bowtie in the cab of that locomotive back at the station.” 47

48. RDC Caption Contest – Entry #2
Preoccupied with putting flags on the locomotive, Edgar and his comrades forgot a basic safety rule: “leave the handbrake ON”. 48

49. RDC Caption Contest – Entry #3
Overconfident in their knowledge of railway safety rules, Edgar and his comrades confused the “Blue Flag” rule with the Estonian flag. 49

50. RDC Caption Contest – Entry #4
Tragically, Edgar and his comrades learned too late the reason why railway workers wear high-visibility clothing. 50

51. RDC “Past” Investments: Estonia (cont.)
Post Script:
Political conflict with Russia (“Bronze Soldier”) decimated traffic 4 months after re-nationalization
“Monopoly” handling 45 million tons in private hands now handling 25 million tons in public hands 51

52. RDC “Past” Investments: Steel City Flyer
Express bus Pittsburgh/Harrisburg, “business class”
Initiated 11/08 to connect with Amtrak high speed Keystone Corridor at Harrisburg
No subsidy
Discontinued 7/09 due to:
Inability to access Harrisburg “intermodal” rail/bus terminal
Flawed assumption that Highmark was interested in saving $1 million per year/increased employee productivity 52

53. History of RDC Plan A: Initial Years Plan B: P&LE Plan C: IAIS
Plan D: International 53

54. Plan A: Initial Years
Formation in 1987 in conjunction with former L.B. Foster principals (G&M, DM&E)
Strategy; continue formation of regional railroads at same pace (1 or 2 per year)
Results; high transaction costs, no results
“Duck Creek North” (CNW North of Green Bay)
TranStar
W&LE 54

55. Plan A: Initial Years (cont.)
Conclusions
Many buyers bidding for few lines
Every bidder is innovative, aggressive, market-driven, etc.
Successful bidders:
pay lowest wages
renegotiate after award
obtain public funding later 55

56. Plan B: P&LE (1990) Local company in trouble
Opportunity for consensus with labor
Negotiated transaction (not a Class 1 auction) 56

57. RDC’s Plan for P&LE Preserve Local Company Financial Package Completed
Serve Local Customers, Monongahela Railway Coal
Provide Trackage Rights to CSX for Through Trains
Promote McKees Rocks Car Shop
Financial Package Completed
Acquisition Financing
14 Labor Agreements (all unions) 57

58. Results Sale Aborted June 20, 1990
Primary Cause – management believed it could use RDC labor agreements and financing
Secondary Cause – DER hard line regarding McKees Rocks (retroactive environmental liability)
Additional Cause – local counsel’s advice to lender that they would be subject to joint and several environmental liability 58

59. SELECTED HEADLINES – Pittsburgh Post-Gazette
10-Feb-1990
Local Investors Agree to Buy P&LE
20-Mar-1990
Regulators Back Sale of P&LE Assets
16-May-1990
P&LE, Unions Reach Agreement on Severance
29-Jun-1990
Deal Off for Assets, P&LE Says
30-Jun-1990
Railroad President Denies P&LE Cheated Investment Group
25-Oct-1990
P&LE to Cut 500 Jobs, Trim Wages
2-Jul-1991
Regulators Approve P&LE-CSX Deal
31-Jul-1991
P&LE Agrees to Operate Meadville Shortline
11-Sep-1992
CSX Buys Out P&LE Railroad 59

60. SELECTED HEADLINES – Traffic World
19-Feb-1990
P&LE Hoping Third Time is Charm as Local Investors Plan Purchase
2-Jul-1990
P&LE, Unions in Holding Pattern as Would-Be Buyers Cast Aside
5-Nov-1990
P&LE Breaks Deal with Organized Labor
8-Jul-1991
CSX Wins ICC Approval for Plan to Acquire & Lease Back P&LE Track
21-Sep-1992
Pittsburgh & Lake Erie Railway Sold; Big Environmental Clean-Up Remains 60

61. P&LE Today A Wide Spot on CSX McKees Rocks: A Ghost Town
Trackage Rights Traffic Strong
Monongahela Railway Coal Strong
On-Line Industry Weak
McKees Rocks: A Ghost Town
Car Shop Demolished
Environmental Problems Remain 61

62. Conclusions RDC’s Plan Would Have Worked RDC’s Plan Was Undermined By:
Management’s belief that financing and labor agreements were transferable
Management’s economic incentive to see the company liquidated
DER’s inability to deal in good faith (“A job killing machine.” – Governor Tom Ridge) 62

63. Plan C: IAIS (1991)
Initially formed in 1984 to restore through service on Chicago-Omaha main line of Rock Island
Unsuccessful restructuring initiated by CWP in 1990
Negotiated transaction completed by RDC
RDC ownership of 20%, with option to buy additional 80% 63

64. Plan C: IAIS (1991) (cont.) Conclusions
RDC finally in the railroad business
Part of a substantial company (Class 2, connecting with all Class 1’s)
Entry price reasonable 64

65. Plan D: International (1991)
RDC contacted by Argentine company looking for partner
Argentine rail privatization unprecedented…and in Latin America
Very risky and difficult to analyze relative to U.S. transactions
RDC only company interested 65

66. Plan D: International (1991) (cont.)
Conclusions
RDC an early leader in overseas privatization
Not as risky or difficult to analyze as perceived to be
A very long-term investment horizon
Heavy emphasis on flexibility and cultural skills
Tried by many (RailTex, CSX, etc.), few left 66

67. The Future 67

68. RDC “Future” Passenger Service: Hamburg-Köln Express
Service to begin late 2011, three roundtrips/day
Used rolling stock purchased, to be refurbished
“Paths” confirmed on DB main line
No subsidy 68

69. RDC “Future” Wagonload Business: France
Joint venture with Reseau Ferre de France (RFF) to streamline and save the wagonload business
Translate the U.S. short line model to France
Important opportunity to take trucks off highways 69

70. The Future “With great power comes great responsibility.”
Spider Man for GE Transportation Systems
“There is no ‘I’ in Iowa Interstate.”
Henry Posner III 70

71. “Come with us to the New Lands!”
“A Luta Continua…” Samora Machel 71