Coos Bay Rail Link an expensive hobby

OUR CROSLINE RAILROAD

In order to prove the futility of government “economic development” schemes, my book ‘The JOB Messiahs’ (published last summer) chronicled all of the Port of Coos Bay’s failed “ecodevo” ventures during the last forty years. The Port’s first “ecodevo” fiasco involved an old wooden ferry boat, the Crosline, which is still remembered, if not with fondness, by people who lived here in the seventies. Named after its owner, Captain Crosby, who had run it across Puget Sound for many years, the Crosline was purchased by the Port in the spring of 1975. The purchase itself was a strange affair, though only the first of many. When the idea of buying the Crosline first came up, its price (including towing to Coos Bay) was reported as $40,000. The Port Commissioners called the hulk a “good investment,” and authorized their manager to “negotiate” an option to buy it. The next thing they knew, he had bought it for $50,000, skipping both negotiations and option. Then we learned that seven years earlier, the ferry had changed hands for a mere $10,000. And before its new owner sold it to the Port he had removed all of the Crosline’s machinery, including two big diesel engines, so the Port’s acquisition was a mere powerless wooden hulk. Given the paucity of the Port’s records and the passage of time, I was unable to find any reasons besides stupidity, but any skeptic of human nature could make plausible guesses about what went on. The Crosline was far from the only (and certainly not the last) expense by a local public body that smelled of graft and kickbacks. But in Coos Bay we don’t investigate such things. It’s not nice.
Still and all, the Crosline venture might have worked out if the Port had done its homework. The idea behind the acquisition had been to rent the hull to tourist-oriented businesses such as restaurants. But the Port had never required an aspiring restaurant owner’s signature, nor a deposit, nor had it hired a marine expert to assess the Crosline’s condition, nor a designer to plan its conversion to a commercial space, and to calculate the cost of that. Finally, after wasting a couple of years and another $60,000 in attempts to attract restaurant owners who never showed up, the Port Commission got desperate enough to offer the Crosline for sale; and the successful bidder was Emery Hanson of Charleston, a scrap dealer who got it for $10,500. Unlike the Port, Emery knew what he was doing, and he made money off the Crosline, selling its ballast, brass portholes and other parts, and using much of the hull’s lumber. And then, setting the Crosline’s superstructure on skids, he pulled it on land, where for many years it housed a good part of his junk inventory, while irritating diehard believers in the Port of Coos Bay’s greatness.

THE CROSLINE METHOD
Looking on the positive side, with “only” $100,000 wasted the Crosline ferry was one of the Port’s least expensive ecodevo boondoggles. But it set a course, one that ever-more-costly Croslines would follow. In the ferry’s wake, the Port invested hundreds of thousands in fish plants that continued to go broke, causing defaults on State loans. Then the Port invested $2.5 million in the T-dock, in hopes of cashing in on a fishing boom that never materialized. More financial trouble ensued. Then millions were spent to attract a pulp mill, a chromium smelter, a steel mill, a container terminal, and other pipe dreams. While reading each of those stories you will see the Port applying the Crosline method, over and over. Without any kind of prior investigation, without a business plan, another purchase would be decided on, money would be spent and then – reality set in, because the Port had dug itself into yet another financial pit. But it’s so easy to waste other people’s money, and so seductive.
And now, after all these years, we have acquired the most expensive Crosline of all: the Port’s railroad.
In my book I estimated the total amount of public money poured into that mother of all boondoggles at $63 million (page 20-17, second edition.) This was remarkably close, as confirmed by a recent tally:

So far, almost all of the $63 million have been public funds, mostly federal and state grants along with some loans.
For a perspective, let’s consider the construction cost of the new Coos Maritime Museum, which now has started on the former Central Dock property. That building’s cost will be somewhere around $10 million, no doubt a hefty expense for Coos Bay, as proved by the necessity of many years of fund raising. But just think: for the money spent on the railroad we could have built six museums.
And that’s an understatement, because by the time sanity returns to Salem and to Washington DC, and the Port finally runs out of other people’s money, it will have easily spent three or four times $63 million.

BUT WAIT! THERE IS MORE!
This July, the Oregon legislature allocated yet another $10 million to the port for railroad repairs, mostly of bridges. At that time, Port spokeswoman Elise Hamner, Jeff Bishop’s former groupie, disclosed that engineers had “. . . identified $25 million to $30 million in bridge repairs needed within the next two to three years.” That made the $10 million sound like a mere down-payment, and even more so because, even though the legislature’s latest gift will bring the total spent to $73 million, Hamner’s $25 to $30 mil was not even close to reality. The previous month, apparently without informing his P.R. specialist, Bishop’s successor David Koch had quoted a much higher anticipated cost for the bridge repairs.
The Port’s 134-mile railroad includes 118 bridges, varying in length from the long swing spans at Coos Bay, Reedsport and Florence to short ones measuring less than one steel bridge segment. In a June 20 memo to the Port Commission, Koch had disclosed that his engineers had “revealed several critical and priority repair and rehabilitation projects that must be completed to . . . the . . . bridges within the next 3-5 years in order for the rail line to continue operating at its current service levels.” This was Koch’s tally of those urgently needed expenditures:

In other words, not only was Koch’s estimate twice that given out by Hamner, but it looked as if the needed bridge work would cost as much again as the taxpayers had already paid for the line from 2000 to 2013. And notice that Koch was saying that all that work was needed for the line to “continue operating at its current service levels.” Those current service levels offer train speeds from 10 to 20 miles an hour, on a line whose annual carloads are unlikely to exceed the 5,000 CORP was hauling during the final years of its stewardship, on a line that at one time carried 40,000 railroad cars a year. 5,000 cars would produce annual gross revenues of $3 million. It’s highly unlikely that those numbers will be exceeded. For example, the American Bridge plant in Reedsport, even though it was loudly bemoaned as a victim of CORP’s callous suspension of service, was never expected to generate more than 150 carloads a year.
But, here comes Koch’s punch line:

“Our recent experience has shown that these engineering cost estimates may be low, and the actual costs for completing these projects may be substantially more. For example, a recent solicitation for timber bridge repair work included an engineer’s estimated cost of approximately $350,000, but actual bids received for the work were in the approximate range of $650,000 to $1,900,000.”

In other words, if this recent experience is a good indicator, the Port’s complete list of bridge work will cost between 2 and 5 times Koch’s $62 million estimate.

ARE ALL BIDDERS LEGIT?
In fairness, we’re dealing with a lot of unknowns here, so we’re partly flying blind – as may be the Port.
One possible explanation for the wildly diverging cost figures is that the Port hires incompetent engineers who have no idea what things cost; not an unusual arrangement given the crony capitalism practiced at the Port.
Another possibility is that among bridge contractors the word is out that the Port is their pipeline to the public treasury, so they see its bid invitations as ripe fruit for the picking. Those would likely be the high bidders.
On the other hand, sometimes the high bidders on a project are not really interested in doing the work, but they supply a bid for other reasons, like courtesy to the Port, or to help Joey get the bid.
Yet another possibility is suggested by the customary outcome of bid invitations for public construction projects, which is that the lowest bidder gets the work as long as he seems qualified. If that happens, Koch’s $63 million estimate for the lot may end up ONLY costing twice as much, or $126 million. But there can be problems with low bidders. Even if they are qualified to do the work, they may be schemers who figure they’ll be able to make up their loss with change orders for “unforeseen circumstances”, duly rubber-stamped by the Port Commission.
For all these unknowns, let’s split the difference by picking the number halfway between the two extremes cited by Koch, or the average of 2 to 5 times the engineers’ estimates. This means that the cost of the bridge repairs will amount to 3 ½ times his engineers’ estimate of $62.6 million giving us a total of about $220 million. That money would build another 22 Coos Historical museums, thus enabling us to fill the entire Coos Bay/North Bend waterfront with museums, with maybe a few left over for Empire. Not that I’m anxious to cover our shores with museums; but it does provide some perspective on what is rapidly turning into Oregon’s most outrageous corporate welfare case.

QUICK! WE GOTTA DO SOMETHING!
I mentioned that for every one of its boondoggles, the Port never produced a business plan. Incredible as this may seem to people who deal with finance, that applies to the railroad too. Instead of sharpening its pencils, the Port got into this mess by depicting it as an earth-shaking emergency, a customary tactic of government empire-builders. During the Port’s quest for railroad ownership in August 2008, its high-priced attorneys argued to the Surface Transportation Board that “the very existence of the Port may depend on rail service.” They also pleaded that the railroad was vital to the Coos Bay container shipping terminal that Maersk would never build.
All that was lies and nonsense. Unless you go back a century or more, to Coos Bay’s coal mining era, cargo for the vessels in the harbor was almost never brought by rail. Instead the railroad’s purpose had been to haul the products of the local mills inland. For a long time the Weyerhaeuser containerboard mill on the North Spit had been the line’s biggest shipper with 3,000 carloads annually, but that plant had closed in 2003. Between then and September 2007, when CORP, the railroad’s operator, stopped running trains due to collapsing tunnels, the line’s main users had been the Georgia-Pacific mill in Bunker Hill and the Roseburg Timber plywood plant in Coquille. Together these two plants had accounted for 80% of CORP’s carloads, or 4,000 out of 5,000.
As to the Maersk container terminal: it’s true enough that container terminals require rail, and a hypothetical Coos Bay terminal even more so. But despite inciting sensational headlines and political brouhaha, Maersk never made any kind of commitment to Coos Bay, nor did it spend any money on its so-called container terminal. Instead, what big companies like Maersk and Nucor and Daishowa Paper do is exploit the arrogant stupidity of our “leaders”, who still believe Coos Bay can become a world port and a great industrial center. Maersk and other such companies approach Coos Bay only as a ploy to get a better deal some place else, where they really want to build their new plant. But every single one of those highly unlikely ecodevo-schemes was feverishly promoted by the Port’s bureaucrats.
One brutal truth about government agencies is that they seek to perpetuate themselves, even if doing so takes a big dose of make-believe. “Politicians,” Napoleon observed, “are peddlers of hope.” The reason the Port needed the railroad was to keep that hope alive.
To realize how true that is, imagine for a second that the Port had NOT thrown millions at its DC attorneys to obtain STB approval for its acquisition. In that case the railroad would have been scrapped and its material sold off, leaving the people of the Coos Bay port district with a vacant right-of-way, perhaps turned into a bicycle path. At that point the people would have started rubbing their eyes and wondering why they were still supporting an industry-obsessed Port Commission and its highly paid staff, doing nothing useful in a harbor without a railroad and with hardly any ships.

NOW HE TELLS US
Imagine my surprise when, in his June 2013 message to the Port commission, David Koch exploded the arguments the Port itself had made before the STB in 2008:

“It is worth noting that most of the rail line, as well as most of the existing customers using the line, are located outside of the Port’s traditional district boundaries. In fact, only one rail shipper is currently using the rail line to move a commodity (wood chips) through a marine terminal located on Coos Bay. Although the continuing existence of rail service is seen as critical to supporting most future marine terminal development activity for the import of [sic] export of commodities, the present reality is that the rail line serves almost exclusively non-maritime customers in Lane, Douglas and Coos counties.”

It’s also worth noting that this “present reality” is no different from the reality that prevailed back in 2007, before the port started telling all those lies to the Surface Transportation Board in order to justify buying a derelict, unprofitable, unneeded railroad with other people’s money.
And just as was the case during the final years of CORP’s management of the line ending in 2007, most of that line’s carloads will be produced by two mills, the GP sawmill in Bunker Hill and the Roseburg Timber plywood plant in Coquille. Both ship their products to destinations east, and have done so by truck for five years, until the railroad was revived. This should be kept in mind by anybody who argues that without rail, both G-P and Roseburg would have shut down.

AN EXPENSIVE CHOO-CHOO TRAIN HOBBY
In the fall of 2011, four years after CORP quit running trains, a bright-blue engine carrying the CBRL (Coos Bay Rail Link) logo finally made it from Eugene all the way to the Southport mill on the North Spit. The event was more of a public relations stunt than an economic feat, since that mill would not ship the number of carloads to be expected from the Georgia-Pacific mill and the Roseburg Timber plywood mill in Coquille. Reaching that goal would take more than another year of expensive repairs. And to get the little engine to Southport in 2011, the Port had more or less bribed the line’s operator, a subsidiary of an Arizona railroad, by charging it a token ten dollars for using its line, without any obligation to pay royalties or to contribute to the line’s restoration. The only stipulation was that the company would run at least one train a week.
When that agreement expired this spring the Port signed a new one, with a Eugene-based operator. According to page 7 of the contract posted on the Port’s website (which refers to the new operator as “The Railroad”), The Railroad will get to keep 90% of the gross receipts from moving up to 3,600 carloads a year. That percentage will be reduced to 87.5% on the next 3,600 carloads, and it will drop a little more yet when a total of 7.200 carloads is exceeded. That seems unlikely to occur.
Like the Port’s first operator, the present one has no obligation to pay for major repairs or rehabilitation of the line. Its responsibility is limited to routine upkeep and cleanup, such as greasing switches and removing brush and rockfalls. No doubt under those conditions The Railroad can make money, just like CORP could have made money. Instead CORP, during its final three years of running the line, was spending between 48% and 80% of its gross revenues (which ran between $3 and $3.5 million a year) on major repairs, maintenance and rehabilitation, accumulating losses averaging $1 million a year. After suspending operations in 2007, CORP had offered to resume them with government aid of about $16 million, but the politicians were too busy crucifying the company to listen, and the Port’s acquisition went full speed ahead — at a final cost we have no idea about, but hundreds of millions for sure.
And, the Port has sweetened The Railroad’s pot even more. This summer it got our obsequious politicians in Salem to pass a bill exempting The Railroad from property taxes, and on top of that The Railroad will be the beneficiary of certain tax credits acquired by the Port (p. 4).

A SIGN OF THINGS TO COME?
It’s hard to avoid the conclusion that the Port will go to any lengths to keep its railroad running, but also that it isn’t terribly confident of its viability. For one thing, the Port promises not to require “a minimum operating speed for any segment of the lines.” (page 14). It also reserves itself the right to “abandon any portion of the lines,” regardless of The Railroad’s plans. And that goes for both parties, since the Port cannot “require the Railroad to operate common carrier rail service of those segments of the Lines that the Railroad in its sole discretion believes are unsafe for regular operation.” (p. 13). An awful lot of money has been poured into a pit that still threatens to collapse. But what else is a Port District mired in an existential crisis going to do?
If, as mentioned above, The Railroad gets to keep 90% of gross railroad revenues of roughly $3 million a year, that would leave $300,000 for the Port. But the Port will also start levying a surcharge on each railroad car, varying from $35 to $90. David Koch estimates the annual revenues to be gained from this at $350,000. He calls this money the Capital Projects Surcharge Fee, since it would be used for “capital projects on the rail line, which may include debt service on loans.”
It turns out Koch had a reason for his observation that the railroad mostly serves “non-maritime” industries outside the Port District; it led him to propose the creation of a Coos Bay Railroad Advisory Committee (CBRAC), made up of politicians and industrialists from all three counties, Coos, Douglas and Lane. The CBRAC plan carries a whiff of getting the other Counties to cough up money for the railroad’s never-ending physical needs.
In the meantime we may wonder: with $220 million in repair bills soon to be added to what’s already been spent, $63 million, should not the Port’s railroad be a candidate for the most outrageous case of corporate welfare ever? With anticipated annual net revenues to the Port of $650,000, or 0.22% of $283 million? Just asking; I can already hear the perennial advocates of “infrastructure” rising up in anger.
And before we spend that additional $220 million, wouldn’t it be a good idea for prudent people – if there are any in politics – to take a good look at what good this will do, or if this is yet another case of good money going after bad?
If nothing else, one thing to consider is this: Back in 2008 the scrap value of this railroad was set at $16.6 million. That was at a time when commodities’ prices like steel were high. It was calculated by adding the value of the railroad’s real estate to the value of the salvaged rail materials, mostly steel rails, minus the cost of retrieving them.
But this means that much of the money spent for track repairs since the Port acquired the line is irretrievable. If any track was replaced, that material does have more value than what was there before, but ballast, and re-aligned track materials, have added no value. The fact that tracks were re-aligned means nothing to a buyer looking for usable second-hand rails. So – even if it turns out that the salvage value of this line is twice the $16.6 million quoted before the STB in 2008 (and I doubt that), $33.2 million will still only recover a mere 50 cents on the dollar of what’s already been spent. And if, as described, the total public investment in this line rises to $283 million, $32.2 million comes to a mere 3 cents on the dollar.
Pssst – you wanna buy a railroad?

Wim de Vriend’s book “The JOB Messiahs” is for sale at Books-by-the-Bay in North Bend, at Farr’s Hardware in Coos Bay, at The Sentinel’s office in Coquille, and at the Blue Heron restaurant in Coos Bay.