Every time a rail car filled with grain rolls into Perdue Farms' large poultry feed mill in Hurlock on the Eastern Shore, Maryland taxpayers are picking up part of the tab.
The reason is the state's extensive support for the Maryland & Delaware Railroad Co. (M&D;), which provides rail service to Eastern Shore businesses, many of which are tied in one way or another to the region's vast poultry industry.
In a little-known but sizable subsidy, the state has poured millions of dollars into the freight rail operation over the past 21 years. State officials say the money is well spent because it helps preserve 22,000 jobs tied directly or indirectly to the poultry industry.
"It's about jobs -- the preservation of jobs, the growth of jobs," said David L. Ganovski, who manages the state Mass Transit Administration's freight rail services division.
Most other states have programs to support freight rail services, he said, adding that virtually all forms of transportation -- highways, ports, airports and railroads -- are subsidized in some fashion.
Ganovski and poultry industry representatives said it is uneconomical to move bulk goods, such as large quantities of corn and soybeans, over long distances by truck. The poultry industry that dominates the Eastern Shore's economy would be threatened if rail service was not available at affordable rates, they said.
"It could cost anywhere from two to four times as much [to move goods by truck], depending upon the commodity, the weights of those commodities and the distance they are being moved," Ganovski said.
J. William Satterfield, executive director of Delmarva Poultry Industry Inc., a trade association, said transportation costs are a big concern.
"In this industry, companies measure the costs of production in the hundredths of a cent per pound -- not a penny per pound or a tenth of a cent per pound -- a hundredth of a cent," Satterfield said. "Everybody is always striving to have lower costs of production. If we didn't have the railroads, this industry probably wouldn't exist."
Tita Cherrier, a spokeswoman for Perdue Farms, said grain accounts for about two-thirds of the cost of growing chickens.
She said losing rail service would affect the competitiveness of Perdue and other poultry companies in the region.
Most states have programs similar to Maryland's to support short-line freight railroads, those that operate on tracks branching off major carriers' lines, providing service that the bigger companies find unprofitable.
Short lines stepped into a vacuum created in the 1970s, when bankruptcies of major rail carriers such as Penn Central, restructurings and deregulation led big carriers to abandon service on all but their heaviest-volume lines.
The abandoned lines were sold to smaller, private railroad companies with lower overhead. In some cases, states bought rail lines to preserve service in certain areas.
"The basic phenomenon of offering government assistance to preserve this kind of service is well established," said Curt M. Grimm, a business professor at the University of Maryland, College Park.
In recent years, Maryland has spent $3.5 million to $4.5 million annually on its short-line rail program. The money helps pay for upgrading road crossing and bridge, rerailings and similar projects.
Besides the Eastern Shore rail lines, the state owns sections of rail lines in Carroll and Frederick counties that are used by the Maryland-Midland Railway Co. and in a few other areas of the state.
Ninety of the 127 miles of active rail lines the state owns are operated by M&D.; The two lines run off a Conrail/Norfolk-Southern line, from Townsend, Del., to Chestertown and Centreville and from Seaford, Del., to Preston and Cambridge.
The state also owns 54 miles of tracks from Clayton, Del., to Denton and Easton, but M&D; quit running trains on it in 1982 when the volume of traffic fell.
Another operator, the Chesapeake Railroad Co., waged a long, unsuccessful battle to reopen the line. It briefly ran fewer than 30 freight cars a year on the line in 1995-1996.
William G. Bartosh, Chesapeake's owner, said state officials posed nothing but obstacles over the 15 years he doggedly pursued the project, in contrast to their support for M&D.;
In M&D;'s case, the state takes care of many of the big expenses of equipping and running a railroad, The state bought the locomotives the railroad company uses, owns the rail lines, pays M&D; to maintain the tracks and gave it a no-interest loan to buy hopper cars.
Alice C. Saylor, vice president of the American Short Line and Regional Railway Association, said that is an unusual degree of state government support for a privately owned short-line railroad company. "It does seem like a lot of state support, but obviously the state felt it was justified in this case," Saylor said.
No government help
Saylor said most short-line railroad companies use their own, revenues to acquire rail lines and upgrade and maintain them with little or no government help. Though states make some money available, they usually are "certainly not meeting all the infrastructure needs of small railroads by a long shot," she said.
By contrast, Maryland gives M&D; extensive state support:
The state paid $146,500 in the late 1980s to buy three used locomotives for M&D;'s use, later spending $700,000 more to refurbish them. The engines are painted with M&D;'s burgundy and black colors and bear the company's logo.
Last year, the state put up $410,000 so that M&D; could buy 20 covered hopper cars to haul grain. The money was in the form of a no-interest loan to be repaid in $16,400 annual installments over 25 years.
The state has been paying M&D; $375,000 a year since 1989 to maintain one part of the state-owned rail lines the railroad company runs on. In 1996, it began paying M&D; $300,000 a year more for maintenance-of-way expenses for a separate section. M&D;'s owners said the extra $300,000 a year is for extensive rehabilitation work, not routine maintenance.
The state budgeted $1.2 million last year to rerail deteriorating sections of the tracks and has spent hundreds of thousands more over the past 21 years on other improvements to upgrade the rail lines and keep them in shape to move freight.
M&D; Chairman Edward Banks, a prominent Salisbury lawyer, said his company essentially is performing a service for the state under contract. He said the state money isn't really a subsidy. "All we are is a management company," Banks said. "We provide rail service over land and track owned by the state of Maryland."
Banks said the state is keeping "its own house in order" by spending money to maintain M&D;'s lines, because the state owns the tracks. He said it also made sense to buy and refurbish the locomotives because the state had been leasing engines for $3,000 a month. Today, the cost would be would be as much as $400 a day, he said.
Banks said there is little profit in M&D;'s operation, even with the state's financial help. He said prof- its are "in the low- to mid-five-figure range" each year after expenses.
M&D;'s offices are in an old, wooden three-room railroad station building in Federalsburg. The company has 13 full-time workers and one part-time employee, Banks said, and runs about 2,000 rail cars a year over its lines. M&D; pays the state $15 per car load for using the state-owned rail lines, the same assessed on rail lines in other areas of the state.
The company also operates on two other lines on the Delmarva Peninsula, one owned by the state of Delaware and the other by the Snow Hill Shippers Association, a partnership of the huge poultry companies Perdue Farms and Tyson.
M&D; is owned by Banks, who has done legal work for Perdue Farms and serves on the board of the Delmarva Poultry Industry; M&D; President John C. Paredes, once a Perdue Farms accountant; and Eric H. Callaway, who worked his way up from the M&D;'s track gang to become its vice president and general manager.
Banks said about 40 percent of M&D;'s business is hauling car loads of corn and soybean to feed mills on the Delmarva Peninsula, where the grain is processed and trucked to contract growers who supply chicken poultry processors.
Although M&D; has customers outside the poultry industry, many other products it hauls, such as propane to heat chicken houses and fiberboard to make boxes used for shipping, are tied to the poultry industry.
'Poultry railroad'
"We are a poultry railroad," Banks said. "The poultry industry on the Eastern Shore is like what the auto industry is to Michigan. Everything here ties into the chicken industry. This would be a dust bowl without the poultry industry."
M&D; has been providing rail service on the the Eastern Shore rail lines since the company was established in 1977. The state initially leased the lines from the Penn Central, then bought the lines from the railroad in 1981.
Banks, Paredes and Callaway bought the company in 1989. Before they took it over, the state had been paying a direct operating subsidy to keep the lines going. The state paid the company's losses, plus a 4.5 percent operating fee.
The MTA's Ganovski said the state is conducting an economic assessment of all 218 miles of rail lines that it owns, with the goal of eventually getting out of the rail business. The state might sell some segments to private operators and close others that do not have enough traffic, he said.
In other states, short-line freight railroads get financial help in varying degrees.
John E. Brown, a rail official with the Pennsylvania Department of Transportation, said that state has spent about $8.5 million a year for the past two years on freight rail construction and rehabilitation work in partnership with rail companies and shippers.
In Virginia, William D. Ketron, a state rail official, said $3 million was budgeted this year for its freight rail preservation program. Ketron said Virginia's Constitution prohibits the state from owning rail properties. But the state has purchased locomotives for some of its eight short-line railroads.
Pub Date: 10/18/98