Now is the time for Congress to act on the sale of Conrail.
Last year, I recommended that Contrail, the government-owned railroad, be sold to the Norfolk Southern Corp. I made my decision after conducting a lengthy bidding process consistent with Congress' directive to provide it with a plan to get the government out of the freight railroad business.
I chose Norfolk Southern because it is the best long-term guarantor of a financially strong Conrail. Norfolk Southern's offer best satisfies the criteria I set in evaluating the bids, bringing the most financial strength to Conrail, best preserving service to shippers and communities, and consistent with these two, the best financial return to the government.
Almost three years ago, I asked Goldman Sachs & Co., my investment adviser hired at the direction of the Congress, to contact every conceivable buyer, and to review the public offering alternative. After contacting more than 110 potential buyers, Goldman Sachs worked vigorously for a year on both tasks. In the spring of 1984, Goldman Sachs advised me that the risks of a public offering were substantial. It recommended a competitive bidding process, which I immediately initialed.
Over a year and a half ago, I received 15 offers to buy Conrail. After months of negotiating, and after still another review of the public offering alternative, I concluded the public interest would be best served by a sale to Norfolk Southern.
Five congressional committees held 16 days of hearings on all aspects of the Conrail sale. Members of Congress also held numerous hearings outside of Washington.
Under the agreement we reached with Norfolk Southern, the railroad has agreed to public interest covenants designed to preserve quality service, protect Conrail shippers and to ensure the financial strength of Conrail.
The merger brings to Conrail the enormous financial resources of a strong parent. Norfolk Southern will bring important new business to Conrail--new traffic that will come from the cheaper, faster north-south single-line service the combined railroads can offer. It will diversify Conrail's traffic base and lower its operating costs. It will stimulate competition, not inhibit it.
The Norfolk Southern/Conrail combination was reviewed by the Antitrust Division of the U.S. Department of Justice. This competitive review was the most stringent to which any rail merger has ever been subjected. Based on its lengthy review of a plan by Norfolk Southern to divest track and grant trackage rights to other railroads, the Justice Department said Norfolk Southern divestiture plan "appears to create long-term, viable and competitive service for affected shippers."
Today there is only one railroad--Conrail--offering single-line service between the Northeast and the major Midwestern gateways at Chicago and St. Louis. But the divestitures to Guilford Transportation Industries will end that monopoly. Guilford will become an important carrier offering single-line service between Chicago and St. Louis and a broad range of Eastern and Northeastern markets. The creation of a second single-line east-west competitor will restore head-to-head competition between those points for the first time in about 20 years.,
Selling Conrail to Norfolk Southern would net a minimum of $1.2 billion to the Treasury on the day of closing--the equivalent to approximately 10% of what the government has to save in 1986 under the recent Gramm-Rudman-Hollings deficit-reduction legislation.
Conrail today, in the words of one railroad official, is "an inherently fragile" company. In looking at Conrail's future, one must consider that it carries recession-sensitive traffic, which puts it at risk when the economy weakens. Conrail's tonnage has declined steadily over the past 20 years. Since it was organized in 1976, Conrail has laid off more than 50,000 employees and sold off properties in order to cut costs. Furthermore, Conrail plans to lay off another 4,000 employees by 1989 and is considering or planning to abandon another 2,100 miles of track.
Conrail cannot continue to shrink itself into prosperity. One observer, Hays Watkins, chairman of CSX, chief competitor of Conrail and Norfolk Southern, has said that if the business cycle produces a recession, the market will support only two carriers. He said that since Conrail is vulnerable to truck competition, since it lacks significant coal reserves and a strong parent company, an independent Conrail would be the carrier to fail.
The investor group headed by Morgan Stanley and Co. has made an offer for Conrail. I and my financial adviser have studied this offer in detail and we have concluded that this offer does not provide the financial strength of the Norfolk Southern offer. Norfolk Southern is committed to the railroad business for the long haul and is not motivated by a desire for a quick profit, nor to extract substantial sums to pay dividends.
As I have worked on the Conrail sale during the past three years, I have kept in mind the sacrifices made by Conrail employees and their need for security, the needs of its shippers and the interest of the taxpayers.
The information needed for a decision is on the table. The sale has undergone exhaustive review. Now is the time for Congress to complete the sale process it mandated over four years ago. Further delay will only allow a major railroad to remain a ward of the federal government.
ELIZABETH HANFORD DOLE
Secretary of Transportation