The Heritage Foundation

Executive Summary #1179es on Regulation

May 15, 1998

May 15, 1998 | Executive Summary on Regulation

BG1179ES: Congress Should Accept Industry Offers to Buy Amtrak

Since Amtrak's inception in 1971, Congress has appropriated $21 billion (or about $30 billion in 1998 dollars) to subsidize a mode of transportation that reached its peak in the 1930s and today carries only 0.3 percent of the country's intercity passengers--about the same number that travel through the Charlotte, North Carolina, airport each year. Despite three decades of substantial federal subsidies, Amtrak's financial condition is as bad as it has ever been. In recent years, Amtrak's annual losses have exceeded $750 million, and because its operating costs exceed its revenues and the federal subsidy, Amtrak has had to borrow increasingly larger amounts to stay in business. In a move that will undermine its future prospects further, Amtrak now is diverting significant portions of its capital budget--money that had been set aside for modernization and equipment upgrades--to cover expenditures for routine maintenance. As a result, Amtrak's debt and lease obligations soared from less than $50 million in 1988 to nearly $1 billion in 1996. Of course, Amtrak's interest expense has soared as well, adding to its escalating costs and diminishing further its prospects of achieving financial solvency.

As Amtrak's financial situation worsens, it becomes increasingly obvious that maintaining the status quo no longer is an option, and that it is time for Congress to give serious thought to privatization, an option that has been used with increasing frequency to revitalize passenger rail service in Europe, Asia, and Latin America. Officials at the U.S. Department of Transportation and members of the congressional transportation committees have received at least three serious inquiries or offers from major transportation businesses and investors to acquire Amtrak's intercity rail passenger service. By accepting these offers, the United States would join with the many other advanced countries that have privatized their rail passenger service successfully within the past several years.

Despite this emerging interest in privatizing Amtrak rail service, in late 1997 Congress approved two pieces of legislation that together will amount to one of the most extraordinary bailouts in the history of the United States--promising Amtrak more than $7 billion over the next five years. One of the acts contains numerous provisions that purport to improve Amtrak's management, but that in practice are likely to do nothing more than exacerbate the managerial confusion that hobbles the troubled organization.

Congress continues to pump money into Amtrak by the hundreds of millions of dollars as Amtrak teeters on the brink of insolvency and loses passengers to competitors because of service cutbacks, aging rolling stock, and fares that are too high. With increasing competition from intercity buslines and airlines, these problems have caused Amtrak's inflation-adjusted passenger revenues and passenger miles provided to fall since 1991. And despite some cost reductions and route closings, Amtrak's operating losses still average about $750 million dollars per year. According to the U.S. General Accounting Office,

Amtrak's financial condition is still very precarious and heavily dependent on federal operating and capital funds.... It will be difficult for Amtrak to achieve operating self-sufficiency by 2002 given the environment within which it operates.

The most recent bailout is not likely to reverse Amtrak's financial deterioration or increase its passenger base. Congress has the opportunity--in light of the offers from the private sector and the success of passenger rail privatization efforts in Argentina, Great Britain, Japan, and New Zealand--to study the privatization option more seriously. Privatization has yielded significant improvements to passenger rail service in many other countries, and there is no reason that the same cannot occur in the United States.

--Dr. Ronald D. Utt is Visiting Fellow in Economic Policy Studies at The Heritage Foundation.

About the Author

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow

Related Issues: Regulation