May 13, 2002 | Backgrounder on Regulation
The heated public policy debate about Amtrak's future shifted into overdrive in November 2001 when the Amtrak Reform Council (ARC) reported, as required by Section 204(a) of P.L. 105-134, that Amtrak would not meet the statutory mandate of becoming financially self-sufficient in 2003. On February 7, 2002, ARC submitted to Congress its proposal, as required by Section 204(c) of the same law, that Amtrak be fundamentally restructured and, among other things, recommended pilot projects to test greater private-sector participation in America's passenger rail system.
Although the law also required Amtrak to file a liquidation plan within 90 days of the finding, in December 2001, Congress prohibited Amtrak from spending any money to develop a strategy to do so. Despite that prohibition, a host of thoughtful proposals from the private sector, the research community, and a number of legislators filled the gap to supplement the proposal put forth by the ARC. Among the more innovative legislative proposals are one by Senator John McCain (R-AZ) titled the Rail Passenger Service Improvement Act (S. 1958) and another by Representative John Mica (R-FL) called the Systemic Passenger Infrastructure and Network Overhaul Through Financial Freedom Act (SPINOFF, H.R. 3591). Both would apply to Amtrak the types of private-sector reforms that have succeeded elsewhere in the world, such as franchising, privatization and competitive contracting.
In contrast with these strategies is the National Defense Rail Act (S. 1991), introduced in the Senate by Senator Ernest Hollings (D-SC) in early 2002, which would reward Amtrak's failure to provide cost-effective and timely transportation services by increasing its annual subsidy by 500 percent from approximately $600 million to $3.6 billion over the next five years, plus a one-time payment of $1.4 billion for security improvements. This bill would also free Amtrak from the self-sufficiency requirement and add two more high-speed rail corridors to the 11 that the federal government pretends it will construct.
As ARC's November finding makes clear, Amtrak is nowhere near meeting self-sufficiency as required by P.L. 105-134 and, if anything, is moving in the opposite direction. Despite ongoing federal subsidies of more than $500 million per year and a one-time special "tax refund" of nearly $2.3 billion in 1998 and 1999, Amtrak is in worse financial condition than it was before enactment of the 1997 legislation.
Specifically, Amtrak's losses in 1997 were $763 billion on 20.2 million passengers served, compared with a loss of $944 million on 22.5 million passengers in fiscal year (FY) 2000 and the $1.1 billion lost in FY 2001. 1 With few if any unencumbered assets left to borrow against, and with annual losses now vastly exceeding the yearly taxpayer subsidy, Amtrak will likely be insolvent by the summer or fall of 2002 unless it dramatically reduces costs or receives much larger taxpayer subsidies.
Amtrak's management knows better than anyone else how financially troubled the company is and has spent much of the previous year seeking larger subsidies--an effort which included such questionable antics as posing as a victim of terrorism in order to extract more money from Congress. To its credit, Congess has not yet granted larger subsidies to Amtrak, in spite of the introduction of numerous legislative proposals to provide greater funding.
Amtrak now contends that it will have to close down as many as 18 routes by October 2002 unless Congress doubles its annual subsidy to $1.2 billion. 2 In presenting this list of prospective service cutbacks, Amtrak's managers have drawn attention to the railroad's most serious problem--excessively high operating costs--and, in doing so, have provided congressional reformers with a valuable list of money-saving options.
Although Amtrak is quick to note that its ridership has recently been increasing--up 1.4 percent since 1990, compared to a 38.5 percent gain for air travel over the same period--trains serve only six-tenths of 1 percent (0.6 percent) of the intercity passenger market, ranking it below even that of intercity buses. 3 But such gains, however modest, may be a burden to Amtrak because of an operating system and cost structure that appear to yield higher losses with more passengers, suggesting that the more it sells, the more it loses.
Significantly, and notwithstanding Amtrak supporters' claims to the contrary, Amtrak did not experience an increase in ridership in the immediate aftermath of the September 2001 terrorist attacks. In fact, ridership was down in both September and October and flat in November.
One of Amtrak's fundamental operating problems is revealed in a 1998 audit by the U.S. General Accounting Office (GAO) and, more recently, by similar route-by-route performance data that Amtrak provided to Congress. The GAO audit revealed that all but one of the 40 routes then operated by Amtrak lost money, with some losing substantially more than others. 4 The Metroliner running from Washington, D.C., through New York City to Boston (and now largely phased out in favor of the Acela Express) was, according to the GAO, the only route allegedly running at a profit under the accounting standards applied, incurring costs of $0.94 for every $1.00 earned in ticket sales. The other 39 routes lost money, with the poorest performances recorded for the Sunset Limited (Los Angeles-Orlando), the Cardinal (Chicago-Washington, D.C.), and the Chicago-Pontiac (Michigan) line, all of which lost more than $3.00 for every $1.00 in ticket revenue earned.
A more recent report produced by Amtrak documented route-by-route revenue/cost relationships for FY 2001. Although this study's findings were presented in a per-passenger surplus/loss format, it revealed similar patterns for the routes. 5 Of the 29 routes labeled as "intercity," only one, The Heartland Flyer, recorded a surplus (at the rate of $20 per passenger). All the rest of the routes lost money. Some of the worst performers and their per-passenger losses were the since-discontinued Lake Country Limited ($1,069.97); the Sunset Limited ($290.97); the Pennsylvanian ($248.55); and the Texas Eagle ($212.84). On average, the 29 intercity routes lost $87.20 per passenger in FY 2001, up from $73.90 in FY 2000.
While these routes have performed poorly with regard to their per-passenger losses, the number of passengers using Amtrak's intercity service has been flat since 1996--and down from the levels of 1994 and 1995 when Amtrak first began providing separate counts of intercity passenger volumes as well as passenger counts for the East and West Coast corridors. It is in the two coastal corridors that all of the passenger growth has occurred since the mid-1990s, and it is also here that per-passenger losses were the lowest. 6 On the West Coast corridor, all six services lose money, but their losses average $12.97 per passenger--about 15 percent of the loss incurred on the intercity routes.
For the eight separate services Amtrak includes as part of the Northeast Corridor, it estimates that it earns a profit of $0.42 for each passenger, due largely to the estimated per-passenger profit of $28.51 on the Metroliner and Acela Express. While the "profit" that Amtrak reports from the Acela service along the Northeast Corridor has led some rail reformers to argue that passenger rail service should be cut back to this profitable core, skeptics have noted that even this reported profit may be illusory, since Amtrak does not include depreciation costs in its route-by-route loss/profit calculations.
Depreciation costs for 2001 have not been made available yet, but they are likely to be even higher than the $359 million incurred by Amtrak in FY 2000. 7 Because a disproportionate share of these depreciation charges are incurred in the Northeast Corridor where Amtrak owns the roadbed, tracks, and signals (it leases access on all other lines), and where it has also placed most of its newer train sets imported from Canada, an accurate allocation of depreciation expenses among Amtrak's many routes would likely reveal the greatest negative impact on the Acela and Metroliner services, and could tip their accounts into the "loss" category.
Even with these losses and the steep per-passenger taxpayer subsidies they entail, Amtrak's ticket prices are no bargain in comparison with alternative intercity modes of travel. The combination of Amtrak's higher prices and longer trip time largely explains why 99.4 percent of intercity passengers choose alternative ways of getting from one city to another. More to the point, as noted by ARC member Wendell Cox in his February 7, 2002, concurring statement on the ARC's action plan, Amtrak fares per passenger-mile are higher than those of both airlines and intercity buses--even when the applicable federally imposed user fees are included in the calculation of the costs of air and bus transportation. One reason for the ticket price disparity despite the subsidies granted to Amtrak is the fact that Amtrak's cost per passenger-mile is four times that of intercity buses and 3.5 times that of the airlines, according to Cox's statement. 8
The excessive costs of passenger rail operations and the effects costs have on fares were echoed by the head of the U.S. Department of Transportation's Federal Railroad Administration (FRA) in hearings before Congress early in 2002. According to Administrator Allan Rutter:
FRA analysis shows that as of the end of 2000, Amtrak's per-mile fares remained almost two-and-a-half times as high as the perceived cost of driving. The rail fare increases had, in that regard, partially negated the effects of the gas price hikes in recent years. With constant dollar airfare yields declining and Amtrak fares increasing, Amtrak's average fares were approaching fifty percent higher than those of air. These fare comparisons were system averages and will vary among market and service types. Still, nationwide, there was an obvious dissonance between the relatively high--and growing--fares and the declining timeliness of the service provided by Amtrak. 9
Ignoring the significant cost and price disparities that may deter ridership, Amtrak and its supporters frequently argue that a key reason for Amtrak's manifest deficiencies is the "unfair treatment it receives within the federal budget." A typical example is the statement of Amtrak's former president in recent congressional testimony:
In fact, all we are asking for is fair treatment. In FY 2001, highways received $33.5 billion in federal funds, aviation received $12.6 billion, transit received $6.3 billion--but intercity rail received $0.5 billion--less than 1 percent of all transportation modal spending in FY 2001. 10
Adjusted for the generous rounding process applied by Amtrak's management in estimating shares, the figures show that Amtrak actually did not fare so badly in comparison with the other modes. In fact, its share of federal money (1.0 percent) is nearly double its intercity passenger market share (0.6 percent), suggesting that it got more than its fair share, not less. But even more significant in this skewed comparison is the presumption that all of these subsidies come out of a single, taxpayer funded pot, when in fact they do not.
The $33.5 billion in federal funds that was spent on highways in FY 2001 was derived entirely from user fees paid only by motorists via the federal fuel tax levied on each gallon of gasoline (18.3 cents) or diesel fuel. In fact, the $6.3 billion spent on transit that year represents money diverted from the fuel tax revenues paid by motorists. In effect, under the current federal system, motorists pay more than their fair share.
This fact belies the arguments of Amtrak advocates who claim that the federal self-sufficiency requirements are unfair because (1) motorists are not expected to meet the same requirements and (2) the federal highway program is not expected to "make a profit." To the contrary, they are and it does. Each year, motorists see billions of dollars of their fuel tax revenues spent on transit, hiking trails, roads on federal lands, Amtrak-operated commuter rail lines, bicycle paths, historic preservation, train station restoration projects, and other non-automotive functions. Indeed, each year, as much as 30 percent of highway funds is siphoned away from general purpose highway uses. 11
Similarly, and taking into account the recently imposed new airport security tax, users of commercial airlines are subject to a total of 11 separate federal user fees/taxes that fund airport construction and operation, air traffic control, and the safety and security of airlines. 12 The revenues generated by these taxes are the source of revenue for any federal funding that is given to commercial aviation.
Collectively, these taxes are now a significant component of the ticket price paid by passengers. For example, a roundtrip fare between Washington, D.C., and Europe posted in late 2001 was $323.40, an amount that included $83.40 for FAA-imposed taxes and user fees. Buried in the remaining $240.00 of the ticket price were additional federally imposed user fees such as fuel taxes and landing fees, the costs of which were paid by the airline and then passed on to passengers.
As the federal funding mechanisms for the U.S. transportation system are currently configured, the "fairness" demanded by Amtrak's advocates and modal parity would best be achieved by adding similar fees and taxes to Amtrak tickets. Of course, if such taxes or user fees were added to the already steep prices that Amtrak charges its customers (or "guests" as they are described) to the same extent that such fees are now imposed on airline passengers, Amtrak's market share would likely fall below the 0.6 percent it ekes out today.
But such a strategy is not economically viable in the absence of ever higher subsidy payments. A system based partly on maintaining politically motivated routes that incur such losses also requires sustained subsidies from government, and ensuring these subsidies often necessitates more political favors in the form of additional money-losing routes, and so on and on. As the losses worsen, Amtrak digs itself--and the taxpayer--deeper into the hole in a vicious circle of enterprise insolvency.
Our conflicting policy mandates are at the root of our problems. For 30 years, Amtrak's primary mission has been to maintain and operate a national network of rail passenger service. Our charter statute directs Amtrak to "completely develop the potential of modern rail transportation to meet the intercity and commuter needs of the United States." In 1997, Congress reaffirmed our national public service role, but it also added a requirement that we achieve operational self-sufficiency by December 2002. 13
It was also in response to this problem that Secretary of Transportation and Amtrak Reform Board member Norman Mineta suggested earlier this year that Amtrak should "look at selective routes rather than blanket the country with rail service that is not...really viable." 14
Over the past few years, several pieces of legislation have been introduced to fund the development of some measure of high-speed rail service in the United States. The High Speed Rail Act (S. 250)--which would provide Amtrak with $12 billion in subsidized loans over the next 10 years--had attracted the most support and discussion. More recently, the National Defense Rail Act (S. 1991) would add $1.5 billion per year for high-speed rail outside the Northeast Corridor.
Although some supporters may truly believe that enacting this bill would provide Americans with high-speed rail services similar to those of Europe and Japan, it is just a first small step toward that goal. Amtrak admits as much when it describes the $12 billion in loans as "seed money." In truth, $12 billion represents only a small fraction of what it would cost to bring U.S. rail passenger service up to the level of the sustainable high speeds that characterize a number of genuinely high-speed rail services that are currently available in a few other countries.
As most rail experts define it, the term "high-speed rail" refers to trains that can hit top speeds of 200 mph and run at average speeds well above 100 mph throughout an entire route. Examples of genuine high-speed rail systems include Japan's Shinkansen ("Bullet") train, which runs at average speeds of 115 mph to 170 mph, depending on the route, and France's TGV, which runs at average speeds of 140 mph to 160 mph, again depending on the route. In contrast, Amtrak's Acela Express is capable of top speeds as high as 150 mph only on a very small fraction (about 18 miles) of the track that extends from Boston to Washington.
It would require substantially more funding than the $12 billion proposed in the High Speed Rail Act to achieve the average speeds reached on the best lines in Europe and Japan on Amtrak's Northeast Corridor and the 10 routes identified by the U.S. Department of Transportation (DOT) as prospective high-speed rail corridors. Last year, Amtrak estimated that $30 billion might be needed, 15 while a recent proposal introduced in the House of Representatives argues for $70 billion in subsidized rail loans to support high-speed rail in America. 16 In July 2001, the GAO estimated the cost of improving the Northeast Corridor and the 10 proposed high-speed rail corridors as being between $50 billion and $70 billion, 17 and in September 2001, the chairman of the Amtrak Reform Council estimated the cost at $100 billion.
In fact, even the $100 billion estimate might be too low when one considers the amounts that have been spent to provide faster and more extensive passenger rail service in countries with substantially smaller land masses than the United States.
The Japanese National Railroad, for example, which serves a land mass that is just 4 percent the size of the United States, had incurred debt of more that $300 billion and required annual operating subsidies in excess of $6 billion by the mid-1980s when the Japanese government abandoned its commitment to government-owned and -operated rail service and began to reform, and then to privatize, the system. 18
It is expected that France, whose borders encompass the equivalent of just 6 percent the U.S. land mass, ultimately will spend $50 billion on its TGV network, and the entire French rail network is losing $3.2 billion per year while carrying a long-term debt load equal to about $20.1 billion. 19
Given the comparatively high costs incurred by others to serve rail markets with land masses that are just a tiny fraction of the United States, the $50 billion to $100 billion cost estimates that many have postulated for Amtrak may be far too low in relation to the size of the prospective DOT-endorsed network of 11 routes.
For the sake of illustration, despite the very high costs that would be incurred, suppose that a decision were made to expend many tens of billions of taxpayers' dollars to construct a series of genuinely high-speed rail corridors in which trains average Shinkansen-like travel speeds of 150 mph throughout their routes. What would be achieved? Another way of looking at the accomplishment is that the government would have spent billions of taxpayer dollars on a publicly funded intercity transportation system that, under the best of circumstances, operates at speeds that are less than one-third the speed of its chief competitors--the airlines--which provide services with funds provided only by the people who use them.
Those who argue in favor of publicly funded high-speed rail often point to road and airport congestion as the compelling rationale for subsidizing a fourth mode of intercity transport. However, under the circumstances, it would seem that the more cost-effective and consumer-preferred response to such congestion-related problems would be to invest in increasing road and airport capacity.
It is apparent from recent Amtrak performance that current management strategies and existing operating practices have not solved the system's problems and are not likely to do so in the future, regardless of how much additional time and public financial support are provided. To deal with this situation, Congress must choose one of the following four options:
In light of the foregoing discussion, the fourth option is the recommended course of action because it would bring the benefits of competitive contracting and private-sector participation to the troubled railroad. If reform is properly and comprehensively imposed, the cost and service efficiencies unleashed by privatization could very likely put passenger rail service in the United States on the path to resolving Amtrak's seemingly conflicting mandates (covering costs and providing affordable services), which cannot be reconciled under the current management, and the existing operating concept that relies on political advantage rather than the economic benefits of efficiency.
In August 2001, following extensive hearings on Amtrak's problems, Representative Mica, a member of the House Transportation and Infrastructure Committee, recommended that potentially profitable routes such as the Northeast Corridor be separated from the rest of the system to create a financially viable transportation enterprise that could be free of dependence on taxpayer subsidies and operated by the private sector. 20
Representative Mica also suggested that the more scenic coast-to-coast routes be offered on a competitive basis to tour operators that serve the lucrative leisure travel market. As for the rest of the routes that have limited tourist potential and no meaningful intercity mobility value (and where most of Amtrak's financial losses occur), Congressman Mica proposed offering them to the states they serve to fund and operate if they wish, or to private-sector operators who might want to invest in the enterprise.
Representative Mica has since incorporated some of these ideas into a legislative proposal, which was introduced in the House as H.R. 3591 in late December 2001. Focusing only on the operation of the Northeast Corridor and the Autotrain, the bill proposes that the property and operations of the Northeast Corridor be transferred to the U.S. Department of Transportation to operate on an interim basis while DOT initiates, within 90 days, a competitive selection process that will award the operating rights along the Northeast Corridor to the winning contractor, also on an interim basis. The bill stipulates that within two years after its passage, DOT will choose an entity for future operations among the following three options:
In introducing legislative proposals that require privatization, contracting, and franchising, Congressman Mica and Senator McCain are drawing on the model of successful passenger rail reforms accomplished in other countries that turned to the private sector to restructure and operate rail systems that had been inefficient when operated by their governments. Where such reforms have been introduced, subsidies have been reduced, service improved, and ridership increased.
In anticipation that Amtrak will in fact fail to meet its self-sufficiency goal and may have to cut back routes, Congress and the President should begin the process of instituting reforms that would result in better service and lower-cost operations. As both Representative Mica and Senator McCain suggest, one way to achieve this is by requiring Amtrak to implement some of the privatization techniques that Great Britain, Japan, Australia, Argentina, Sweden, Germany, and New Zealand have applied with considerable success since the 1990s. Japan, for example, began selling off portions of its passenger rail system early in that decade; all routes are now operating at a profit. Also in the 1990s, Australia and New Zealand privatized passenger rail service, and their systems have likewise become profitable. Sweden has contracted out commuter rail service, and Germany is in the process of doing so in several of its metropolitan areas.
Table 1 provides a sampling of the innovative, privatization-based reforms underway or under active consideration in numerous advanced, industrialized countries as of October 2001. Excluded from the table because of space constraints are scores of privatization projects underway or under consideration in the less-developed countries and in the formerly communist countries of the Commonwealth of Independent States (CIS) or in Eastern Europe. 21
In reforming their inefficient rail systems, both Great Britain and Argentina adopted the "concession," or franchise, approach under which the government maintains an ownership interest in the system but "sells" the right to operate services over specific routes for specific intervals of time. Private operators compete for these route rights, which are awarded to the entity that offers the highest lease payment or requests the lowest subsidy. As a result of improved service provided by the private-sector operators who are chosen for these concessions, Great Britain in 1999 experienced its highest rate of rail ridership since 1947. Despite a widely publicized fatal accident in 2000 and the subsequent disruption in service that occurred in its aftermath as new safety measures were implemented, passenger boardings continued to increase during FY 2000-FY 2001 and were up by 30 percent from 1995 when the privatization reforms were initiated. 22
While this transformation in passenger rail service has not been problem-free, where it has been applied, costs have been reduced, losses sometimes turned to profits, service improved, and ridership increased. Even in Britain--where early mistakes regarding infrastructure transfer contributed to fatal lapses in safety--the Labor government, which inherited the newly privatized system from the Conservative government, has shown no inclination to reverse course. The original infrastructure owner, Railtrack, has been liquidated, and a not-for-profit successor is in place. The United Kingdom plans to increase infrastructure investment from its current $3 billion per year to a prospective $81 billion in public and private funds over the next 10 years. 23
Although much of the current discussion of trends toward rail privatization focuses on recent activities occurring abroad, it should be kept in mind that the first successful rail privatization (and the largest privatization initiative until that time) occurred in 1987 in the United States when the federal government sold its 85 percent ownership stake in the freight railroad Conrail to private investors for a combined payment of $1.9 billion. As a result of the improved management that followed privatization, Conrail's value increased more than fivefold between 1987 and 1998, when it was acquired by CSX and Norfolk Southern for $10.3 billion.
Although some contend that Amtrak would not receive investor interest that would be on a par with that of Conrail or the rail systems in Europe and Asia that were privatized, there is good reason to believe that many serious proposals from qualified bidders would be received if the federal government earnestly pursued the privatization of its passenger rail system. In fact, a number of U.S.-based investors offered their formal expression of interest in the system prior to enactment of the Amtrak Reform and Accountability Act in 1997, and renewed interest has emerged as a prospective solution for Amtrak's worsening financial problems.
Given the many successes experienced as a result of efforts in the United States, Europe, Asia, and Latin America to reform financially troubled rail systems with varying degrees of private-sector participation, Congress and the Administration should end their 30-year obsession with trying to prove that socialism can be made to work and instead welcome the opportunity to review and consider the many innovative proposals that might be adopted as remedies for America's ailing rail service.
To facilitate the widest possible review and to stimulate the development of innovative solutions from the nation's transportation experts, Congress and the Administration should also encourage interested parties--from the private sector, the financial community, the unionized work force, Congress, passenger associations, and current management--to submit proposals that they believe could lead to better passenger rail service at lower cost, or at no cost at all, to the taxpayer.
Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow at The Heritage Foundation.
9. Statement of the Honorable Allan Rutter, Federal Railroad Administrator, to the Subcommittee on Transportation and Related Agencies, Committee on Appropriations, U.S. House of Representatives, February 27, 2002, p. 6.
10. Statement of George D. Warrington, President and Chief Executive Officer, Amtrak, before the Subcommittee on Transportation and Related Agencies, Committee on Appropriations, U.S. House of Representatives, March 21, 2001, pp. 4-5.
11. TEA-21: A Summary--Authorization Table, U.S. Department of Transportation, available at www.fhwa.dot.gov/tea21/sumauth.htm as of 9/14/98.
20. Representative John Mica, "It is Time to Cut Taxpayer Losses on Amtrak," Federal Times.com, August 13, 2001, at www.federaltimes.com/commentary/main081301.html.
22. Business Review: Passengers, Strategic Rail Authority, The United Kingdom, available at www.sra.gov.uk/sra/annual_report/Annual_Report_Default.htm.