The Heritage Foundation

Executive Summary #1547 on Regulation

May 13, 2002

May 13, 2002 | Executive Summary on Regulation

BG1547ES: Amtrak's Impending Collapse Offers One-Time Opportunityfor Reform

In 1997, Congress passed the Amtrak Reform and Accountability Act, which required Amtrak to reach financial self-sufficiency by FY 2003--a goal that Amtrak's past two presidents and its board of directors claimed they could and would meet. Yet, despite these repeated promises, and 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 currently in worse financial condition than it was before enactment of the 1997 legislation.

Before the 1997 bill was passed, Amtrak served 20.2 million passengers with losses of $763 million. In FY 2000, it served 22.5 million passengers with losses of $944 million. Although its annual report for the past fiscal year has not yet been released, Amtrak has confirmed that it lost a record-breaking $1.1 billion in FY 2001. With few, if any, unencumbered assets left to borrow against, and with annual losses now vastly exceeding its yearly subsidy from taxpayers, Amtrak will likely be insolvent by this summer or the coming fall unless it either dramatically reduces costs or receives substantially larger subsidies.

A Losing Proposition?

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, thus far without success, despite the introduction of numerous legislative proposals to provide additional government assistance. The most recent congressional effort, reported out of the Senate Commerce Committee on April 18, 2002, is the National Defense Rail Act (S.1991), which would increase Amtrak's annual subsidy by 500 percent to $3.6 billion per year.

In late 2001 and early 2002, Amtrak's management announced that it would initiate successive waves of layoffs to sustain financial solvency in the

face of widening losses. Now, as its fiscal condition has worsened further, Amtrak contends it will have to close down as many as 18 routes by October 2002 unless Congress doubles its annual subsidy to $1.2 billion. Shortly after the announcement of prospective route closings, Amtrak's beleaguered president, George Warrington, announced his resignation following five years of service and a track record of escalating costs and losses that resulted in growing skepticism about his and the board's ability to run the railroad effectively.

As has been the case during much of the preceding 30 years, the choice that Congress and the Administration face is whether to muddle through with the status quo at some minimal budgetary cost or instead try a completely new strategy of management for the rail system. To date, the "muddle through" option consistently has been chosen, largely because it was presumed that there really was nothing new to try. It was assumed that passenger rail was, everywhere and always, a money-losing proposition.

Options for Reform

However, the notion that there are no viable reform options began to be challenged--first in Japan, New Zealand, and Argentina, and later in Great Britain, Australia, and Sweden. In each of these countries, government-owned, taxpayer-funded passenger rail systems were transformed, either incrementally or in their entirety, through the application of competitive private-sector participation. These reforms utilize such techniques as operating concessions, franchising, and outright privatization through the sale of assets and/or complete enterprises to private investors and operators. Within the past few years, additional countries have turned to the private sector for passenger rail solutions, including Belgium, the Netherlands, Germany, Italy, and Spain.

The long-running debate about Amtrak's future acquired new urgency in November 2001 when the Amtrak Reform Council (ARC) reported its finding, 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 its proposal to Congress, as required by Section 204(c) of the same law, that Amtrak be fundamentally restructured and, among other things, recommended pilot projects to test the efficacy of 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 such a finding, in December 2001, Congress prohibited Amtrak from spending any money to develop a strategy to do so.

Congress's prohibition on investing in the design of an innovative solution created a gap that was quickly filled by a host of thoughtful proposals from the private sector, the research community, and a number of legislators. 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 bills would apply to Amtrak the types of private-sector reforms that have succeeded elsewhere in the world, such as franchising, privatization, and competitive contracting. Relying as they do on various types of competitive sourcing, these proposals deserve a serious review, as do various private-sector solutions that have been implemented in other countries.

As Congress and the President contemplate these and other reform options and alternatives for revitalizing the nation's passenger rail system, they should bear in mind that the first major rail privatization to occur anywhere was conducted in the United States in 1987. At that time, the once-bankrupt Conrail was sold to private investors for $1.9 billion. After a little more than a decade of private management, it was resold to other investors for $10.3 billion--a fivefold increase in value.

Congress should be inspired by this earlier rail privatization success; it should let go of its 30-year obsession with a failed attempt to apply socialism in the arena of passenger rail and instead open the door to the innovation and motivation of entrepreneurship and privatization.

Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow at The Heritage Foundation.

About the Author

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