March 7, 2002 | Testimony on Regulation
Ms. Chairman and Members of the Subcommittee:
My name is Ronald D. Utt. I am the Herbert and Joyce Morgan Senior Research Fellow at the Heritage Foundation where I conduct research in the areas of transportation, housing, community development, privatization, federal budget issues and public/private partnerships for infrastructure investment. It is an honor and a privilege to appear before the Subcommittee today to discuss opportunities to improve passenger rail service in the United States. I must stress, however, that the views I express are entirely my own, and should not be construed as representing any official position of The Heritage Foundation.
The heated public policy debate about Amtrak's future shifted into overdrive in November, 2001 when the Amtrak Reform Council (ARC), as required by Section 204 (a) of P.L. 105-134, reported that Amtrak would not meet the statutory mandate of becoming financially self-sufficient in 2003. On February 7, 2002, and as required by Section 204(c) of the same law, the ARC proposed to Congress that Amtrak be fundamentally restructured, and that, among other proposals, 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, Congress in December 2001 prohibited Amtrak from spending any money to do so.
Whatever gap in the development of innovative options that prohibition may have caused, many in Congress, the private sector and the research community have eagerly filled it with a host of thoughtful proposals to supplement that put forth by the ARC. Chief among the more innovative legislative proposals is 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 (aka SPINOFF and H.R. 3591). Both propose the application to Amtrak of the types of private sector reforms such as franchising, privatization and competitive contracting that have succeeded elsewhere in the world. These two initiatives are among the many bills focused on Amtrak that have been introduced during the 107th Congress.
Financial Performance Weakens
As ARC's November finding makes clear, Amtrak is nowhere near meeting its P.L. 105-134 self-sufficiency requirement, 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 prior to the enactment of the 1997 legislation. Then its losses were $763 billion on 20.2 million passengers served, compared to FY 2000's loss of $944 million on 22.5 million passengers, and the $1.1 billion lost in FY 2001. 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 this summer or fall unless it can dramatically reduce costs, or receive much larger taxpayer subsidies.
Amtrak's management knows better than anyone how financially troubled the company is, and has spent much of the previous year seeking larger subsidies, which to date it has failed to obtain despite the introduction of numerous legislative proposals to provide such subsidies. Amtrak now contends it will have to close down as many as eighteen routes by October 2002 unless Congress doubles its annual subsidy to $1.2 billion.
In offering this list of prospective service cutbacks, Amtrak's managers have drawn attention to the railroad's most serious problem and, in doing so, provided Congressional reformers with a valuable list of money saving options.
Although Amtrak is quick to note 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 one percent (0.6) of the intercity passenger market, ranking it below even that of intercity buses. But such gains, however modest, maybe a burden to Amtrak because of an operating system and cost structure that appears to yield higher losses with more passengers, suggesting that the more it sells the more it loses.
High Costs Deter Use and Cause Losses
One of Amtrak's fundamental operating problems is revealed in a 1998 audit by the government's General Accounting Office (GAO), and more recently by similar rout-by-route performance figures provided to Congress by Amtrak. The GAO audit discovered that all but one of the 40 routes then operated by Amtrak lost money, and some lost substantially more than others. The Metroliner running from Washington DC through New York City to Boston (and now being phased out in favor of the Acela Express) was the only route running a surplus under the accounting standards applied, incurring costs of 94 cents for every dollar earned in ticket sales. The other 39 routes lost money, with the poorest performances turned in by the Sunset Limited (Los Angeles/Orlando), the Cardinal (Chicago/Washington DC) and the Chicago-Pontiac (Michigan) line, all of which lost more than $3.00 for every dollar in ticket revenue earned.
Amtrak's own, more recent release of route-by-route revenue/cost relationship for FY 2001 are presented in a per passenger surplus/loss format but show similar patterns between routes. Of the 29 routes labeled as "intercity", only one, The Heartland Flyer, recorded a surplus of $20 per passenger. All the rest lost money, with some of the worst performers being the $1,069.97 loss per passenger for the Lake Country Limited (since discontinued), $290.97 for the Sunset Limited, $248.55 for the Pennsylvanian, and $212.84 for the Texas Eagle. On average, these 29 intercity routes lost $87.20 per passenger in FY 2001, up from $73.90 in FY 2000.
In addition to their poor performance on a per passenger loss basis, the number of passengers using Amtrak's intercity service has been flat since 1996, but down from 1994 and 1995 levels when Amtrak first began providing separate counts of intercity passenger volumes, as well as for west and east coast corridor travel. It is in these two coastal corridors where all of the passenger growth has occurred since the mid-1990s and where per-passenger losses are the lowest. 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, largely due to the per passenger profit of $28.51 on the Metroliner and Acela Express. On the west coast corridor, all six services lose money, but the loss averages $12.97 per passenger, about 15 percent of the loss incurred on the intercity routes.
Even with these losses and the deep per-passenger taxpayer subsidies they imply, Amtrak's ticket prices are no bargain compared to alternative intercity travel modes, and combined with the longer trip time Amtrak often entails, this largely explains why 99.4 percent of intercity passengers chose alternative ways of getting from city A to city B. More to the point, and as noted by ARC member Wendell Cox in his February 7, 2002 Concurring Statement to the Action Plan, Amtrak fares per passenger mile are higher than that of both airlines and intercity buses, even when the applicable, federally-imposed user fees are included in airfare and buses. One reason for the ticket price disparity despite the subsidy is that Amtrak's costs per passenger mile are four times that of intercity buses and 3.5 times airlines.
In contrast to these significant cost and price disparities that may deter ridership, Amtrak and its supporters frequently argue that one reason for Amtrak's deficiencies is the "unfair treatment it receives from the federal budget." Typical is the statement of Amtrak's 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."
Adjusting for the generous rounding process in estimating shares, Amtrak actually didn't fare so badly in comparison to the other modes. Indeed it's share of federal money (1.0 percent) exceeds it's intercity passenger market share (0.6 percent), suggesting that it got more than its fair share, not less. But even more important in this 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 spent on highways in FY 2001 was derived entirely from user fees paid only by motorists by way of 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. In this regard some Amtrak advocates have argued in opposition to the federal self-sufficiency requirement that the same is not expected of motorists and that no one expects the federal highway program to "make a profit" To the contrary, they do 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 and other non-automotive functions. Indeed, each year as much as 30 percent of highway funds leak away from general purpose highway uses.
Similarly, and counting the recently imposed new airport security tax, users of commercial airlines are subject to a total of eleven separate federal user fees/taxes that fund airport construction and operation, air traffic control, safety and security. Altogether, the revenues generated by these taxes are the source of revenue for the federal funding of commercial aviation. Collectively, these taxes are now a significant component of the ticket price paid by passengers. In my own case, on a recent trip to Europe, my round trip airfare of $323.40 included $83.40 of FAA-imposed taxes and user fees, and buried in the remaining $240.00 were such additional costs as fuel taxes and landing fees paid by the airline and passed on to me.
As funding mechanisms for the current U.S. transportation system are currently configured, Amtrak's hoped for "fairness" and modal parity could best be achieved by adding similar fees and taxes to Amtrak tickets. Of course if these taxes were added on top of the already expensive prices Amtrak charges its customers, as such fees are imposed upon airline passengers, its market share would likely fall below the present 0.6 percent.
Rational for Costly Route Structure
The reason for operating so many costly routes has little to do
with any attempt to maintain a cost effective transportation
service, but quite a bit to do with an attempt to maintain a
politically viable operation, and this helps explain why Amtrak -
despite the prospect of substantial losses -- continues to propose
the establishment of new routes of even less economic value than
the costly existing routes that attract few passengers even after
many years of operation and promotion.
But such a strategy is not economically viable in the absence of ever higher subsidy payments. A system based partly upon 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 so on. As the losses worsen, Amtrak digs itself and the taxpayer deeper in the hole in a vicious circle of enterprise insolvency.
It was essentially this sort of problem that Amtrak's President described when he recently testified that: "Our conflicting policy mandates are at the root of our problems. For thirty 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." 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."
It is apparent from recent Amtrak performance that current management and existing operating practices have not solved this conflict and are not likely to do so in the future no matter how much additional time and public financial support is provided. This suggests that Congress is confronted with one of four choices: (1) Endorse the current operating structure but substantially increase annual subsidies to maintain existing route structure; (2) Endorse the existing operating structure but cut back money losing routes until financial self-sufficiency is achieved; (3) Endorse the current system but substantially increase government spending to achieve some measure of "high speed" rail; and (4) Fundamentally overhaul the existing operating system by imposing new market-based reforms that would allow the system to maintain the maximum number of routes by substantially reducing costs and increasing revenues.
I recommend pursuing choice (4) and believe that the greater emphasis on the benefits of competitive contracting and private sector participation that would be required by the bills introduced by Representative Mica and Senator McCain could very likely put passenger rail service in the United States on the path to resolving the seemingly conflicting mandates -- cost and coverage -- that heretofore have escaped resolution by the current management and the existing operating system.
But before discussing the private sector/competitive contracting option in more detail, a few comments are in order on the feasibility of the high speed rail alternative, option (3), because it is often presented by Amtrak's management and the system's many supporters as the solution that will get passenger rail back on track in America.
The Allure of High Speed Rail
Over the past few years, several pieces of legislation have been introduced for the purpose of funding the introduction 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 ten years -- has attracted the most support and discussion. Although some supporters may truly believe that the enactment of this bill would provide American's with European and Japanese types of high speed rail service, in fact the bill would be more aptly named if it was titled the "higher" speed rail act. Indeed, Amtrak admits as much when it describes this $12 billion in loans as seed money, because $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 sustained speeds that characterize several of the genuine high speed rail services available in some other countries.
As most rail experts define it, the term high speed rail describes trains that can hit top speeds of 200 MPH and run at average speeds well above 100 MPH over an entire route, as is the case with Japan's Shinkansen or "Bullet" train, (running at average speeds of between 115 MPH to 170 MPH, depending upon route), or France's TGV (running at average speeds of between 140 MPH to 160 MPH, depending upon route). By comparison, the Acela Express is capable of top speeds of as high as 150 MPH but on only a very small fraction of the track that extends from Boston to Washington.
To achieve the kind of passenger train speeds reached on the best lines in Europe and Japan on the ten or so prospective high speed rail corridors identified by the U.S. Department of Transportation (plus the Northeast Corridor) would require substantially more than the $12 billion proposed in the High Speed Rail Act. Amtrak last year estimated that $30 billion might be needed, while a recent proposal introduced in the House argues for $70 billion in subsidized rail loans to support high speed rail in America. In July 2001, the GAO estimated the cost of improving the Northeast Corridor and the ten proposed high speed rail corridors at between $50 to $70 billion, and in September 2001 the Chairman of the Amtrak Reform Council estimated the cost at $100 billion.
But even the $100 billion estimate might be too small in comparison to what other countries have already spent to provide faster and more extensive passenger rail service. The Japanese National Railroad, for example, which serves a land mass 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. France, whose borders encompass the equivalent of just 6 percent the U.S. land mass, is expected to ultimately spend $50 billion on its TGV network, and the entire French rail network is currently losing $3.2 billion per year while carrying a long-term debt load equal to about $20.1 billion. Given the comparatively high costs incurred by others to serve rail markets with a land mass that are just a tiny fraction of the U.S., the $50 billion to $100 billion cost estimates that many have identified may be much too low in relation to the size of the prospective U.S. network.
For the sake of argument, and despite the very high costs that would be incurred, suppose that the decision is made to expend many tens of billions of taxpayer dollars to construct a series of genuinely high speed rail corridors where trains average Shinkansen-like travel speeds of 150 mph along the route. Expressed as such, one way to look at this endeavor is to recognize that we have expended tens of billions of taxpayer dollars on a publicly funded intercity transportation system that, under the best of circumstances, is still operating at speeds of less than one-third that provided by the alternative - the airlines - who accomplish this task with funds provided by users.
And while those arguing 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, it
would seem that the more cost effective and consumer preferred
response to such congestion-related problems is to build more road
and airport capacity.
Fortunately, some in Congress have recognized this, and are urging new leadership at the railroad and restructuring of Amtrak's routes and business operations to bring costs in line with revenues and with passenger interest. In August, 2001 following extensive hearings into Amtrak's problems, Representative John 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, free of taxpayer subsidies, and operated by the private sector.
Rep. Mica also suggested in the interview that the more scenic coast-to-coast routes be offered on a competitive basis to tour operators that serve the lucrative leisure travel market. 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, the Congressman proposed to offer them to the states they serve to fund and operate if they wish, or to private-sector operators who might want to make a go of it.
Representative Mica has since then 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. Within two years after enactment of the Act DOT will chose a future operating arrangement among three options included in the bill: (1)Transfer operations to an interstate compact; or (2) Transfer operations to a new government corporation or to a private sector corporation; or (3) Retain ownership within DOT, with competitive franchising used to select one or more operators. A similar series of options would be applied to the Autotrain.
On February 15, 2002, Senator McCain introduced S.1958, a comprehensive proposal to reform and restructure Amtrak. Among the bill's many significant provisions are:
1. The creation of a Rail Passenger Development and Franchising Office within DOT. Beginning in October 2003, the Secretary of DOT would be authorized to contract out rail passenger service franchises to qualified operators.
2. The requirement that Amtrak be restructured into three separate lines of business that would be privatized within the next four years.
3. The creation of an independent Amtrak Control Board to oversee Amtrak's restructuring, reform, financial plans, budget and privatization. The control board would be modeled on control boards created in the past to assist troubled cities overcome periods of financial difficulty.
4. The requirement that states play a greater role in route decisions and financial contributions. Routes operating at a loss would be discontinued in October 2003 unless states agreed to subsidize the loss.
In introducing legislative proposals that require privatization, contracting and franchising, Congressman Mica and Senator McCain are drawing on the successful passenger rail reforms accomplished in other countries that have turned to the private sector to restructure and operate their once inefficient, government-operated rail systems. Where such reforms have been introduced, subsidies have been reduced, service improved, and ridership increased.
Options for Success
In anticipation that Amtrak will in fact fail to meet the self-sufficiency goal and may have to cut back routes, Congress and the President should begin the process of redirecting Amtrak toward better service and lower cost operations. As both Rep. 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 beginning in the 1990s. Japan, for example, began selling off portions of its passenger rail system early in that decade, and all are now operating at a profit. Also in the 1990s, Australia and New Zealand privatized passenger rail service, and their systems are also profitable. Sweden has contracted out commuter rail service, and Germany is in the process of doing so in several of its metropolitan areas.
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 service over specific routes for specific intervals of time. Private operators compete for these route rights by offering the highest lease payment, or the lowest subsidy. As a result of improved service from the more efficient private sector concession winners, Great Britain in 1999 experienced its highest rate of rail ridership since 1947.
Although much of the current discussion of rail privatization trends focus on recent activities occurring abroad, it should be remembered that the first successful rail privatization (and largest privatization up 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 application of better management following its privatization, Conrail's value increased more than five fold 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 the same level of investor interest as Conrail or as did the systems in Europe and Asia that were privatized, there is every reason to believe that many serious proposals from qualified bidders would be received if the federal government expressed an equally serious interest in such proposals. Indeed, formal expression of interest from U.S.-based investors were made prior to the 1997 enactment of the Amtrak Reform and Accountability Act, and renewed interest has emerged in response to Amtrak's worsening financial problems and the lack of consensus on how to deal with them.
Given these many successes in the U.S., Europe, Asia and Latin
America of reforming financially-troubled rail systems with varying
degrees of private sector participation, Congress and the
Administration should welcome the opportunity to review and
consider the many innovative proposals that might be adopted as
remedies for America's ailing passenger rail service. Moreover, 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
encourage interested parties, whether 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 Utt is a policy analyst at The Heritage Foundation.