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Download Full Report (2.7 Mb | .pdf)  » Intro [.pdf]  » Authors [.pdf]  » Letter from the Editor    [.pdf | html]  » Table of Contents    [.pdf]  » Federal Update    [.pdf | html]  » State Privatization    Update    [.pdf | html]  » Tax and Spending    Limitations    [.pdf | html]  » Emerging Issues    » Social Security Reform      [.pdf | html]    » Arctic National Wildlife      Refuge      [.pdf | html]    » Offshore Outsourcing      [.pdf | html]    » Improving Parks      Funding and Services      with User Fees      [.pdf | html]    » Contract Management      and Performance      [.pdf | html]    » Privatization Going      Postal in Japan      [.pdf | html]    » Military Housing      Privatization      [.pdf | html]  » Housing and Land Use    [.pdf | html]  » Air Transportation    [.pdf | html]  » Surface Transportation    [.pdf | html]  » Rail Transportation    [.pdf | html]  » Space Travel    [.pdf | html]  » Health Care    [.pdf | html]  » Water / Wastewater    [.pdf | html]  » Corrections    [.pdf | html]  » Education    [.pdf | html]  » Insurance    [.pdf | html]  » Developing Nations    [.pdf | html]  » Endnotes    [.pdf]

» Annual Privatization Report 2005

Rail Transportation

Amtrak: Time to Abandon this Train Wreck

The Bush administration has sent a powerful signal to Amtrak in proposing virtually no government funding for the struggling passenger train operation for the coming fiscal year. Amtrak has been persistently plagued by cost overruns, project delays, poor on-time performance, maintenance problems, missed goals, poor management, and government bailouts—not to mention the fact that it has never posted a profit—since its inception in 1971. Congress must realize that, with the rise of relatively cheap transportation alternatives such as airlines, buses, and cars, subsidized intercity passenger rail is no longer necessary or desirable. Privatization would allow those Amtrak assets that hold true value and promise to be operated more efficiently by private firms—which would be not be hampered by political directives that often conflict with sound management practices—and save the American taxpayer from wasting any more money on unprofitable and unnecessary operations.

The National Railroad Passenger Corporation, or Amtrak, was established by Congress through the Rail Passenger Service Act of 1970 and began operations on May 1, 1971. It currently serves more than 500 stations in 46 states and had a total ridership of over 25 million in fiscal year 2004.¹ Amtrak operates over more than 22,000 route miles, most of which is owned by freight railroads. It owns 650 route miles of its own, primarily in the Northeast Corridor route between Boston and Washington, D.C., and in Michigan.²

According to a February 2004 General Accounting Office (GAO) report, Amtrak was created "because existing railroads found such service [intercity passenger rail] to be unprofitable."³ Indeed, the 1970 bankruptcy of Penn Central—which was created by the merger of the Pennsylvania Railroad and the New York Central, the two largest railroads at the time—prompted lawmakers fearful of an industry-wide failure to ensure the future of intercity passenger rail.⁴ However, the GAO report neglects to note that it was government regulation that was killing the railroad companies in the first place! The Interstate Commerce Commission strictly regulated railroad rate schedules and routes, among other things.⁵ The inability of freight railroads to discontinue unprofitable intercity passenger routes and reduce freight rates to compete with truckers (who had become an increasing threat since the development of the Interstate Highway System) ultimately crippled the industry and led to bankruptcies such as Penn Central.

When Amtrak was created, Transportation Secretary John Volpe asserted that it "could be profitable within perhaps three years."⁶ In its 34-year existence, however, it has consumed $29 billion in taxpayer dollars, and not once has it posted a profit.⁷ Last year's cash loss exceeded $600 million.⁸ In addition, despite the fact that it is currently $4 billion in debt, Amtrak is requesting an increase in federal subsidies of more than 50 percent over last year's allotment, from $1.2 billion to $1.82 billion.⁹ The $1.2 billion subsidy for the current fiscal year represents approximately one-third of Amtrak's total budget.¹⁰

Numerous reform efforts have been made over the years, but to no avail. According to a Congressional Budget Office (CBO) report, "By 1978, the Congress had apparently given up on the notion that Amtrak could become profitable and free of federal subsidies."¹¹ The Amtrak Improvement Act of 1978 sought to improve customer service and set a goal for Amtrak to provide service between Boston and New York City in 3 hours and 40 minutes and between New York City and Washington, D.C., in 2 hours and 40 minutes. These goals would not be "substantially achieved" for about two decades.¹² The Amtrak Reorganization Act of 1979 sought to reform the organization by allowing it to generate greater revenues and improve on-time performance while establishing a reduced-fare program for the elderly and handicapped. Thus, it directed Amtrak "to act like both a business and a public-service agency."¹³ These dual—and oftentimes conflicting—roles would serve as the policy throughout the 1980s and most of the 1990s.

In 1997, the Amtrak Reform and Accountability Act loosened restrictions on business decisions (of which Amtrak failed to take advantage) and authorized appropriations of approximately $5.2 billion between 1998 and 2002, in addition to about $2 billion in funds available from the Taxpayer Relief Act of 1997¹⁴ (an ironic bill title, it would seem). This money was to be used to make the investments necessary to get Amtrak on solid financial footing once and for all and end its dependence on federal subsidies. The legislation also created the Amtrak Reform Council (ARC) to oversee Amtrak, and required Amtrak to submit a liquidation plan to Congress if the ARC determined that it would not be able to achieve self-sufficiency by December 2002.

On November 9, 2001, the ARC found that "Amtrak is no closer to self-sufficiency today than it was in 1997."¹⁵ ARC Chairman Gilbert E. Carmichael had few kind words to say about Amtrak. Among his findings:

• "Sadly, Amtrak has proven that it cannot concentrate on its core mission of running trains and running them well."

• "[Amtrak] has too much to do, and does little of it well."

• "The chronic difficulties that Amtrak experiences—year in and year out—are not due principally to lack of funding. They spring primarily from an organization that is obsolete, that cannot do all the things that it is charged to do, that will not consider recommendations for change, and that desperately needs to be redesigned."

• "Over its lifetime, the increase in Amtrak's ridership has barely kept pace with the growth rate of the U.S. population."

• "No matter what the Congress decides to do about Amtrak one thing is very clear—the Northeast Corridor will continue to exist, with or without Amtrak . . . . Based on historical funding patterns . . . having Amtrak as the owner of the NEC [Northeast Corridor] may be the worst outcome."¹⁶

Of course, Amtrak was not liquidated. To get around the Amtrak Reform and Accountability Act mandate, Congress prohibited Amtrak from preparing such a plan in an amendment attached to a defense-spending bill.¹⁷ It also provided a bailout in the form of a $100 million loan and a $205 million supplemental appropriation.¹⁸ Not surprisingly, the same problems that existed in 1997 and 2002 remain to this day.

The Current Amtrak Struggle: Echoes of 1997

In an attempt to generate significant reform of the troubled passenger rail "company," the Bush administration proposed no federal funding for Amtrak, except for $360 million specifically dedicated to preserving the valuable Northeast Corridor commuter route.¹⁹ Amtrak officials and Transportation Department inspector general Kenneth Mead have warned that Amtrak will face bankruptcy within months or even weeks of the end of the current fiscal year (September) if its budget request is not met.²⁰ According to Amtrak Chairman David M. Laney, "At current funding levels, existing operations and capital investment will have to be severely curtailed or discontinued beyond FY05."²¹ Added Laney in Amtrak's 2005 Annual Report to Congress, "Any significant reduction in the infrastructure investment program will likely force Amtrak to suspend high-speed operations on the Northeast Corridor. This will potentially balloon the operating deficit due to erosion of revenues."²²

If all this sounds familiar, recall that in 2002, after the ARC report was issued, Amtrak threatened that if it did not get the $1.2 billion it was seeking it would discontinue its unprofitable cross-country routes at the end of the fiscal year.²³ According to Joseph Vranich, a former Amtrak spokesman and a critic of the organization, the latest scare tactics are a form of "blackmail" and "hostage-taking" because no one wants to suspend service in the important Northeast Corridor (which crosses numerous political districts). Argues Vranich, "Would we permit a small, badly-run airline on the brink of bankruptcy to somehow have the power to shut down the entire commercial aviation system if Congress wouldn't give it more money? No, of course we wouldn't."²⁴

The Bush administration seeks to shift the responsibility for intercity passenger rail from the federal government to the states. States would be primarily responsible for developing and funding rail service and would be permitted to bid routes to providers other than Amtrak.²⁵ Yet, while this would get the monkey off the government's back, it would largely just shift existing problems to the states (although outsourcing strategies might result in some efficiency gains, depending on how strictly providers are regulated). Amtrak claims that if Congress would just fork over another $1.8 billion, it will be able to eventually bid competitively with other rail lines for service routes.²⁶ (Where have we heard this before?) This begs the question, however: Assuming that this time the statement is true (a dubious proposition at best), why should we pay just so Amtrak can compete with other rail companies? Why should we spend nearly $2 billion so that Amtrak can compete when we could instead sell Amtrak's assets, realize an influx of capital from those asset sales, and simply allow existing competitive firms to take over Amtrak's operations?

Amtrak Benefits Debunked

A number of supposed public benefits of Amtrak are put forth to validate its existence. Among these are: (1) Reducing congestion, (2) Improving air quality, (3) Increasing transportation capacity, and (4) Offering travel choice. All of these arguments fail to provide reasonable justification for Amtrak's government subsidies, however.

Intercity passenger rail clearly will not have any significant impact on long-distance travel since "rail travel is not time-competitive with air travel."²⁷ The only possible congestion relief would be on shorter-distance travel in certain densely populated areas of the country, and even then the impact is likely to be minuscule. according to a GAO report, "[I]n 1995, we reported that each passenger train along the busy Los Angeles-San Diego corridor kept about 129 cars off the highway (about 2,240 cars each day)—a small number relative to the total volume."²⁸

Claims of the superior energy efficiency, and thus improved air quality, of Amtrak trains are similarly unconvincing. While the Congressional Research Service has found that Amtrak is much more energy-efficient than airplanes, it is much less energy-efficient than intercity bus transportation and about equally energy-efficient as automobiles for trips greater than 75 miles.²⁹

While Amtrak has argued that rail transportation is more cost-efficient than other modes of transportation and can carry 5 to 10 times as many passengers as highways for the same amount of money, the assertions turns out to be just plain false. As the GAO noted, a 1999 study found, for example, that the investment costs of providing highway and high-speed rail service between Los Angeles and San Francisco were about the same, while air service was significantly cheaper than either of these.³⁰ Moreover, "If the added capacity is underutilized (say, for example, because it is not cost competitive or offers inconvenient travel), then the foreseen benefit will not be realized."³¹

This last point leads us to the travel choice argument. To justify Amtrak's existence (not to mention its government subsidies), one must demonstrate not only that it offers an alternative to other forms of transportation, but that it offers an attractive alternative to a significant segment of the population. (A national rickshaw network would also provide travelers another transportation option, but surely the time and cost necessary to get anywhere would prevent any serious person from advocating for government subsidies to run such an operation.) Depending upon the source, intercity passenger rail makes up between 0.3 percent and 1 percent of all intercity travel.³² To be sure, people have been given another transportation option in Amtrak—and they have decided that it is not worth it.

The Need for Subsidized Passenger Rail?

Despite record ridership (which, as explained previously, still does not amount to much), Amtrak continues to fail. As Figure 8 illustrates (see below), intercity passenger rail travel declined substantially after World War II and has remained relatively constant since the creation of Amtrak. The development of the Interstate Highway System beginning in 1956 significantly reduced the cost of automobile travel, which also contributed to the growth of suburbs and increased reliance on the automobile for transportation. Technological innovations such as improvements in fuel economy reduced the relative price of automobile travel even further. Air travel also became cheaper, and the reduction in travel time it offered (though you might not know it from the security lines at airports these days) made it a more convenient option for long-distance travel. So, generally speaking, automobiles have become more attractive than rail for short-distance travel and airplanes have become more attractive for long-distance travel. Where does this leave Amtrak? The answer is "nowhere."

If there ever was a need for subsidized intercity rail transit, there is none today. Technological advances and falling (relative) prices in the automobile and airline industry have rendered Amtrak obsolete except in very specific locations with dense populations where large cities are close enough that rail can time compete with other forms of transportation, such as in the Northeast Corridor.

As Amtrak President and CEO David L. Gunn himself noted in a 2003 article, the notion that Amtrak or passenger rail can be profitable is a "myth."³³ Added Gunn, "The economics of passenger rail haven't improved in the past thirty years and won't change much in the next thirty years."³⁴ So if Amtrak has proven to be an unattractive transportation option for over 99 percent of the population, then why expend so much time, energy, and money to preserve it? Taking taxpayers' money and diverting it from their preferred (and cheaper) transportation alternatives—such as automobile, bus, and airplane travel—to a higher-cost, less efficient transportation system that the vast majority of them shun clearly makes them worse off. One explanation may lie in the difference between free-market business incentives and political incentives.

The Negative Influence of Politics on Business Decisions

Unlike in the private sector, political decisions are not driven by supply and demand, by finding the optimal balance between making profits and satisfying consumer demands, but rather by the interests of those in power (and those special interests that support them). Amtrak is no different in this regard. According to the CBO, early in Amtrak's history, it "became evident that Amtrak would be guided by politics as much as by business decisions"³⁵ and that "the accommodation of political interests has been a more important factor than business experience in the selection of board members."³⁶

It is no secret that a number of Amtrak's long-distance routes are highly unprofitable. The Sunset Limited, for example, which runs from Los Angeles to Orlando, lost $466 per passenger in 2004.³⁷ Obviously, there is insufficient demand to justify such a route. What keeps such routes in existence is the fact that they run through influential politicians' districts. As a Cato Institute scholar noted, "It's political pressure that keeps money-losing, half-empty trains running 12-hour routes when for not much more money, one could fly between the cities served by those trains in an hour."³⁸

Sadly, there is bipartisan support for such pork-barrel spending. Support for Amtrak funding has come from political figures as disparate as Republican Senators Arlen Specter (Pennsylvania), Rick Santorum (Pennsylvania), and Trent Lott (Mississippi) and Democratic Senators Frank Lautenburg (New Jersey), Joe Biden (Delaware), and Byron Dorgan (North Dakota).³⁹ Senator Lott even called the Bush administration's zero-funding proposal "ridiculous."⁴⁰ Some would think it is ridiculous to continue sinking money into a venture that has done nothing but fail for 34 years! That has not stopped a House committee from unanimously approving legislation to authorize an additional $6 billion for Amtrak over the next three years, however.⁴¹

There is another political element that cannot be ignored. There is a persistent bureaucratic thinking in Washington that rewards failed government programs. If a program is performing "well" (by whatever arbitrary standard), the thinking goes, it should be rewarded with more taxpayer funding. If it is performing poorly, it is obviously because of a lack of funding and even more money should be appropriated to "fix" it. The taxpayer just can't win. It is in this spirit that Amtrak is requesting a 50 percent increase in government funding.⁴²

There is a different saying in economics: "Sunk costs are sunk." In other words, just because you are in for the dime does not mean you should go in for the dollar. You will only be 90 cents poorer.

Ineffective Management

As if all this were not enough, the sheer incompetence of Amtrak's management should be enough to send this boondoggle to its grave. Among Amtrak's managerial failures are the following:

• Ignoring vital capital improvements, such as in the important Northeast Corridor, while spending money on short-term projects that would help it reach its operating self-sufficiency goal;⁴³

• Launching new routes in low ridership areas;⁴⁴

• Not taking advantage of the increased flexibility in business practices afforded by the Amtrak Reform and Accountability Act (for example, Amtrak's union laborers are still allowed to collect up to five years in severance pay);⁴⁵

• Spending millions of dollars to fix long-distance sleeper cars instead of fixing or replacing Amtrak bridges in 2004;⁴⁶

• Failing to meet the 3-hour trip-time goal established by the 1992 Amtrak Authorization and Development Act, or even to prepare a comprehensive management plan to do so;⁴⁷

• Delaying the introduction of the Acela Express trains between New York and Boston for several years due to design flaws.⁴⁸ (A 2002 Wall Street Journal editorial complained of the Acela: "The Acela 'Express' between New York and Boston operates at its top speed of 150 mph on only 18 of the route's 231 miles. After billions of dollars of investment, the Acela runs only a half hour faster than the train covering the same route in 1950."⁴⁹); and

• Entering the costly—and, of course, unprofitable—mail and express businesses, which it finally exited in recent years.⁵⁰

Things are still in disarray today. In April, cracks were found in 300 of the Acela fleet's 1,440 disc brake rotors, forcing a long-term suspension of the service.⁵¹ Some have speculated that excessive car weight or the poor condition of the tracks on which the trains run may have contributed to the cracks.⁵² In addition, not satisfied with past and present failures, Amtrak is seeking to expand them through the development of new passenger rail corridors.⁵³ Moreover, Chairman Laney asserts, "The capital program is now in full swing, and we must increasingly rely upon appropriations to meet our needs."⁵⁴ In other words, "We embarked upon a capital program that we can't afford, so now you (Congress) have no choice but to continue to fund our indiscretions or else we will go broke and shut down the Northeast Corridor!"

The Solution: Privatization (Case Studies)

We have established that Amtrak is an undesirable entity, but the next question is: What to do about it? As Will Rogers famously said, "If you find yourself in a hole, the first thing to do is stop digging." This means an end to government subsidies. Those assets that may actually have commercial value, such as the Northeast Corridor, should be auctioned off to private companies. Those that do not should be left until a more productive use can be found for them. In Great Britain, for example, an Institute for Economic Affairs article recommended converting rail lines to roads. According to the article, in Britain, trucks and buses could take over the functions of trains at significantly reduced cost while maintaining a lower accident rate and utilizing 20-25 percent less fuel and 25-33 percent less land.⁵⁵ Such a conversion would not be unprecedented in the United States. In fact, the Pennsylvania Turnpike, Dallas North Tollway, and Westpark Toll Road in Houston were all built on former rail rights of way.⁵⁶ Rail privatization, in one form or another, has taken place in dozens of countries, including Great Britain, New Zealand, Australia, Japan, and Canada.⁵⁷ If rail privatization can be successful in other parts of the world, it certainly can be in America as well.

Conclusion

After 34 years and $29 billion in government subsidies, Amtrak's unblemished record of failure should be self-evident. It is wasteful, obsolete, unnecessary, inefficient, and caters more to political and special interests than it does to its customers. Today there is a plethora of cheap transportation alternatives available to travelers. There simply is no reason to "invest" in intercity passenger rail when such superior options exist. Furthermore, as a Providence Journal piece argued, "if those who choose to take the train refuse to pay the costs, why should taxpayers fund it?⁵⁸

The Bush administration's zero-funding proposal would be welcome if it were sincere, not merely a stick to pressure Amtrak to adopt reforms that will largely just shift Amtrak's problems onto the states. Selling off Amtrak's assets to private businesses will ensure that they are put to the most productive uses, where they are valued most. Establishing a regulation-free business climate will ensure that railways have the ability to compete fairly and keep the government from repeating the mistakes of the Interstate Commerce Commission during the 1950s and 1960s. Money-losing cross-country passenger routes likely will not survive, which is for the best since the costs of service greatly outweigh the benefits. The highly valued Northeast Corridor, and perhaps some other routes, would simply be assumed by private operators (and state operators that share the system). These private operators would have an incentive (profit motive) to serve customers rather than political interests. Such entrenched interests will prove difficult to overcome, even for such an obviously failed program as Amtrak. (Indeed, the fact that it has survived this long, given its numerous failures and bailouts, is testament to the strength of these interests.) On the other hand, how can we hope to achieve a greater, more accountable government if we cannot eliminate the worst and most wasteful of our government programs?

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Endnotes

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