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Can Privatization Put Passenger Rail Back on Track?

By: Ray B. Chambers
Discovery Institute Inquiry
August 31, 1995


Executive Summary


America needs passenger rail service as an economical and ecological alternative to endless road and airport construction. Unfortunately, Amtrak cannot (and probably should not) survive as it is presently structured and funded. Perpetuating the status quo will burden America with a lame, government-run passenger operation, limping along on the nation's freight rail rights-of-way, operating under outdated federal rules from its 1970 authorization, and surviving on Congressional handouts.

But, the solution is not to throw Amtrak on the market, accepting whatever happens. What would happen is, Amtrak would die. The proper course is to reorganize the system, privatizing whatever can be privatized, building new public-private alliances and compacts around the set of rail corridors that link cities 100-500 miles apart-which is the functional core of the national system-and then reconnecting this reorganized nation system to other forms of transportation to create a true intermodal passenger network.

But before dealing with Amtrak, we need to understand its true circumstances. Since its birth in 1971, Amtrak has been a neglected stepchild. The government had no interest in its success. Neither did the freight railroads, over whose tracks it ran. Labor made certain Congress burdened it with uneconomical work rules; politicians picked the routes; bureaucrats ran the place like, well, a bureaucracy. In retrospect, the wonder is that Amtrak succeeded as well as it did.

Amtrak's 1994 fiscal crisis coincided with the rise of budget cutting as a national political priority. Following the election of the new Republican Congress in November 1994, Amtrak's new president, Tom Downs, tried to adjust to this priority, cutting 22% of its train miles and 1500 employees and developing new, flexible strategic business units. Unable by themselves to save the system, these measures did help reduce the financial crisis, while improved marketing and a few new routes actually led to a small increase in ridership. The cuts also alerted ordinary people to the value of passenger train service. As a consequence, a number of states have offered subsidies or have committed revenues to help save local service.

Presently, the unwillingness of many Congressmen to buck the opposition to reform from the rail labor unions, the trial lawyers and commuter rail states led Rep. Bud Shuster, Chairman of the House Committee on Transportation and Infrastructure to declare, "Amtrak is dead." His pronouncement may prove to be prophetic, but it is premature. Amtrak's continuing financial crisis still can be turned into an opportunity if the public's interest is sustained and if a government reform process can be formalized. Toward that end, Discovery Institute proposes the following measures:

* Approve three years of interim Amtrak operating support, tied to a firm schedule for transition to a new system.

* Pass a comprehensive Amtrak Privatization and Revitalization Act that gives management power to eliminate all costs that do not improve service. This will lift prohibitions against contracting out services, repeal excessive labor provisions and resolve the legal liability questions between freight and passenger rail.

* Establish a public-private commission to develop a new national system. This Rail Alliance for Passenger Services (RAPS) will analyze proposals for privatizing various corridors. These proposals should come from compacts among local and state governments, private entrepreneurs, and the freight railroads over whose tracks the passenger trains run.

It is vital that the freights become stakeholders in passenger service. RAPS will seek ways to upgrade passenger service, infrastructure, technology and safety. And, RAPS will study development of a truly intermodal passenger system, closely linking rail to bus service, airports, ferries and other modes of transportation, with coordinated ticketing. At the end of this period RAPS will recommend which corridors become part of the new National Passenger Rail System, and will preside over the transition.

The new National Passenger Rail System will be composed of corridors in every region of the country, with a national organization setting safety and service standards. To help justify the cost of long distance trains that make the national system truly national and which assure service to rural areas where air service is often lacking, passenger trains should be allowed to carry mail and packages once more. Further, as in the National Highway System, there should be a Federal commitment to provide infrastructure capital-possibly through states and interstate compacts. After all, the government provides the roads and airports over which the trucking and air transport industries operate. Indeed, given the congestion in many parts of the country and the ecological harm inherent in road and airport expansion, passenger rail may turn out to be one of the bigger transportation bargains in the federal budget.

Why Are We in This Situation? A Little History


The United States has not always neglected its railroads. Far from it. In the 19th century, railroads were closely allied with the government. Land grants, state loan programs, and other subsidies facilitated rapid expansion. By the 1890s, indeed, the so-called Rail Barons had achieved incredible influence and wealth, and some railroads employed more people and took in more money that the government itself. But power and arrogance triggered trust-busting and aggressive regulation. The railroads found themselves fighting against an intermittently irate government, while the press and populist politicians inflamed voters.

Once the railroads' servile ally, government eventually became their effective enemy in an era of social experimentation, imposing stifling regulation and unnecessarily costly labor rules. All rates, routes and service were under the rigid control of the Interstate Commerce Commission. Shippers became a privileged class in commerce. Railroad workers received a special Federal retirement program, a Federal unemployment program, and a Federal tort-based workers compensation program.

Meanwhile, railroads often headquartered in far-away cities saw their rights-of-way become targets for ever-increasing taxation revenues by state and local governments.

But even as government presided over the slow strangulation of the railroads, it began starry-eyed love affairs with the automobile and the airplane. Upon creation of the Highway Trust Fund and under the general guidance of the Bureau of Roads in Washington, DC, a great bureaucratic auto constituency was built in the states. The motor industry and its allies saw the government as a potential partner, and one of the most powerful lobbies in history was created. General Motors, the trucking industry, asphalt producers, road contractors, dealerships, and the American Automobile Association (AAA) became the "Road Gang" that worked effectively through the Association of State Highway Officials (AASHO) and the Congress. A similar combination of "Airmen" pressed for airports in every community and for a fail-safe air traffic control system.

A bipartisan political team transformed America. Many of the results benefited the average citizen and community, but rail transportation was left out of the new dispensation. Private railroad operators found that cars, buses, trucks and airplanes operating over government-funded superhighways and aviation infrastructure became virtually unbeatable. The economic and social effects were tremendous as cities emptied and people and industry moved to the suburbs. Freight and passengers were increasingly diverted from the rail beds to the interstate freeways and the airports.

By 1980, the competition seemed to be over. Much of the railroad industry was insolvent. Salvaging passenger rail was beyond the capabilities of private companies. Led by the once mighty Penn Central, Northeast railroads tumbled into receivership one after the other, followed in the Midwest by the Rock Island and the Milwaukee Road. At the low point, 25% of America's railroads were bankrupt, with the Chicago North Western, Illinois Central and Southern Pacific nearly so. Rail market share continued to fall; debt was staggering, the physical system was breaking down. A national system failure was probable. Liquidation or nationalization were serious alternatives.

From the beginning, saving the freight lines received top priority. Passenger service was an afterthought. The first step toward recovery came in 1971 when Congress created Amtrak as a relief measure for freight railroads. In 1973, Congress authorized a Northeast rail restructuring process and a rebuilding of the freight infrastructure that produced Conrail. Congress then authorized some repayable loans directed primarily at rebuilding midwest freight lines. The Staggers Act of 1980 eliminated decades of over-regulation and freed the freights to compete. Profitability soon followed. Unfortunately, over in the new public sector, service did not fare as well.

It need not have been this way. Although passenger service had been deteriorating for a half century, experiments in the depths of the Great Depression had demonstrated that revival was possible. In 1930, Ralph Budd, president of the Burlington Railroad and his ally, railcar maker Edward Budd (no relation), committed massive capital to high-speed, light-weight, state-of-the-art rail technology. In a few years, modern diesel engines were pulling art-deco, air-conditioned cars at over 100 miles per hour. Consumer response was enthusiastic and profitable. American passenger trains, such as the California Zephyr and the Santa Fe Chief, were the best in the world. During World War II, passenger and freight railroading boomed.

At war's end, the country had a great opportunity to create a balanced transportation system that included rail. But the government chose to subsidize rail's air and automobile competitors. Perhaps no one fully understood the long-term implications for America. Western Europe and Japan, on the other hand, committed to balanced systems and today enjoy high speed and, in some cases, profit-making passenger rail operations.

In 1971, the U.S. government finally committed to maintaining passenger rail. In an exceedingly thoughtless law, no attention was given to restoring American rail passenger service to a world standard. While Europe and Japan invested billions in passenger rail to create true modal balance, Congress directed Amtrak to become a self-sufficient, independent passenger operation. Government funding was always minimal and no long-term capital commitment was planned. The results of this policy are now apparent.

The Amtrak Act created several counter-productive conditions. A government-owned (and ill-financed) passenger system now operated over privately-owned tracks and infrastructure-the exact opposite of the air and automobile and trucking systems, where privately owned vehicles utilize government-provided facilities. Further, the freights had no self-interest in seeing Amtrak succeed, since the government paid them less-than-market rents for the use of their facilities. Amtrak trains interfered with the freights' own operations and created unwelcome insurance and liability problems. They agreed to the arrangement only as a way of getting passenger service off their backs. Since the establishment of Conrail, the freights have concentrated on their own core businesses.

Amtrak never really had a chance. The government didn't care and the private entrepreneurs were out of the game. And, from the beginning, the Amtrak Board was dominated by the Department of Transportation. Increasingly, Amtrak behaved like a government bureaucracy. Middle management, with no incentives and salaries capped by Congress, became rigid. There was continuous rancor between management and the 16 rail labor unions, making highest quality service impossible. The Washington, D.C.-based bureaucracy was nearly blind to potential state and local community efforts for rail improvement. Further, Amtrak inherited an ancient fleet and received little capital for modernization.

Both the Reagan and Bush administrations thought that Amtrak should be zero-funded. In fact, Amtrak survived largely because senators and congressmen protected trains running through their districts, enabling Amtrak President Graham Claytor to maintain limited subsidies. Unfortunately, this meant that Congress effectively controlled the national route system, which it froze in place regardless of growing route losses. Congress became a de facto Board of Directors, albeit a Board that paid attention to Amtrak's business only sporadically. Statutory labor protection continued to guarantee Amtrak employees up to six years' salary if they were moved more than thirty miles because of a route change. Contracting car maintenance or any element of the passenger operation to lower cost providers was forbidden by Federal law and union contract.

Under the circumstances, it is remarkable that, for many years under Claytor, Amtrak arrived as well as it did. A good system was built in the Northeast Corridor, and new rail cars were acquired. For a period, ridership improved, creating an illusion that all was well. But decline could not be staved off forever. By 1994, with a recession and fare wars in the airline industry, ridership fell, while costs and capital needs increased. By fall, Amtrak was confronting a cash crisis. In November, Americans went to the polls and elected the first Republican Congress in 40 years. "Deficit reduction" became the political battle cry. For Amtrak, the crisis had ripened at the worst possible moment.

American political debate in the aftermath of the 1994 elections set the tone of a pseudo-debate. Aggressive freshman and senior budget-cutting Republicans suggested that Amtrak has no modern function in an age of planes and automobiles. They proposed "Zeroing Amtrak" in the Budget. Amtrak did make cuts. But, then, from around the Nation, complaints of those affected quickly found their way to mayors, governors and Capitol Hill.

The crisis, however, created new interest in Amtrak. Several states, especially Wisconsin and Vermont, offered subsidies to preserve threatened services. Amtrak, Washington State, Oregon and British Columbia began incremental development of high speed rail service along the Cascadia Corridor from Eugene and Portland, through Seattle to Vancouver, BC. Initial ridership has been higher than expected and a recent Wall Street Journal article highlighted the new service and its special emphasis on regional cuisine. North Carolina inaugurated its new Piedmont Service. Florida and California have committed revenue streams to high-speed rail development. Amtrak, New York State and the Federal Railroad Administration developed an experimental 125 mph turbine train retrofit which is now in service between Albany and NYC; the state is studying the re manufacture of additional trains to establish a fleet capable of regular 125 mph service. At the suggestion of Senator Trent Lott, Amtrak conducted a series of outreach meetings throughout the country. These meetings produced broad recommendations and also demonstrated popular and local government support for passenger rail. Passengers have increased four percent so far in 1995. Maybe, then, passenger rail has a future.

The Role of Congress


The Clinton Administration has called for a continued Amtrak and has pushed for labor provisions to be negotiated through collective bargaining. But the Administrationcannot or will not advocate immediate cost savings that cross the rail labor unions. Key Republican Representatives and Senators, however, have made a clear that substantial savings must come from such reforms. Further, they insist, Amtrak must have total flexibility to contract operational functions to low cost, sometimes non-union, providers. To the Republican leadership, these changes are a pre-condition for continuing subsidies, even for an interim period.

At the beginning of the 104th Congress, veteran Pennsylvania Congressman Bud Shuster was named chairman of the newly organized Committee on Transportation and Infrastructure (T&I), and that committee and its Rail Subcommittee, chaired by Representative Susan Molinari of Staten Island, New York, were given authority of Amtrak. In the Senate, jurisdiction stayed with the Senate Commerce Committee where Senator Larry Pressler of South Dakota is Chairman. The Subcommittee Chairman is Trent Lott of Mississippi. Lott also serves as Majority Whip of the Senate, putting him in a powerful position within the Leadership. All four key chairmen have expressed support for saving Amtrak-if it can be reformed.

Hearings began in Congress in the Spring. The popular outcry resulting from service cutbacks brought new focus. The Committees took a hard look at the real problems of Amtrak, and of passenger rail in general. First came the battle of the budget. It was a solid win for proponents of a national rail passenger service-at least in the short term. During a transition period through fiscal year 1998, the combined capital, operating and other payments can total $712 million a year under the Republican-passed budget.

However, Representatives Shuster and Molinari also promised the budget hawks on the House Budget and Appropriations Committees that they would wring maximum savings out of the existing system in exchange for these relatively generous appropriations. Whereas current law prohibits any contracting by Amtrak, other than for food service, the Shuster/Molinari bill (the Amtrak Reform and Privatization Act, H.R. 1788) would repeal all anti-contract law and permit subcontracting of all rail operating functions. H.R. 1788 reduces labor protection payments from 6 years to 6 months for an employee whose job is eliminated. In addition, the bill places stringent limits on liability exposure for freight and passenger carriers in intercity (including high speed) and raises the rent for commuter passenger rail in the Northeast Corridor.

In the face of these proposed House reforms, rail labor mounted an intensive lobbying campaign to overturn the contracting and labor protection amendments which are the heart of the bill. Trial lawyers mounted an effort to remove the liability limitations, while commuter rail states fought the move to increase rental rates. When, June 14, the full T&I Committee markup on the Shuster/Molinari bill was held, opponents caught the bill's backers off-guard, prevailing on two vital reform votes. Chairman Shuster adjourned the Committee mark-up without "reporting out" the bill to the House of Representatives. It was the next day that he announced in the press, "Amtrak is dead."

Action moved to the Senate. On June 16, the Senate Commerce Committee held a substantive hearing on Amtrak. Interest for the next few months has shifted to this Committee, where it will remain unless the House deadlock can be broken.

Prospects are certainly unclear. Amtrak has a large enough base in Congress that is likely to receive some level of financial support for the coming year-if it is tied to significant reforms. But the base is now more fragile than in some time. And it is not realistic, in any event, to expect federal subsidies adequate to restore or improve service over the longer term. But, the need for inter-city and regional rail is still conspicuous. This means that now is the time to establish a long-term comprehensive strategy for our national rail passenger system.

Making Rail Passenger Service a Success: The Discovery Proposal



Step 1: Cut All Administrative Costs Permitted by Law

Amtrak must take all necessary steps within existing law to cut costs. Under Tom Downs' leadership, remarkable progress has been made in a short time. Business-oriented operating units have been established. Service on major routes has been reduced while reinvigorated marketing has prevented a matching decline in ridership. In fact, passenger revenues are 4% ahead of last year. If passenger rail service is to be saved, more can be done within the existing Amtrak framework.

Step 2: Cut All Extra Costs Imposed by Law

The contracting and labor reforms, as well as liability provisions of Shuster/Molinari, must be adopted to give the system any real chance of survival. Second, Railroad Retirement, the worker liability statute known as FELA, and all of the other costly and non-productive Federal mandates that are unique to railroads (described earlier) should be ended, or at least sharply reduced.

Step 3: Maximize Resources

There are several laws which allow funding for elements of intercity passenger service. The Swift High Speed Rail Act authorizes grants for development of high speed rail technologies and corridor planning. The massive Intermodal Surface Transportation Efficiency Act (ISTEA) allows limited funds for technology development (section 1036) and grade crossing protection in emerging rail passenger corridors (section 1010). All of these provisions should be integrated into a comprehensive intercity rail program. This is a good job for the Federal Railroad Administration.

Step 4: Design a National System Plan

A blue ribbon federal commission should be charged with development of an overall passenger system analysis, leading to a new national system plan. The commission, which, for convenience, we shall call the Rail Alliance for Passenger Service (RAPS), also should be responsible for overseeing implementation of the plan. While Amtrak should be represented on RAPS, membership should be heavily represented by the rights-of-way owners, states and communities, the general business and labor communities and consumers.

Some believe that Amtrak itself could take on the functions of RAPS, obviating the need for a new entity. However, Amtrak never has had a planning capability and, as a bureaucratic organization with rail operating responsibility, has a corporate culture and an altogther understandable urge for self-preservation, that might complicate its performance of the role envisioned for RAPS.

RAPS should be charged with market-driven development of a National Rail Passenger System that provides incentives for Amtrak and other operators to make money. Once the new national system is in place, the Amtrak monopoly for providing intercity passenger service will pass to RAPS. Operations over the new national system then will be re-distributed to Amtrak or other qualified passenger rail operators.

RAPS will:

* Analyze corridors as candidates for inclusion in the National Rail System. It will contract with a major accounting firm to review Amtrak's financial and operating records and make findings as to the fully distributed cost of each Amtrak route. That firm also will make findings about the most likely shortfalls between revenue and cost on each route.

* Make a special study of the unique Northeast Corridor (NEC) between Washington and Boston to determine its role in the National System. The NEC has taken a large share of Amtrak's federally provided capital and is presently faces an estimated five billion dollars of needed repairs. Amtrak owns the tracks (which are also used by many commuter trains) and must maintain the NEC to an exact standard to achieve high speeds. Yet the NEC is a popular service and the only rail corridor where Amtrak is competitive with airlines. RAPS would investigate transferring ownership to an interstate compact. Privatization options, as well as Congress might well designate the Corridor as a highly controlled "interstate highway," making it eligible for trust fund spending, with private users paying a fee to operate high speed rail service over its lines.

* Analyze the cost and feasibility of upgrading designated routes throughout the national corridor system to 125 mph. Swift Act planning funds and ISTEA section 1010 funds will be used to hire engineering firm consultants for this purpose. Freight/passenger interface problems will be addressed as will estimates of infrastructure improvement costs. RAPS, further, will analyze potential funding sources and cost-benefits.

* Over an 18 month period, solicit proposals from multi-party compacts for corridor route operations and intermodal connections. These pacts should be composed of: an entrepreneur who proposes to operate the trains, the host railroads (who may choose to operate the trains themselves), the states and communities served, and possibly other private stakeholders. Transition employee interests must be considered. Proposals should include both a realistic operating budget and financial plan, identify specific funding sources and ways of overcoming financial shortfalls. Although it is probable that some long-term federal financial support for infrastructure will be necessary, each plan should be based on realistic assumptions-not on the hope of a bottomless well of federal money.

* See to it that issues involving host freight railroads are resolved in compact negotiations. These issues include: grade crossing protection; liability; operational interface; rent for use of track; and financing capital improvements (such as higher rail speeds) for passenger operations. Through the RAPS corridor, the freight owners in each will have a long-term role in the governance of the National Rail Passenger System.

* Recommend the specific routes that will become elements of the National Passenger Rail System and approve the operating plan. This concept assumes that there will be competition for the right to operate these routes. Different contractors, freight carriers, and/or state/local authorities may operate trains on different routes, so long as they meet RAPS' standards,which must be approved by the Federal Railroad Administration and the track owners for safety and operating compatibility.

* Permit Amtrak itself and its employees, if they so decide, to privatize and compete as a member of compact coalitions. In the interim, a residual "public Amtrak" will need to operate during five-year analysis-and-transition period. This public Amtrak will continue to operate the existing basic system but with complete flexibility to achieve cost savings provided in the Shuster/Molinari legislation.

* Address in this planning process the distribution and ownership of Amtrak passenger equipment.

* Establish a plan for a national intermodal surface passenger system. This will include a national system of reservations and ticketing, with links to bus and even air. Intermodal bus/rail stations will be encouraged. RAPS will set standards and principles of service, including equipment design and compatibility for the National Rail Passenger System.

* Provide a permanent residual national authority for oversight and coordination with the National Passenger System. The RAPS Board will provide for arbitration of disputes and administration of whatever federal funding is ultimately authorized. It also will serve as residual holder of the right to provide passenger service as a part of the National Rail Passenger System. The RAPS Board will ultimately be privatized.

Funding for the Plan

Funding for the implementation of the National Rail Passenger System envisioned in this proposal will be provided in three parts.

First, Amtrak will be given a general fund operating subsidy for the "interim" planning period of three to five years. (The 1996 Congressional Budget allows adequate funding for 3 years.)

Second, the states will be given flexibility to commit discretionary ISTEA trust funding to "National Rail Plan" rail projects. Currently, states may not use highway trust fund money for rail. However, in considering a highway bill recently, the Senate passed an amendment offered by Sen. Anthony Roth (R.-Delaware) and Sen. Joseph Biden (D.-Delaware) to provide some highway trust fund flexibility for Amtrak projects. The vote was a persuasive 64 to 36. Coincidentally, a recent national poll indicated that 63% of the public support the concept of committing gas tax revenues to Amtrak projects. Nevertheless, Roth-Biden has fierce opposition from the highway lobby and will face great difficulties in the House of Representatives. The opponents, unfortunately, include Transportation and Infrastructure Chairman Bud Shuster. However, if Roth-Biden becomes law, chances for a passenger rail revival will become greatly improved. At the very least, it will quickly become clear how much priority the states are willing to give passenger rail when confronted with a real choice. Besides, in many corridors, federal capital improvements mean highway/rail grade separation and improve port access, which benefit community safety, trucking and sea/air traffic.

The National Rail Plan adopted by RAPS for transmission to Congress will include a statement as to whether any additional Federal funding is necessary on a temporary or permanent basis.

Needless to say, the more detailed the plans developed by RAPS, and the more solid the state and local commitments, the easier it will be for Congress to respond with long-term capital funding. Government has traditionally provided infrastructure investment capital when public benefits are substantial. For example, on congested or higher speed routes that are shared with freight trains, double tracking, passing tracks, and state-of-the-art signal and separation systems (as well as fencing), may prove necessary. Once a rational planning process has been completed, the Congress will have a solid foundation on which to allocate national transportation dollars to competing intermodal priorities.

Creating a National System



A large issue will be how to deal with the long distance overnight trains that make up much of the current national system. Nostalgia and romantic names out of the past have political appeal. The question is whether they make economic sense. Should the Sunset Limited ride into the sunset? Or can such new (and old) ideas as combined passenger and mail service help make the longer runs viable? Perhaps states and communities at location stops along the route could maintain stations and underwrite part of the cost of service. The answers must come out in the factual analysis and should not prejudiced at the beginning of the process.

Under this Discovery Institute proposal, the National Passenger Rail System will be based on the building blocks of corridors in every region of the country. Only after the corridor compacts have been submitted, analyzed, and implemented-and costs are known-will it become clear whether national connectivity should be a system goal. No doubt, the entrepreneurial imagination of rail and bus operators will see opportunities where bureaucratic thinking has seen only problems.

Conclusion



It is possible and desirable for this country to have a world-class passenger rail system once again. But what priority will Congress and the people give to saving and exploiting this asset? There must be a serious debate in Congress-a debate informed, not just by political pressures from constituents and economic interests, but by proof of cost-effective readiness to enter new partnerships and try new arrangements.

Today's new federalist philosophy seeks to return decision-making power to the people. It seeks to give resourceful, customer-oriented capitalism a chance. Saving passenger rail falls into this overall challenge. Privatization is not a magic answer, but it can be a key part of a successful long-term solution.






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