A failure of public enterprise?

Written by Frank N. Wilner, Capitol Hill Contributing Editor
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Amtrak Surfliner F-59PH 455 in Operation Lifesaver livery at San Diego’s Santa Fe Depot. The intended message is safety—stay off the tracks—but the wording is ironic, considering Amtrak President and CEO Richard Anderson’s service cuts, which many advocates say is an attempt to shut down the long-distance network. Photo by Joseph M. Calisi.

From the November 2018 issue of Railway Age: Were Amtrak a business school case study, it would be advertised as “The Failure of Public Enterprise”—users receiving services for which they don’t pay the full cost; taxpayers subsidizing the difference; a failure to follow Generally Accepted Accounting Principles (GAAP), as if Bernie Madoff were Amtrak’s chief accountant, and conflict of interest collaboration with the Federal Railroad Administration (FRA) to impede entry by more efficient private-sector competitors.

The Amtrak subsidy is no small sum, and actually considerably greater than the advertised $1 billion annual average federal transfer Amtrak has enjoyed since its creation by Congress 48 years ago.

Amtrak’s purpose was to relieve privately owned, predominantly freight railroads of a financially crushing and statutorily mandated burden of providing perennially unprofitable passenger service. In exchange, freight railroads were required to provide Amtrak trains with access to their privately owned track at regulated compensation. While few foresaw Amtrak ever turning a profit, Congress intended Amtrak to conduct business as if it were a for-profit enterprise.

As Congress, under voter pressure in 1970, declined to allow market forces to determine the future of rail passenger service, Congress continues, under voter pressure, to provide subsidy support to keep Amtrak operating. Voter endorsement of an intercity rail passenger network is so robust—notwithstanding that there are many-fold more Amtrak supporters than riders—that states progressively are providing their own subsidies, which include cash, equipment and passenger stations. Plus, there are hidden subsidies.

Freight railroads have said the priority-access mandate adds another near quarter-billion-dollar annual subsidy, as the regulated compensation is substantially below market-based rates. And owing to speed differentials over a congested freight network, a single passenger train can crowd out from between two to six freight trains, creating out-of-pocket and opportunity costs that the compensation formulas fail to recognize. Additional sidings could reduce costly delays, but a single two-mile-long siding, with signaling, Positive Train Control and high-speed turnouts at each end, could cost up to $15 million—with dozens or scores required—and it is unlikely Amtrak would pay.

There is a compelling economic argument that if users of a service do not pay its full costs, the service is not sufficiently valued to be provided. Amtrak, however, is hardly a lone island of socialism in America’s sea of capitalism. The listing of government-subsidized enterprises would fill the pages of this magazine.

However, there are snowballing reasons why Congress may be unable to sustain Amtrak, even at its current subsidy level.

First, Amtrak is not an essential public service. Airplanes and automobiles are America’s preferred means of transport, and buses increasingly are poaching Amtrak’s market share in the population-dense Northeast Corridor (NEC) between Washington, D.C., and Boston.

In fact, German-based Flixbus, asset light and information-technology heavy with its ride-hailing model similar to Uber, is pilfering long-distance passenger market share from European rail carriers, and is about to export its model to the U.S. Also on the horizon are self-driving vehicles and vertical takeoff and landing aircraft suitable for passenger transport.

A more menacing storm cloud over Amtrak is the shrinking public purse. In the past, on the few occasions when Presidents—Democratic and Republican—zeroed-out Amtrak subsidies in their budget requests, Congress still delivered bare-subsistence rations. Well, Congress may soon be incapable of doing even that, with no evidence that Pollyanna Amtrak and its supporters are prepared.

Beginning with the 2020 fiscal year beginning Oct. 1, 2019, every federal program is in jeopardy as lawmakers confront a new reality of annual $1 trillion budget deficits, a national debt of $21 trillion and growing, and interest payments on that debt projected to exceed the level of defense spending within 10 years.

Further crowding out future Amtrak subsidies in the federal budget is that while Congress perennially barked at Amtrak to behave more as a for-profit business, the entreaties often were ignored. Should Amtrak confess its sins, it would best lug lunch and dinner to the confessional.

Among the sins are Amtrak accounting practices. While Class I freight railroads must follow a uniform system of accounts, patterned after Generally Accepted Accounting Principles (GAAP), and file those R-1 Reports with regulators for public inspection, accounting transparency is not required of Amtrak. Such actions reinforce the axiom that if you can’t measure accurately, you can’t manage effectively and efficiently.

Among criticisms of the General Accountability Office (GAO), Congressional Budget Office and other watchdogs are Amtrak’s arbitrarily assigning operating costs as capital costs, or allocating expenses to unrelated lines of business. GAO called Amtrak’s accounting “inconsistent and incomplete.”

Were Amtrak’s Inspector General not compromised by reporting to the Amtrak board of directors, rather than being independent as is the Department of Transportation (DOT) IG, it might confront Amtrak management rather than labeling managerial problems as “challenges” and producing reports reading as if edited by the Amtrak law department.

As for the political-patronage-heavy Amtrak board—nominated by the President and confirmed by the Senate—it has exhibited conflicts of interest, and often lacks members with experience in railroad operations, rail labor relations, travel and hospitality, and violating corporate-board best practices.

When questions related to accounting were asked of Amtrak President Richard H. Anderson following his presentation at the annual California Passenger Rail Summit in Los Angeles in April, Anderson was hustled from the room by an Amtrak vice president.

Although Anderson targets Amtrak long-distance routes as unprofitable, his predecessor, Charles “Wick” Moorman, wrote Congress that if the long-distance trains were eliminated, Amtrak’s federal subsidy requirements for fiscal year 2018 would have increased by some $400 million annually, suggesting that long-distance trains actually make contributions to Amtrak’s bottom line.

Nothing encourages economic efficiency as does competition. Where external impediments are few, private-sector competitors have been selected by commuter authorities through competitive bidding to replace Amtrak, notwithstanding a senior Amtrak official terming urban areas “the future of Amtrak.” Congress, meanwhile, has been extinguishing Amtrak’s tenuous government-protected monopoly on long-distance and state-supported routes.

The 2015 Fixing America’s Surface Transportation (FAST) Act authorized a pilot project to open three of Amtrak’s 15 long-distance routes—between 780 and 2,728 miles long—to a bidding process by private-sector competitors, beginning at 90% of Amtrak’s existing subsidy on that route.

Potential competitors who sought— but haven’t taken advantage of—that legislative provision, allege FRA wrote compliance rules to shackle the program. For example, the FAST Act intended that the FRA “shall require Amtrak to provide access to the Amtrak-owned reservations system, stations and facilities directly related to the operation.” But the FRA ignored that requirement in the final rule, which potential applicants said made the program unworkable. And, they say, the FRA arbitrarily imposed an unmeetable short deadline for filing applications.

As for Amtrak’s 29 state-supported routes of fewer than 750 miles, the 2008 Passenger Rail Investment and Improvement Act (PRIIA) created a framework for selecting alternative operators. So far, just one emerged following successful negotiation with the State of Connecticut (“Amtrak Reform: Attention Must be Paid,” October 2018).

A festering impediment is negotiating access to privately owned track, although potential Amtrak competitors such as First Transit, Herzog, Keolis and TransDev/Veolia are optimistic it can be obtained from most freight railroads by proving sufficient liability insurance and evidence of safe and reliable operations elsewhere. The Association of Independent Railroad Passenger Operators (AIRPO) is working on their behalf. Of note, Amtrak’s safety record and culture have been criticized by the National Transportation Safety Board.

Meanwhile, Amtrak is alleged to be scrapping retired passenger equipment purchased with federal grants, rather than making it available for purchase and refurbishment by potential competitors, and Amtrak twice has attempted to thwart potential competitors by restricting access to Amtrak-owned passenger stations in Chicago and Washington, D.C. (“No Fingerprints on NEC Track Grab,” September 2015; and, “Amtrak as Bully,” June 2018). Virginia Railway Express (VRE) officials recall that after Amtrak lost a commuter contract to operate VRE in 2009, Amtrak refused to assist VRE during the transition.

Also ripe for efficiency-inducing competition is the 457-mile, high-dollar-upkeep Northeast Corridor, owned by Amtrak with the exception of 103 miles in possession of public authorities. Amtrak’s ownership is under a 900-year, no-interest, no-principal-payment mortgage held by the federal government.

The NEC hosts 2,100 commuter, intercity passenger and freight trains daily, with the majority user being eight autonomous commuter agencies providing 243 million annual passenger trips, versus just 17 million by Amtrak. Where Amtrak underpays its full cost responsibility when operating on host freight railroad track, commuter agencies underpay to Amtrak their full cost responsibility on the NEC, whose increasingly decrepit and outdated condition begs for an estimated $38 billion in new capital investment.

In 2002, the congressionally created Amtrak Reform Council unsuccessfully recommended separating Amtrak train operation from NEC ownership, and opening both to competitive bidding. A recent suggestion is a federal, state and local subsidized quasi-government corporation, such as the Northeast Corridor Commission, that would manage and maintain a unified regional transportation system, allowing qualified train operators, including private-sector competitors, access to the NEC. (“NEC Infrastructure: Unification by Separation,” RA, August 2018).

Also suggested is unification of the eight autonomous commuter agencies now operating on parts of the NEC, and allowing commuter trains unrestricted geographic access to the entire NEC network so that a passenger could buy a ticket at any commuter stop on the NEC for passage to any other NEC station. This would allow for more efficient operation of higher- and high-speed trains serving only the largest cities.

Objections are that the Northeast Corridor Commission is a political body with limited expertise and extremely close ties to Amtrak; that eight politically powerful, autonomous commuter agencies would balk at unification, and a low probability that a multi-state compact could agree on an equitable funding formula, much less deliver on funding commitments, given that the involved states are cash-strapped.

Another approach is a public-private partnership, such as the AIRNet-21 concept, whereby a private-sector management organization would lease the NEC, manage it, and self-finance expansion and renewal, while providing open access (see guest editorial below by former AAR and Amtrak executive Robert VanderClute). A profit would be earned through commercial development and assessment of statutorily regulated market-based user charges on qualified intercity passenger and commuter operators.

Competition has long been the engine of maximum efficiency. Each of these alternatives to a government owned and protected Amtrak franchise introduces such market-force horsepower, allowing more efficient management and methods to drive out the less efficient.

The AIRNet-21 concept to make the NEC open-access was first proposed 17 years ago and continues to rely on a massive infusion of capital from the federal government—currently, a daunting $40 billion loan guaranty from Congress.

Former New Jersey Governor Jim Florio, a past chairman of the House Transportation Subcommittee and principal author of the 1980 Staggers Rail Act that partially repealed efficiency-smothering freight railroad economic regulations, says, “The current Amtrak model is unsustainable.” Still active in the public policy arena, Florio counsels that “only when the pain of the status quo exceeds the pain of change” will change take place. Such conditions now exist, suggesting a new Congress (with the House of Representatives in Democrat control), to be sworn in Jan. 1, may be nudged to turn 2019 into the year of passenger rail structural overhaul and reform.

The previous overhaul of passenger rail was the creation of Amtrak in 1970, when computers required paper punch cards; phone calls were carried by copper wire; and to determine driving directions, one opened and spread large printed maps.

What Congress can accomplish over the next two years, through a new infrastructure renewal program and reauthorization of the FAST Act, is to secure for passenger rail a more reliable and consistent source of capital funding; devolve from the conflicted FRA all responsibility for passenger rail planning and funding, and allow for, and encourage, more private-sector competition.

The sword of Damocles hanging over Amtrak may concurrently ensure a positive event for commuter and intercity rail passengers, and the taxpayers subsidizing the service.

Frank N. Wilner

Frank N. Wilner is author of six books, among them Amtrak: Past, Present, Future, published by Simmons-Boardman Books. Wilner earned undergraduate and graduate degrees in economics and labor relations from Virginia Tech. He has been AVP-Policy for the AAR, a White House-appointed chief of staff at the Surface Transportation Board, and director of public relations for the UTU. He is a past president of the Association of Transportation Law Professionals.

 

 

 

Let’s stop whining and start winning

By Robert VanderClute

Policymakers and rail passenger advocates alike whine about Amtrak issues, yet offer no viable solutions.

Amtrak’s latest band-aid approach to fiscal responsibility is to reduce its food service options and intentionally cause long-distance train revenues to decline by increasing ticket prices to a point that ordinary people can neither afford nor are willing to pay.

This strategy risks accelerating Amtrak’s demise. Amtrak’s survival is dependent on its long-distance trains. In Amtrak’s FY 2018 General and Legislative Annual Report, former President and Chief Executive Wick Moorman stated that Amtrak’s long-distance trains were projected to contribute more than $400 million to Amtrak’s bottom line, and that without those revenues, Amtrak would “require more funding from Congress and Amtrak’s partners rather than less.” Furthermore, the great majority of Amtrak’s congressional support comes from members whose districts are served by Amtrak. Without that congressional support, Amtrak would not survive.

Congress can barely fund Amtrak at current levels, let alone at required levels. As a senior Democratic Senate staffer observed, “Amtrak’s funding model is dead.” So, what is Amtrak doing? It’s reducing its long-distance services’ financial contributions and ignoring Wick Moorman’s observation. But even were Amtrak to fully “liberate” itself of its long-distance trains, Amtrak would still bear the high maintenance and capital costs of its owned rail infrastructure. Amtrak intends to mitigate these costs by making commuter carriers and states pay more, but there is only so much blood one can squeeze from a stone.

Meanwhile, Amtrak, a government entity needing tens of billions of dollars just to fund the Gateway trans-Hudson tunnels and associated bridges, is more concerned about maintaining control than encouraging Congress to entertain the use of a public-private partnership (PPP)—a proven funding alternative. It seems that Amtrak prefers to pander for grants and never-to-be-repaid “loans” from the federal government and to try to leverage funding from New York and New Jersey—neither state flush with excess funds.

We are clearly approaching a tipping point. But, even if Amtrak’s status quo is crumbling, what is a viable option?

The answer: a legislative proposal called American Intercity Rail Network for the 21st Century, or AIRNet-21.

AIRNet-21 is an innovative PPP with a unique design. Its elements are bipartisan in nature, and it involves no selling-off of government (Amtrak)-owned assets. It puts infrastructure management in the hands of infrastructure specialists, but makes those specialists subject to government oversight. It returns Amtrak to its pre-1976 role as a passenger-services-only operator. It removes from Amtrak the need to beseech Congress and the states for funding to maintain its owned rail infrastructure, and also removes the Northeast Corridor infrastructure cost allocations from Amtrak’s national network trains.

AIRNet-21 guarantees that, during the 50-year lifespan of the PPP, close to $100 billion of private-sector money will be invested in Amtrak’s owned NEC and Midwest infrastructures to bring them beyond a state-of-good-repair. It immediately furnishes $1 billion to Amtrak, which it could use for new passenger cars and locomotives. It funds the Gateway Hudson River tunnels and bridges, a new Baltimore tunnel and a new Susquehanna River bridge, an upgraded traction power system, and numerous other major state-of-good-repair programs. It restricts when and how much money the private partner may extract from the venture, but allows it to profit if it successfully turns around the infrastructure.

Most interestingly, it appears that AIRNet-21 will score well and may actually make a budgetary contribution in excess of $8 billion, which appropriators can use to pay for other federal priorities.

So, what’s the magic here? There really is no magic. The keys to making Amtrak’s owned infrastructure an opportunity as opposed to a burden are greater utilization; new, more frequent and different types of services; greater market segmentation, and competitive pricing.

Whining about Amtrak’s current dilemma achieves nothing. I played a key role at Amtrak during its formative years, but a new century requires a new approach. The only thing preventing the implementation of AIRNet-21 is Congress enacting the needed legislation. Let’s start winning by working together to implement AIRNet-21, and revitalizing Amtrak to provide modern, energy-efficient and consumer-friendly transportation in the 21st century.

Robert VanderClute

Robert VanderClute, prior to becoming principal of FirstRail International, LLC (a rail consulting firm with expertise in freight, intercity and commuter rail services), was Senior Vice President-Safety and Operations with the Association of American Railroads and Vice President-Operations and Chief Operations Officer of Amtrak, where he was responsible for Amtrak’s day-to-day operations. VanderClute, a graduate of the University of Tennessee (transportation major), completed graduate school programs at the Darden Graduate School of Business (University of Virginia) as well as the Harvard Business School. He is a recipient of Railway Age’s W. Graham Claytor Award for Distinguished Service to Passenger Transportation.

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