Thursday, June 30, 2011

The Privatization of Amtrak (and high-speed rail) Argument: Ron Utt; The Heritage Foundation

We recently took on the topic of privatization vs. government managed projects like Amtrak.  Here are two articles on this subject by Ron Utt, who writes for the conservative Heritage Foundation.  Obviously, he's a privatization advocate.

His arguments are compelling although I still have reservations about this.  I can't help wondering if such privatization (and the accompanying profitability) is not a usurpation of tax dollars by indirection.  The only way, it seems to me, that privatization can work on behalf of the consumer is with competition.  Thereby, management finds it in its own best interests to improve the product as much as possible at the lowest costs; in this case, train rides on Amtrak, and, eventually, high-speed rail.

That means government guaranteed profits for participating operators.  Nonetheless, passenger rail is not, inherently, profitable.  Anywhere.  Transit costs are larger than any possible farebox revenues.  The difference has to come from somewhere; and that somewhere is us. Also, when private bidders compete, one survives to get the contract. Then there's no inducement to either improve, or increase service and reduce costs.

The desired competition then is with other modalities, like flying or buses.  Yet, under the "rules" of privatization, each of those modalities should also be competing for riders from the same airports, on the same bus routes and on the same rails.  But, that's not what's going on here.

I should also mention, as I did in previous blog entries, that the UK experience with the privatization of their extensive rail service was far less than successful and there has still been no resolution to their financial crises, debt restructuring and other problems with privatization.  

It appears to me that either way, nationalized or privatized, the taxpayer is inevitably on the hook.

Using Market Processes to Reform Government Transportation Programs: Report No. 1
Published on June 6, 2011 by Ronald Utt, Ph.D.

There’s a simple solution to this traffic problem. We’ll have business build the roads and government build the cars.
—Will Rogers

The quote above, attributed to one of America’s preeminent comedians and social commentators, came at the dawn of the automobile age in the 1920s or early 1930s, but it remains an accurate assessment of the quandary confronting the nation as it struggles to devise—in an age of fiscal austerity—a transportation policy that will enhance mobility and protect the huge investment that has been made in America’s infrastructure.
Public v. Private Ownership

Today the nation’s transportation system is a mix of public and private responsibilities. In general, the private sector builds, owns, and operates the rolling stock (cars, trucks, and trains) and airplanes, while the public sector builds, owns, and operates the infrastructure—notably, nearly all of the roads as well as nearly all airports and the air traffic control system. The only exceptions to this are the privately owned freight railroads, which own and operate both their rolling stock and infrastructure (and consistently runs at a profit and pays taxes), and the federally controlled Amtrak, which owns its rolling stock and some of its infrastructure (and consistently runs at a loss and absorbs taxes).

What sparked Roger’s quote is that the transportation system has never suffered from a shortage of privately provided rolling stock and airplanes.[1] By contrast, the transportation system—notably in the leading commercial centers—does suffer from a shortage and deterioration of infrastructure that has worsened over the past two decades. Noting that the number of licensed drivers (up 71 percent), registered vehicles (up 99 percent) miles driven (up 148 percent) have all soared since 1970, former chairman of the House Transportation and Infrastructure Committee Don Young (R–AK) lamented during the last reauthorization process that “during the same period new road miles have increased by only 6 percent.”[2]
The Basic Problem with Public Ownership

Among the several reasons the public sector has difficulty in adequately responding to modern transportation needs, there are two chief ones.
1. Politicization of Transportation. Created in 1956 to build the interstate highway system, the federal highway program achieved that goal in the early 1980s and was expected to go out of business and turn responsibility back to the states. But the huge annual inflow of revenues from the federal fuel tax tempted Congress to expand the program’s mission to justify its existence.

Today, only about 65 percent of trust fund spending goes back to serve the motorists and truckers who fund the system, as lobbyists and stakeholders have succeed in expanding trust fund responsibilities to transit, truck parking lots, covered bridges, sidewalks, the National Forest Service, transit on Indian reservations, historic preservation, Appalachian and Mississippi Delta redevelopment, roadside beautification, bicycles, hiking paths, university research, earmarks, and commuter rail—to name just a few—plus a vast federal bureaucracy that costs more than $425 million to operate each year.

Every one of these diversions reflects some passing fashion or lobbyist effort from the distant past that managed to achieve a perpetual claim on the trust fund. With the trust fund going insolvent in 2008 and now subsidized by general revenues at a time of yawning budget deficits, these many whimsical, costly, and unproductive diversions represent a worsening burden on the government and the nation’s economy.
2. Transportation Ranked Low on Budget Priorities. As part of the federal budget, transportation programs must—in practice and in theory—compete with other federal programs for available resources. Until 2008, highway and transit spending escaped this constraint by virtue of a dedicated funding source (federal fuel taxes) and a trust fund that protected these revenues from congressional and presidential predation.

But after several years of spending more than it earned, the trust fund required its first ever infusion of general revenues in 2008, and many more infusions are predicted unless dedicated revenues are increased or spending is cut.

This mode of operation makes little sense from an economic perspective. Transportation services represent a vital commercial activity providing benefits to every American and every American business. Yet the amount of transportation service provided is based on overall budget priorities rather than the needs and desires of transportation users. Such a system is also independent of consumers’ willingness to “buy” more transportation services, since no market exists to accommodate an increase in demand. This results in more congestion and more infrastructure decay.

While it may be possible for a socialist enterprise to mimic the market, the politicization of transportation programs work to undermine that effort. Most Americans want to drive their cars on congestion-free roads, yet most federal, state, and local elected officials and department employees intervene by mandating the provision of non-road transportation products that most transportation consumers do not want.

In a functioning market, a report to the president of a national restaurant chain that sales of apple pies have jumped would induce him to order more apple pie production, yet if today’s transportation officials  ran that chain, they would respond by ordering more salad. In today’s transportation world, that salad is street cars, high-speed rail, Amtrak, and bicycle paths.
What’s Next?

Over the next few months, this new Heritage transportation reform series will present several reports on ways in which market processes can be integrated into the current transportation system in ways that offset diminished budget resources and the poor investment and spending choices of the past. These reports will include analyses of the benefits of competitive contracting and deregulation in transit and passenger rail, public–private partnerships for operations and infrastructure investment, general privatization, and the use of tolls and other user fees to supplement existing financial resources.
Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Chairman Mica’s New Amtrak Proposal Would Use the Private Sector to Reform Passenger Rail
Published on June 13, 2011 by Ronald Utt, Ph.D.

At May congressional hearings, Representative Jon Mica (R–FL), chairman of the House Committee on Transportation and Infrastructure, proposed (1) that 363 of the 456 miles that comprise the Northeast Corridor (NEC) owned by Amtrak be transferred to the U.S. Department of Transportation (DOT) or a newly created government entity and (2) that the U.S. DOT seek competitive bids from private-sector investors/operators to provide the funds and expertise to reconstruct the corridor and provide genuine high-speed rail (HSR) service over the newly renovated line.[1]

One witness at the hearing claimed that as much as $50 billion to $60 billion could be attracted from private investors to accomplish the plan, which Amtrak claims will cost $117 billion.[2] While the obstacles facing the project are substantial, Mica should be applauded for this bold step to end to the death grip that the Federal Railroad Administration, Congress, rail unions, and Amtrak management have on passenger rail in America.
A Major Challenge

Experience indicates that public–private partnerships (P3s) for major transportation projects can be complicated to assemble, finance, and implement, and the prospect for financial success can be elusive. Amtrak’s exotic legal existence—it still has common shareholders, is a government corporation, and is a party to numerous and costly labor contracts—could be a deterrent. On top of these liabilities, passenger rail throughout the world—high-speed or slow-speed—is mostly a money loser.

Thus, overcoming these many obstacles will involve significant challenges. Nonetheless, good-government types, fiscal conservatives, and advocates of cost-effective mobility should support Mica’s effort to shift responsibility to the private sector.
Taking It Step-by-Step

While this is an effort worth making, it will take time, involve complicated legal issues, create intense political battles with entitled unions, and require a costly construction project to rebuild the NEC roadbed to accommodate HSR. As plans for this challenging restructuring get underway, Congress and the President have an opportunity to create and implement a companion program that would boost the quality of service, reduce Amtrak’s operating costs, and allow the U.S. DOT to sharpen its skills in working cooperatively with the private sector.
Implement Mandatory Competitive Contracting

Specifically, Congress should require Amtrak to contract the operation of its existing lines competitively with private-sector providers that have been displacing and/or substituting for Amtrak in operating a number of commuter rail lines throughout the nation, most of which do not use Amtrak to run the service. Examples include:
Virginia. In 2009, the Virginia Railway Express (VRE), a two-line commuter rail system connecting the Virginia suburbs with the District of Columbia, issued a Request for Proposal (RFP) seeking qualified bidders to operate the system. Amtrak had been the contract operator for the previous 17 years, but under a sole-source contract, as no other operators existed when VRE began service. Now that other firms do exist, a competitive procurement was required. VRE subsequently put the operating/maintenance contract out for bid, and the American subsidiary of the French company Keolis won a five-year contract with a bid to provide better service at a cost below that proposed by Amtrak. Keolis took over operations in July 2010.

Massachusetts. The commuter rail operations of the Massachusetts Bay Transportation Authority (MBTA) had been operated under contract with Amtrak since 1987, but in 1999 the MBTA split its commuter operation into three segments and prepared an RFP for the smallest: train cleaning and maintenance. Four companies including Amtrak submitted bids, and a partnership of two U.S. companies won the five-year contract with a bid of $175 million, compared to Amtrak’s $291 million. 

Amtrak and its unions complained, and the Clinton Administration forced MBTA to continue with Amtrak for three more years, at which time the contracts were again put out for bid and Veolia, another French firm, won the contract.[3] Veolia still holds the contract and is in discussions with the MBTA for a third five-year extension.[4]

Maryland. The Maryland Area Rail Commuter (MARC) system operates three commuter rail lines connecting its suburbs with Washington, D.C., and Baltimore. Two of the lines (Camden and Brunswick) have been operated by private providers (most recently CSX) since the Maryland government assumed financial responsibility for the service in 1974. CSX informed MARC that it would not be renewing its contract, which expires in 2012, and MARC put the contract out for bid. Keolis was the only bidder after Amtrak, which operates the third MARC line, withdrew from the competition. MARC is planning to rebid the contract once a series of political issues are resolved.[5]

Make Amtrak Compete for Its Routes

Given that these three and other U.S. commuter rail systems have opted to contract with private operators to achieve better service at lower cost to riders and taxpayers, Congress should impose the same process on Amtrak. At present, Amtrak operates about 23 lines within its own system and about 21 lines that are financially supported by the states.[6] Some of these lines—say between five and 10 per year—should be subject to competition, in which Amtrak would be permitted to participate. In the event a privately financed and operated HSR service can be established on the NEC, DOT will have become skilled at working with competitive contracts.
Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

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