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Off The Rails
2003 offers one-time opportunity to overhaul Amtrak.


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With the federal budget-deficit flirting with $200 billion this year and next, President Bush will have a real fight on his hands to carve out space for the new domestic and international initiatives he proposed in his State of the Union message. His plan to advance the commercialization of fuel cells, for example, will cost an additional $1.2 billion, and his fight against AIDS in impoverished developing countries will cost $10 billion over five years. Combined with tax cuts and other initiatives, the money has to come from somewhere, and paring back or killing the many wasteful programs that now clutter the federal government is a good place to start.

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The first stop on the money-saving tour through the budget should be the government’s subsidized passenger-rail system, Amtrak. Now losing more than one billion dollars a year — the result of incurring two dollars in costs for every dollar of tickets sold — Amtrak’s worsening prospects stem from poor management and inadequate oversight by an unqualified board of directors appointed by President Clinton in 1997. But the terms of appointment for six of the seven Amtrak board members expire in 2003, giving President Bush a one-year window of opportunity to put competent people in charge of this troubled corporation and end the fiscal hemorrhage.

Mandated by 1997 legislation to achieve financial self-sufficiency in 2003, Amtrak instead ran up escalating losses under the Clinton-appointed management team. But fortunately for the American taxpayer, that same legislation also limits the term of service for members of Amtrak’s current board, and all will see their terms expire in 2003 and early 2004.

On top of this, Bush, along with Congress, could enhance the new board’s reform agenda by refusing to approve any more taxpayer subsidies unless Amtrak is reauthorized by legislation that requires financial self-sufficiency, competitive contracting, labor reform, and privatization, and imposes penalties for failure.

Created in 1971 from a consolidation of money-losing passenger-rail systems, Amtrak has never lived up to its promise of breaking even, and instead has plowed through about $25 billion in federal subsidies since its inception. Its most recent annual reports reveal record losses of over a billion dollars in both 2001 and 2002. In 2002, Amtrak experienced its first decline in passengers since 1996. And earlier this month, Amtrak’s president claimed he will need $10 billion in federal subsidies over the next five years to continue operations. So what will it be? Fight AIDS or allow Amtrak to burn money as well a diesel fuel?

Amtrak’s expiring board missed an opportunity to put the system on a market-based reform path when it had an opportunity in May of last year to appoint a reform-minded CEO when the previous one resigned. Instead, the board hired a replacement who was content with a money-losing rail system operating on the principles of monopoly socialism. Further, Amtrak’s new management made it clear that it had little interest in fundamental, market-based reform, and is reluctant to cut back or eliminate parts of its far-flung and underused route system, despite the fact that every single one loses money, and some lose substantially more than others.

The new management team also expressed no interest in renegotiating Amtrak’s costly labor contracts. Amtrak’s unionized employees earn about 20 percent more than the unionized employees of airlines, and this gap is widening as troubled airlines renegotiate labor contracts to reduce costs and cut losses.

Finally, Amtrak’s new management has expressed opposition to contracting out any of Amtrak’s work or services to private businesses that can perform the work for less money. Although competitive contracting and partnerships with private investors have been widely and successfully used by European and Asian passenger-rail systems, Amtrak’s management appears to be unaware of this trend. In comments to the Financial Times in response to his critics, Amtrak’s new president, David Gunn, said, “If they are serious [about competition] would somebody give me the plan? How are they going to do it?”

Note to Amtrak’s management: Your own company lost a competitive contract to operate part of the Massachusetts MBTA commuter-rail system in 1999 when it bid $116 million more than the winning bid from a private firm. Apparently management has also been kept in the dark about the fact that when that same contract came up for re-bid in 2002, Amtrak elected not to compete for it, and a French company, Connex, won it. Perhaps Connex or the other bidders can tell Amtrak “how to do it.”

As for “the plan”, Amtrak’s president ought to direct his congressional-relations staff to obtain a copy of the Rail Passenger Improvement Act of 2002 (S.1958) introduced last year by Sen. John McCain. The bill lays out a five-year plan to restructure and incrementally privatize Amtrak.

The federal statutes that govern Amtrak’s operations require that board appointees “have technical qualifications, professional standing and demonstrated expertise in the fields of transportation or corporate or financial management,” a skill-set nowhere evident among the appointees still serving. By limiting future appointments to those eligible to serve under the provisions of current law, Amtrak’s management will have the benefit of guidance from people comfortable with modern business techniques, and familiar with the principles of capitalism, including competition, free markets, and entrepreneurship.

That opportunity is approaching quickly as the terms of four board members expire on June 25, 2003. By appointing to these vacant seats individuals committed to market-based reforms, President Bush’s reformers will have a controlling majority on the seven-person board, and with these appointments the president can put Amtrak on a path to financial self-sufficiency. Included in this first group of four expiring terms is the seat held by the U.S. secretary of transportation. Under current law, only one federal employee can sit on Amtrak’s board, and by tradition that seat has been held by the DOT Secretary. Perhaps a better choice for the solitary federal slot would be the Treasury secretary, or the director of the Office of Management and Budget, who could speak more convincingly on behalf of the taxpayers whose sacrifice has kept this behemoth afloat for more than three decades.

Back in June 2002, Amtrak’s president threatened to shut down all train service on the eve of a holiday weekend if he did not get a $200 million bailout from the government. As a negotiating strategy his threat was wildly successful: A timid Congress and DOT agreed to give him $305 million in loans and grants. But with a no-nonsense board in place by this summer, and with Amtrak unlikely to make it through 2003 without another taxpayer bailout, President Bush and congressional reformers should ignore Amtrak’s perennial beggary — unless its management and unions agree to a fundamental overhaul.



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