This Is No Way to Run a Railroad

T his month, our nation narrowly averted an economic catastrophe that threatened to derail the domestic-shipping industry during the busiest time of year for retailers and online sellers. With freight-rail companies and the unions representing their employees at an impasse, Congress voted to impose a labor agreement. The vote was pursuant to the 1926 Railway Labor Act (RLA), which was designed to prevent significant disruptions to interstate commerce.

Constitutional concerns aside, the RLA has effectively ensured that rail- and air-transport disruptions remain rare. And protestations that this deal was bad for labor are disingenuous and unfounded.

However, this ordeal has shed light on the dire state of railroading in America. Despite the nation’s extraordinary wealth, our freight-rail network is plagued by delays and high shipping costs, and we do not have a well-functioning intercity network of passenger trains. Flashy new trains with increased fuel efficiency can’t conceal this unfortunate reality. This is partly due to the sheer enormousness of the country, but many man-made factors contribute to the country’s rail problems. But there is a way we can begin getting back on track: adopt a franchise model for freight and passenger rail.

Under the rail-franchising system, the government owns the tracks and private businesses can bid for leases on a particular line. The government awards the leases based on expectations of best value and service. Under multiyear contracts, the business then attempts to turn a profit, subject to the terms of its agreement with the government. If the company is successful, it keeps its earnings. If not, it ceases operations, and the government starts the bidding process over again. The advantage of a franchise model is that all the financial risk is incurred by the companies themselves, not the taxpayer. Shifting to a rail-franchise model would also increase competition in the freight-rail industry, spurring innovation and bringing down shipping prices during a period of high inflation.

Of course, the franchise model is no panacea. Franchising doesn’t work when the only vector of competition is price or where unrealistic promises can be made without any enforcement scheme. This pitfall was exposed with the failure of the U.K. rail-privatization experiment, which heavily relied on a franchise model. Though depressed demand during the pandemic was a major factor in that failure, the system was already suffering.

So how can a hypothetical U.S. franchising scheme avoid a similar fate? For starters, a carrot-and-stick approach. Bidding on contracts would have to include incentives linked to metrics such as ridership and on-time percentage; companies whose trains arrive consistently late and operate over budget would be subject to penalties. Unrealistic bids would need to be discouraged, and the contracts being bid on shouldn’t be exclusive. There should be a multi-company bid process, where if one company is floundering, the other has the opportunity to take over the contract. There should be two separate bidding processes — one for freight companies and one for passenger firms — for many lines, as many routes can accommodate both types of trains. Additionally, international firms should be allowed to bid for contracts, as this would increase competition.

Ideally, America would follow the Japanese rail-privatization model, where the infrastructure and the rolling stock are privatized, rather than the less successful U.K. model. Unfortunately, the U.S. cannot do this because, unlike Japan, where the government owned the tracks and the rolling stock and privatized everything at once, nearly all the tracks in the United States, including most Amtrak routes except the Northeast Corridor (between Washington and Boston), are owned by freight-rail companies. All freight carriers are classified as Class I, II, or III, according to their annual revenue level set by the Surface Transportation Board. Class I railroads control a dominant market share of train-based shipping in the U.S., and following decades of industry consolidation, only seven remain. These seven companies comprise what has essentially become an oligopoly. This uncompetitive arrangement has allowed these firms to charge prices well above the rate of inflation, cut costs at the expense of their clients and the public, and hurt passenger rail by deprioritizing Amtrak’s right of way, causing delays.

One of the ways Japan avoids anti-competitive railroading practices is through price controls. The Staggers Rail Act of 1980, which deregulated the American freight-rail industry and has largely been successful, limits the ability of the federal government to set freight-rail prices. Price controls are also profoundly distortionary and unconstitutional. Japan also doesn’t experience rail monopolies on geographical lines. This is not the case in the U.S., where each Class I railroad has its own fiefdom. Kansas City Southern and Canadian National Railway operate nearly all the north–south lines in the heartland. East of the Mississippi, Norfolk Southern and CSX own most of the trackage, and in the West, Union Pacific and BNSF do all of the transcontinental rail shipping. Remedying the nation’s rail problem thus requires federal control of tracks owned by freight-rail corporations and the adoption of a franchising system.

So what’s in it for the freight-rail companies? Why would a Class I railroad agree to give up its effective monopoly in exchange for the franchise model? Well, for one, they’d be in the best position to bid for contracts in their former regional domains, with all their resources located in the vicinity of the lines they once exclusively owned. Additionally, they would be freed from the constraints of geography and able to bid on operating any route in the country. For example, CSX could place a bid on a line in California. BNSF might have a better chance of securing the contract. But they would be instances where CXS or another firm new to the West Coast freight-rail market would win.

As for the passenger-train industry, a shift to a franchise model for lines on which freight-rail companies own the tracks would end its disadvantage. It could also pave the way for the privatization of intercity passenger rail by allowing private passenger services to bid for franchise contracts rather than indefinitely granting Amtrak a monopoly on this service.

The one Amtrak route that the government makes a profit on, the Northeast Corridor, should be fully privatized. Upgrading the existing infrastructure along the route to accommodate high-speed traffic makes a lot of sense in a region where rail travel between major cities draws many passengers; high-speed trains could run often and help alleviate aviation congestion. This would be much more valuable and targeted than Amtrak’s stated goal of rail lines to many cities that don’t have any use for them. Of course, as a “quasi-governmental entity” that relies on a legislature comprised of lawmakers from all over the country for funding, it would never propose such a regionally focused project. This is why the private sector is best suited to fill this niche. A privatized Northeast Corridor passenger-train service wouldn’t need to answer to a representative from Iowa who’s wondering why his constituents’ taxpayer dollars are being directed toward helping “coastal elitists.”

Outside the Northeast, how could we ensure that building new lines and closing unneeded ones doesn’t become politicized? Well, if the franchise model is adopted, terminating superfluous routes could be mandated if no bids are placed. Deciding when and how to construct new lines is more complex, but a guaranteed exclusive contract period for private entities building new routes is a potential solution. The federal government would take ownership of the rails upon completion of a new line, but the builders would get an exclusive right to operate on the new track and all the profits for a finite yet significant number of years. A clause allowing for an extension of the contract until the builders of the route get at least their investment back, accounting for inflation, should be included. This would incentivize railroad construction, much as patent protection encourages research and development in other spheres: surrendering ownership in exchange for a certain number of years of exclusive profit. The benefit of this approach is that the government doesn’t need to negotiate fair value for the rail line and get into disputes as if it were an eminent-domain issue.

Concerns about government management and maintenance of rail infrastructure are not unreasonable either. One of the reasons why public-works projects in the U.S. cost so much more than in other countries is the Jim Crow–era Davis-Bacon Act, which requires that contractors and subcontractors working on federally funded projects be paid the local prevailing wage. But the Federal Highway Administration has determined that this law does not apply to work performed by rail infrastructure, so fears of inflated on-budget maintenance costs can be dispensed with.

Government ownership of rail infrastructure has been tried before. During World War I, under the Wilson administration, the United States Railroad Administration seized control of the entire U.S. rail network. Lacking any enumerated authority pursuant to Article II of the Constitution or legislative authority granted to him by Congress, the autocratic Wilson did not have the power to seize private property in this manner. Nevertheless, there are instances of more limited federal interventions aimed at improving the nation’s infrastructure on a mass scale.

The creation of Amtrak in 1971 essentially nationalized all intercity passenger rail in the country. And in 1976, Conrail was created to assume operations of six bankrupt railways operating in the Northeast and Mid-Atlantic. And who could forget the nation’s premier public-works project, the National Highway System? Each of these projects facilitated interstate commerce, so there was a compelling case for federal involvement to varying degrees. After all, infrastructure was an area in which even Adam Smith welcomed government investment as well within the ambit of appropriate state intervention.

Getting rail policy right is not easy. It’s why Margaret Thatcher, in her valiant efforts to privatize sclerotic nationalized industries, didn’t dare touch the trains. But there’s a compelling case to be made that moving away from the status quo, where freight trains operate on a wholly privatized basis and passenger rail is subject to inefficacious nationalization, is unsustainable. Adopting a hybrid system where the tracks and the rolling stock are managed separately, except for a privatized Northeast Corridor, would produce better outcomes for shippers, riders, and the nation. This is what the future demands. Congress needs to get on board.