HSR: Public or Private?

We talk a lot about high-speed rail on this site. We’re convinced it would dramatically improve transportation in the United States, providing a useful alternative for travelling distances up to around 600 miles. Not only are high-speed trains far more ecologically sensitive than automobiles or airplanes, but if well designed and implemented, they are faster than both of the other modes in downtown-to-downtown travel. An intensive effort to bring high-speed rail to the United States would therefore act as a stimulus for inner-city development, something for which we should be pushing if we are to act now in the fight against climate change.

So the question of whether or not we should have high-speed rail is answered – in more than a dozen corridors around the U.S., such services would be both useful and well-used. If we know that we want such services, then, how should we implement them? How are high-speed trains managed in other countries, and what would make the most sense in America?

The heart of the debate is whether or not to privatize ownership of the rail infrastructure, and whether to privatize service in a competitive environment. In his recent high-speed rail bill, Congressman John Mica introduced a resolution that called for the Department of Transportation to solicit private parties for the renovation of the Northeast Corridor or the construction of a new parallel line, with the intent of providing a privately-run train that can travel between New York City and Washington in two hours or less. Mr. Mica’s argument – typical among economic conservatives – was that the private industry, working in a competitive environment, would be more effective in developing such a service than would the government such as under Amtrak management.

Thus the announcement last week by DOT Secretary Mary Peters and Mayor Michael Bloomberg in New York’s Penn Station was hardly a surprise; it had been preordained by Mr. Mica’s bill. Private entities have until next September to submit their plans for a $30-40 billion remaking of the corridor.

Whether or not corporations come up with a viable way to fund such a giant project remains unknown, but even if they do, the question of whether to privatize was not answered by Mr. Mica’s bill. Congress will only start considering the question wholeheartedly once the corporations have submitted their proposals and they have been reviewed by Mr. Obama’s Department of Transportation. In the meantime, we at the transport politic don’t mind providing a little background and some advice…

We’ll first discuss the privatization of infrastructure, and then consider private management.

Infrastructure

In the U.S., the vast majority of railway track is privately owned. The national railway system was developed beginning in the 1800s by corporations like the Pennsylvania Railroad, the Santa Fe, and the Southern Pacific, and it has stayed in private hands ever since, though the majority of these rails have either been abandoned or converted to freight-only operation, as we all know. The rare exception is the Northeast Corridor from Washington to Boston, which is mostly owned by Amtrak, though there is a small section owned the Connecticut Department of Transportation.

But true high-speed rail services (150-mph or more) could not run on America’s existing private tracks. So the question of whether or not to have private ownership of the infrastructure is outside of the matter of who currently owns American tracks.

There has recently been a drive to privatize formerly public infrastructure, such as highways, so the concept of running trains on private tracks is not inconceivable. Mayor Richard Daley, for instance, leased out the Chicago Skyway for 99 years. The Bush administration, as we chronicled a few months ago, has repeatedly pushed to sell or lease public assets to private companies.

But having high-speed railways run on privately-owned tracks is a bad idea. The most compelling argument for this is that infrastructure cannot act as a competitive entity in the free market. If you build a high-speed rail line between San Francisco and Los Angeles, and then sell or lease the tracks to a private company, no competing company will build its own tracks over the same route. There is simply not the market or the financial means for that to happen, and it’s the reason why it makes sense to continue the public ownership of, for example, the interstate highway system or the New York City Subway.

Keeping the track in public hands also ensures political accountability. For instance, if a section of track passes through a neighborhood and residents there complain of unreasonable noise, the elected government is more likely to respond with the construction of noise walls than is a private company, because there’s no motive for increased profit in building such a wall. Even if the neighborhood were to boycott the rail system, the collective loss in ticket revenue would be less than the cost of building the wall, so the company would be unlikely to do so, at least unless pushed to do so by the government.

Similarly, if poor management bankrupts the owner of the track, a vital public utility that cannot be shut down, government would be forced to subsidize the track’s operation, even as the private owner escapes accountability. The government does not go bankrupt, and as long as there’s public interest in supporting a railway system, the tracks will continue to be funded, no matter the economic situation. This is necessary insurance for infrastructure.

Indeed, mainland Europe’s highly developed rail system is publicly owned. The European Union’s competition laws are opening services up to private companies (we will discuss this further later in this post), but the infrastructure itself remains under the control and ownership of the national government. In Germany and Italy, the state railway companies (DB and Trenitalia, respectively) act as public owners of the tracks, even as they allow other companies to compete with their train services. In France, a separate governmental department, Réseau Ferré de France (RFF), took ownership of the public rail operator SNCF’s trackage.

The benefit of having governmental control is efficiency; nations decide to invest in new high-speed rail lines and simply hand the money and right-of-way over to the public infrastructure owner. The government is also responsible to the citizens for the maintenance of the lines; when several French TGVs were delayed because of problems with overhead catenary earlier this year, an infuriated public pushed for the government to invest more in the electrical systems, and it did. Would that have happened if there were a private owner? The public’s ability to ensure the continued quality of the tracks is improved with the government in power.

The British experience provides us with a good example not to follow.

Under conservative Prime Minister John Major in the early 1990s, the British began considering the privatization of their country’s railways. Before 1994, the national government operated all intercity rail services and owned all of the tracks. But Mr. Major, whose brand of conservatism closely mirrored that of his predecessor Margaret Thatcher (and that of U.S. President Ronald Reagan), was desperate to get the government out of everything, so privatizing the system under the 1993 Railways Act made sense to him and his government.

In 1994, ownership passed to Railtrack, which was originally supposed to be a semi-public entity whose purpose was to sell off the rights to running train services on the country’s lines. Under profit-motivated leadership, however, Railtrack, too, was privatized and placed on the stock market in 1996. It was expected to make money, like any private company. The assumption made by Mr. Major was that the government simply would not need to subsidize investment in the nation’s rail network, because the market would ensure that the necessary repairs were made.

But Railtrack was a complete disaster. Being profit-motivated meant that it ignored systemic problems in its infrastructure, simply because it was cheaper and easier not to think about the problem. Conditions along the country’s lines deteriorated incredibly quickly, and a series of horrifying accidents quickly made it clear that having a for-profit corporation own the track didn’t make any sense. Plus, the company had little interest in long-term investments that yielded no immediate profit, so Railtrack did almost nothing to implement high-speed rail in the United Kingdom, unlike its continental competitors which were investing at a record pace.

By the early 2000s, the company was on the fits, and the government had to step in. The center-left Labour government, in power since 1997, had less tolerance for the senseless privatization schemes of the previous administration. So in 2002, Railtrack’s assets were put up to auction; only a new organization called Network Rail responded. It succeeded in taking control of the tracks.

The government, which assisted monetarily in Network Rail’s formation, claims that the company, which has no shareholders, is private. But the fact of the matter is that Network Rail is functionally non-profit, works closely with the government and the supervisory authority (the Office of Rail Regulation), and has prevented subsequent major crashes through the carefully monitored renovation of the country’s trackage.

The moral of this story and the cumulative experience in mainland Europe suggests that private ownership of a high-speed rail line’s trackage makes little sense. Government has the capacity, monetary resources, and electoral accountability to ensure that infrastructure remains in good shape. It will not go out of business. Most importantly, perhaps, the work of government will not go towards the well-being of wealthy executives or investors, who are more interested in their own pocketbooks than the mobility of the nation. Let’s keep the tracks public.

Management

But even under the pseudo-public takeover of the British railways by Network Rail, the management of the train services themselves remains in private hands. Network Rail offers a set number of routes that it leases out to private operators for a period of five to seven years. For instance, the route between London and Exeter is run by South West Trains; the route between Carlisle and Newcastle is run by Northern. A few of the major routes, such as between London and Birmingham via Banbury, are run by two or more operators, in this case Wrexham & Shropshire and Chiltern Railways. For the most part, this is not a competitive environment; consumers don’t have much of a choice on specific routes. The only competition that occurs is when Network Rail asks operators to bid for specific lines. Operators offer to pay Network Rail different amounts for the right to offer the service, and Network Rail chooses the best plan.

There is a fundamental difference between privatizing operations and operating them in a competitive environment. Many utilities in the United States, for instance, are private, but once they have won a contract, there is no competition in the services they provide and they are heavily regulated by local, state, and federal rules. It is quite possible to envision high-speed rail service that is private but that – apart from the bidding process – is not competitive.

As of today, there are no true high-speed rail routes that run in a competitive private-market environment. In European countries, China, and Korea, high-speed rail services are run by state corporations. In the few instances where high-speed rail lines cross national borders, those services are provided under bi-national agreements that also restrict the corridor. For instance, the line between London and Brussels is only used by Eurostar. Services between Paris and Stuttgart are run only by France’s SNCF, while those between Paris and Frankfurt are run only by Germany’s DB. There is no competition by design and these carriers essentially remain national entities. In Japan, the rail companies are privatized, but they each provide services to their own, distinct routes.

As of now, then, no specific high-speed route has been opened up to competition, so there is no experience from which to take lessons. There is no city-to-city itinerary that can be effected on more than one high-speed carrier.

That is set to change, however, at least in Europe, where some standard-speed passenger services, such as in Germany, already have private management. High-speed rail, which has been very profitable for government management, will soon become a competitive operation, with international services opened up in 2010; Air France is considering offering trains between its air hub at Paris -Charles De Gaulle airport and destinations in Belguim and the Netherlands, directly competing with the government-sponsored Thalys service currently offered. In 2011, you will be able to choose between at least two carriers – NTV and Trenitalia – when riding between Rome and Milan in Italy.

We’ll have to see whether or not European train privatization actually pans out – there’s considerable left-wing opposition. If implemented, the experience is likely to be less fluid and well-managed than the current government-run systems. Even before international competition opens up, there’s already been significant political and corporate conflict. It’s also unclear how many routes will become competitive, or whether the track owners will simply auction off individual services to the highest bidder, as in England.

If the latter method is chosen to run the routes, there’s little evidence that privately-run rail systems will provide better service. In fact, one could argue that private corporations are set up to offer inferior trains for higher prices, because of the competitive process for acquiring the rights to a route. And if only one company runs a route, shouldn’t the government be the one to do so? A private corporation is likely to see a low-ridership route as a money looser that deserves less service. A government, which has obligations to its citizens, may see the same route as a necessary service that deserves a subsidy. People along such a route would have little recourse for changes in a private service, whereas they could actively vote against political leaders who aren’t working to improve their train systems. Unlike big business, democratic government must be responsive to the concerns of its citizens!

One wonders whether or not privatization makes sense unless there’s a competitive situation. If government is doing the regulation and there’s little true competition, what is the motivation for making the service private? The only strong argument for privatizing train service in a non-competitive environment is the hyper-articulated conservative ideology that government is inherently unfit to run any service, and that it would be incapable of running a high-speed rail system.

But well-managed train services in France, Spain, Italy, and Germany, for instance, are publicly-run. And their high-speed rail systems provide relatively cheap fares, are highly efficient, and make money. Each is a responsible, financially responsible authority. Their government management also presents some significant advantages that are rarely present in private industry: they are held accountable by elected politicians and their management does not profit from extreme compensation.

International routes may provide an interesting experiment in whether private services make sense. It’s possible that there are markets – such as between Germany and England – that are currently not served but which a private operator would be interested in providing. Train routes within countries in Europe, however, are already well-served, and profit-motivated corporations are unlikely to find more ways to economize than today’s government management. So what’s the rush to liberalize the market? If the rail system currently works, and the governments in European countries are keeping them well-managed, why should rich people make money from them?

There is little evidence that government train services don’t work in Europe, or that they are systematically mismanaging their responsibilities. The argument for privatization, based on the poorly reasoned mythology that the market can do things better than can the government, falls flat as long as the public sector continues to act as positive forces for improvement, as have European rail authorities. Keeping the infrastructure, as well as the services, in public hands, makes the most sense.

But we don’t have to look to Europe for evidence of this fact. Nor even do we have to take the example of the recent collapse of the economy for proof that a neo-liberalised, deregulated market doesn’t provide a strong foundation for our society.

Rather, we just have to look at our own railway history. Even as Asians and Europeans were beginning construction on what became the big hit that is high-speed rail, our private railroads were going under. Our faith in the private market wasn’t enough to prevent the Pennsy, the New Haven, or the B&O from falling apart. These companies, operating under the supposedly rational rules of free enterprise, were unable to envision the future profitability of high-speed rail and did not find the funds to invest. As a result, intercity passenger rail in the United States virtually ceased to exist.

In the meantime, we created and underfunded Amtrak. Conservatives continuously pushed for the privatization of Amtrak, assuming that the government, being government, must be managing the entity incorrectly, and were sure that the market would solve its woes. The market never stepped in to solve its woes. The problem was simply that our government was never willing to make a substantial long-term investment.

We can’t continue to place our hopes in private corporations, assuming that they are going to find miracle solutions and huge funds for projects for which our government should pay. It’s time to face the facts and recognize that the European experience in high-speed rail development shows that the effective, long-term manner in which to develop such a system is though public development and ownership of the tracks and public management of the train services.

Until we recognize that fact, we’re not going to go anywhere. The resolutions such as that proposed by Mr. Mica are nice and optimistic, but they’re ultimately unfunded dreams that rely on the naive fallacy that the market will “work” the way we want it to. But only a well-funded government entity will do so reliably.

It’s time to say no to privatization.

14 Comments | Leave a Reply »
  • Eli

    Another reason that the complete privatization of rail building will never work (for example the private project being proposed from New York to Washington as an alternative to the Acela) is that all other forms of transportation are subsidized by the government. The government builds roads and allows its citizens to travel on them free of charge, when it costs the government billions to maintain the same roads. Additionally, most airports are owned by city governments, so the private operators (airlines) did not have to pay for the initial investment of an airfield.

    Congressman Mica’s bill is almost counter-productive. He should instead focus on securing public funds to upgrade the Northeast Corridor and then allow private companies to operate trains on it.
    Although I having private train operators operate on publicly-owned track could indeed work (see Virgin Trains, for example), the idea the some company is going to put up enough money to build a high-speed rail line without ANY government help is absolutely ludicrous. Until ALL forms of transportation are privatized will that be a viable option.

  • John

    Anyone familiar with the present “N.E. Corridor” knows that the money needed to bring it up to standard is enormous (even if “emminent-domain” is invoked to secure new right-of-way). Billions upon billions of dollars would be needed to do the job right. My question is not whether public or private funds should be used, but who benefits from the result. If e-commerce can (and will) eventually supplant personal travel what is left? Pleasure trips? Whatever source of the funds is decided upon, are we willing to invest in such a project when the ultimate beneficiary is Aunt Mary in D.C. going to vist her sister in New York?

  • Passenger rail only works when it is perceived and operated as a public service. HSR achieves fare box returns in excess of 100%, but that just means it can cross-subsidize the feeder services that generate its ridership.

    France built its TGV network after the oil shock of 1973, along with a massive push for nuclear power. The public service delivered is reduced dependence of the transportation sector on imported oil. Electrified passenger and freight rail is intrinsically a national energy security policy.

    The infrastructure needs to be owned by the public. It can be operated and maintained by a long-term franchisee subject to regulatory oversight. Multiple train operators can compete for slots on the timetable, especially on medium- and long-distance routes. Commuter rail works best when fares are based on geographic zones, within which passengers can transfer to light rail, streetcars, subways, buses etc. at no extra charge. In practice, that means the least profitable part of passenger rail service is best delivered by a local public monopoly,

    That may rub some conservatives the wrong way, but the alternative is spending literally hundreds of billions a year on high-tech weapons systems and foreign wars to secure continued access to oil, just so just about everyone spends rush hour breathing in toxic fumes in bumper-to-bumper traffic. The US and her allies prop up Arab potentates that suppress all opposition save the one they cannot: islamic fundamentalism. It’s a straight line.

    Note that many European national railroads are still monopolies, typically overstaffed, heavily unionized and subject to strikes at the busiest times of year. It’s not true that public sector operations are necessarily better than those provided by competing carriers, you have to slice and dice the problem to figure out which ownership and operations model works best in any given context.

    @ John –

    first off, there’s nothing wrong with pleasure travel. There’s a whole internal tourism industry running on it.

    Second, the notion that videoconferencing will render business travel a thing of the past holds no more water than the notion that email magically makes every business “paperless”. In the real world, new technologies tend to supplement existing ones, at least for a long transition period. SNCF recently introduced reliable broadband internet access on its Thalys and TGV Est services so passengers could do something more useful than twiddle their thumbs during their trip.

  • Excellent discussion of a difficult topic.

  • ka

    Regarding the North east corridor, they want a private company to build and operate a high speed line because they think Amtrak can’t do it. Or maybe by ideology they don’t want to develop a public sector in the US (public sector=left=communism=bad=lazy people +strikes). In its current situation Amtrak is unable to handle a project that cost more than $200mios.
    It is really a shame to see that rail operators like DB in Germany or SNCF in France have each more than 200,000 employees when Amtrak doesn’t even have 20,000 employees.

    BTW this article published last year in USA today is interesting

    http://www.usatoday.com/travel/news/2007-07-11-amtrak-high-speed_n.htm

  • keith in dc

    They would like to privatize the DC – NY- Boston corridor because studies show that if the corridor was separate from Amtrak it would be making a profit. Amtrak is bogged down with providing service to places like Peoria IL and Albany NY that need train service but can’t be justified solely on a profit making basis.

  • The corridor is already profitable – Amtrak makes money on Acela and Northeast Regional trains. There is no reason why Amtrak – provided sufficient money to build new high-speed track – couldn’t make a new NEC profitable as well.

  • Larry M

    The essence of the free market is competition. What would HSR ever compete with? There are one set of tracks. Would a competitor build a second, parallel set? Transportation infrastructure is a public good. Private companies do not usually supply public goods. That is the legitimate function of government.

  • Here is the UK we are all debating just the same thing and I have to say I love the Virgin trains I get – clean, fast, and more modern and yes actually cheaper I think. I resent paying expensive prices and standing of cource the tube they have us over a barrel when they turn up for work and not striking!

    Pete

  • Yep UK Trains terrible! I think privatization is the way forward competition can only be good thing!

    Looking forward to cheap seats and a buffet car back!

    Steve

  • Andrew S

    I think the argument for keeping the infrastructure in public hands makes sense, but I think you go a little too far in dismissing competition “for the market” – ie private competition to operate the service in an environment that is not competitive on a day to day basis.

    Services that operate this way do have advantages – private operators genearlly have lower labor expenses and, ideally, are more independent from political pressure to modify service (which you identify as a negative but can certainly also be a positive). London’s excellent bus services, for example, are currently operated by privately contracted companies. Even though several different companies run different bundles of routes, consumers are unaware and the system operates fairly seamlessly. The important thing is to have a well staffed, competent, powerful public regulator who is able to enforce contracts and effectively control the private operators.

  • tettyan

    All the arguments here conveniently ignore the fact that privatization has worked out very well in Japan. Service has vastly increased and improved since the railways were privatized 20 years ago. And HSR there does face very stiff competition from the airline shuttles linking major cities – competition that’s only increased since the airline industry itself was deregulated in the 1990s.

    Privatization can increase investment and improve service on rail and transit lines. I do accept the argument though that it’s not fair to expect the private sector to take the lead in transit projects when the government unfairly subsidizes highways. To make it a level playing field, I believe interstate highways should be privatized too (which would also achieve results similar to congestion pricing).

  • tettyan –

    Japan is indeed an interesting case; however, each of the companies there operate as railway monopolies in their individual zones; there is no competing service on any of the lines.

    It should also be noted that because of the cost of constructing the Shinkansen, Japan National Railways was in a debt of ¥28 trillion when privatization occurred… yet the new private companies were able to buy the tracks for ¥9.2 trillion, leaving taxpayers to make up for the rest.

    Yes, the private companies have done well — but only after a massive, unassumed expenditure by the public sector.

  • Ocean Railroader

    I don’t like the idea of Amtrack being in privet hands they would turn it into something like the Hotlanes on the Beltway with demand pricing meaning they would jack up ticket prices and charge big bucks for suitcases when they find a excuse to do so. At least right now you can go to Amtrack and understand what your ticket price will be in 20 weeks and along with that they seem to keep the most stable ticket prices though the recession and the oil price shocks. Amtrack is simply suffering from secound hand track while the interstates get full unquestioned funding all the way.

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