Foreign Intercity Passenger Rail: Lessons for Amtrak?

Report for Congress
Foreign Intercity Passenger Rail:
Lessons for Amtrak?
June 7, 2002
John Frittelli
Transportation Analyst
Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

Foreign Intercity Passenger Rail
Congress is debating the federal government’s role in providing intercity
passenger rail service. Many believe that Amtrak’s future is now at a crossroads.
Amtrak’s worsening financial situation and its relatively small overall share of the
intercity passenger market have led some policymakers to consider other models of
passenger rail regulation. The experience of other countries is often cited in debates
about passenger rail regulatory regimes.
The foreign experience can provide some perspective and some insight in the
debate on U.S. intercity passenger rail. Many countries have dramatically
reorganized the regulatory framework of their railroads. Market forces and political
pressures were the underlying causes of railway reform. The objectives of rail reform
was to reverse declining market shares due to competition from the automobile and
airplane, to make the railroads more responsive to customers, and to reduce the
railroads’ dependence on government subsidies.
In order to accomplish these objectives, governments have reorganized their
railways along several dimensions. Some national railroads were divided
geographically into separate entities by region. In some cases, national railroads were
also divided by business sector, such as freight separated from passenger services.
Vertical integration, where one entity controlled both train operations and track
infrastructure, versus vertical separation, where train operations and track
infrastructure were controlled by separate entities, was another choice offered by rail
policymakers. Rail policymakers also faced a choice between public versus private
ownership. Levels of privatization can be distinguished among several foreign
railroads. A final important element of railway regulation is the role of competition.
Theoretically, competition in passenger rail service can take the form of multiple
train operating companies competing on the same track. However, in practice,
competition more readily takes the form of franchises bidding for government
contracts to perform rail services and/or competition from other modes, such as
automobile, bus, and airplane. The regulatory framework of passenger rail in seven
countries is profiled: Argentina, Canada, France, Germany, Japan, Mexico, and the
United Kingdom.
The level of government support for passenger rail in Japan and European
countries far exceeds the level of government support in the United States. In many
cases, at the initial stage of restructuring, foreign governments absorbed the large
debt that the previous national railroad had accumulated. Even the most market-
oriented governments have accepted some kind of public support for new (high
speed) track construction. Federal governments also provide direct operating
subsidies to their railroads in most cases. In Japan, a few lines are able to cover their
operating expenses without government operating subsidies. Although restructuring
may provide opportunities for increasing productivity and efficiency, many rail
analysts contend that a more critical issue facing Congress is the high level of
government spending a viable intercity passenger rail system requires.

In troduction ......................................................1
Origins and Objectives of Railway Restructuring.........................3
Options for Railway Restructuring....................................3
Selected Country Experiences........................................6
Government Financial Support for Passenger Railways...................10
Debt Write-Off...............................................10
Government Support for Infrastructure............................11
Government Support for Operations..............................13
Conclusion ......................................................14
List of Tables
Table 1. Classification of Railway Companies based on Levels of Legal
Independence .................................................5

Foreign Intercity Passenger Rail
Congress is currently debating the federal government’s role in providing
intercity passenger rail service. Among the major issues being debated are possible
changes to the regulatory regime, best methods for financing capital and operational
needs, and the appropriate level of public financial support for passenger rail service.
Many believe that Amtrak’s future is now at a crossroads. Since its creation in 1971,
Congress has periodically reappraised Amtrak’s financial condition and its role in
providing intercity passenger service. Some maintain that Amtrak has received
enough funds to keep the system in place but not nearly enough funds to develop an
extensive high speed system like that in Japan or Europe. Amtrak’s worsening
financial situation and its relatively small overall share of the intercity passenger
market have led some policymakers to consider other models of passenger rail
regulation. By this fiscal year, Amtrak is required to achieve operating self-12
sufficiency. It is virtually certain that Amtrak will not achieve this requirement.
Amtrak’s re-authorization is due in 2003.3 Frequently, foreign countries’ experience
with intercity rail is cited in the debate about U.S. passenger rail regulation,
particularly with respect to the ability of foreign passenger railroads to achieve
operating self-sufficiency. In this debate, this topic is relevant because it may
illuminate the necessary prerequisites for creating a stable and viable intercity
passenger rail service in the United States.
This report reviews the causes and goals of railway restructuring in other
countries. It describes the advantages and disadvantages of alternative models of rail
regulatory regimes. The regulatory framework in seven countries is profiled:
Argentina, Canada, France, Germany, Japan, Mexico, and the United Kingdom. The
report examines the economic performance of these railroads, including whether they
are able to achieve operating self-sufficiency. It reviews the level of government
support the railroads receive for infrastructure and for operating expenses. In Japan
and European countries, the level of government support for intercity rail far exceeds
the level of government support in the United States. The concluding section reviews
common themes observed in the foreign experience of railway restructuring.

1The Amtrak Reform and Accountability Act of 1997 (P.L. 105-134) requires that Amtrak
be able to operate without using federal grant funds to cover operating expenses by the end
of FY2002.
2GAO, Amtrak’s Costs and Capital Needs, GAO/RCED-00-138, p.38; U.S. Department of
Transportation, Office of Inspector General, 2000 Assessment of Amtrak’s Financial
Performance and Requirements, September 9, 2000 (Report No. CR-2000-121), p. iv.
3For more information on Amtrak, see CRS Report RL30659, Amtrak: Overview and
Options; GAO, Intercity Passenger Rail, Congress Faces Critical Decisions in Developing
a National Policy, GAO-02-522T, April 11, 2002.

It is important to recognize the differences in the context in which railways have
developed in various countries. Because of cultural, historical, political, economic,
and geographic differences, the countries reviewed in this report are presented as
isolated cases. For instance, the United States lacks a “rail culture” like that found
in Japan or France whose high-speed passenger trains are a source of national pride
and attraction. One reason for this difference may be that “personal incomes in the
United States have been higher than elsewhere, so enhanced access to autos and air
travel attacked the railroads’ passenger traffic far earlier in the United States than
el sewhere.”4
Historically, compared with Japan and Europe, railway development in the
United States has been largely dominated by freight rather than passenger services.
In the United States, rail captures only 0.1% of domestic intercity passenger travel
but 36% of the domestic intercity freight market. In Japan, intercity trains capture
nearly18% of the passenger market but only 3% of the freight market. In France and
Germany, trains carry about 7% of intercity passenger travel and about 20% of
intercity freight.5 Industry analysts note that passenger rail is most competitive with
the automobile, bus, or airplane between distances of 50 to 500 miles. For freight
traffic, rail is most competitive for distances greater than 500 miles. Distances
between cities in the United States are generally larger than in many other countries.
Geographically, countries with relatively small land areas may be better suited for
passenger rail travel.
Industry observers also assert that rail ridership is dependent on the population
density of the country as a whole as well as the density of the cities themselves.
Cities with high urban sprawl (or lower urban density) are generally less rail
supportive. The price of gasoline, and the price and availability of parking are also
factors that influence rail ridership. It is important to consider these factors in
assessing the rail experience of foreign countries and the potential lessons we can
draw from those experiences.
In the past decade, many countries have dramatically reorganized the regulatory
framework of their railroads. Before reorganization, many national railroads could
be described as “states within a state”. They were often characterized as monolithic,
state-owned, and state-run enterprises. In some cases, notably in Japan and Germany,
the national railroad also served to provide employment. Production goals, such as
constructing new lines, maintaining track and equipment, and running the trains,
were the primary focus. Customer service and financial performance were not the
first concerns of the pre-reform railroads.6 Although the traditional focus on
production and technical problem-solving are still important, the intent of railway

4Louis Thompson, “Railroad Mergers: The End of History?” in Frank Wilner, Railroad
Mergers, Omaha, Nebraska: Simmons-Boardman,1997, p. 341.
5As measured by passenger-kilometers for passenger travel and metric ton-kilometers for
freight traffic for year 1996. U.S. Dept. of Transportation, Bureau of Transportation
Statistics, G-7 Countries: Transportation Highlights, BTS99-01, Washington, DC: 1999.
Available at [].
6Louis Thompson, “Railroad Mergers: The End of History?” in Frank Wilner, Railroad
Mergers, Omaha, Nebraska: Simmons-Boardman,1997, p. 342.

reorganization has generally been to reorient the railways to become customer-driven
commercial enterprises.7 How well they have succeeded and the extent to which
their experience is applicable to the U.S. case is the focus of the remainder of this
Origins and Objectives of Railway Restructuring
Market forces and political pressures were the underlying causes of railway
reform. From the 1960s through the 1980s, national passenger rail lost market share
to the automobile and airplane. Passenger rail’s declining market share was due to
rising personal income, road building, and advances in air travel. The general
public’s perception was that they were receiving mediocre service from their
passenger railroads. At the same time, public subsidies were reaching unsustainable
levels in many countries. Mounting debts were creating a macroeconomic financial
crisis in some countries. In Japan, for example, before reforms were initiated in
1987, the national railway’s current deficit reached 4.9% of the total national budget
and 0.9% of GDP. These pressures prompted rail policymakers to adopt new models
for railway regulation.
Railway reform had three goals. One goal was to reverse declining market
share. Governments viewed greater use of passenger rail as a means of reducing road
congestion and environmental pollution. A second goal was to make their railroads
more market responsive, to customers as well as possible investors. By increasing
the railway’s distance from political influence, policymakers believed that managers
would have more discretion to improve efficiency and innovation. A third goal of
reform was to reduce the railroad’s dependence on the public purse or at least make
public funding more transparent. Reforms were intended to reverse the increasing
financial dependence of the railroads on the taxpayer by freeing them to act more like
customer-driven enterprises. In the cases where privatization schemes were initiated,
the government also wished to replace at least a portion of public funding with
private sector involvement. By reducing cross-subsidization within the railroad and
increasing the transparency of public support, public financial assistance could
become more targeted and taxpayers would have a clearer idea of where their funds
were directed.
Options for Railway Restructuring
In order to accomplish the goals of railway reform, governments have divided
their national railroads along several dimensions. One possibility was to divide the
national railroad along a geographic dimension. For example, in Japan, passenger
rail was divided into three regions on the main island of Honshu - JR East, JR
Central, and JR West. Three additional passenger railroads were created on each of
the three smaller islands - JR Hokkaido, JR Shikoku, and JR Kyushu. Service was
divided so that 95% of all passenger trips would begin and end within the service
territory of one company.

7The World Bank Group, “Railways Overview,” Development Topics - Transport -
Railways, 2001. Available at [].

National railroads were also divided along functional or business sector
dimensions. In Germany, freight was separated from passenger service and
passenger rail was split between long distance and regional service. Similarly, in
Argentina, the national railroad was divided into three business sectors, freight,
intercity passenger, and commuter networks.
Another choice rail policymakers faced was whether to keep their railroads
vertically integrated or separate train operations from track infrastructure. Vertical
integration, in which infrastructure, operations, and marketing are all controlled
under one organization, is the traditional model of railway organization. Some
industry analysts believe the interrelationship between track and trains is too complex
to be separated. They argue that a trade-off exists between the design and
maintenance of track and the speed at which trains may operate over the track. This
trade-off affects the cost of the entire operation.8 Another advantage of a vertically
integrated railway is that it allows for integrated planning of operations and gives
incentive for the railroad to adopt a long term perspective in its investment planning.
A disadvantage is that it can be a barrier to the introduction of competition because
of the large infrastructure costs that new entrants must overcome. Also, due to lack
of competition, integrated railways may exhibit a tendency toward becoming
unresponsive monopolies.
To overcome the problems common to a fully integrated railway, some countries
have separated the responsibility of train operations from track. Vertical separation
of rail services puts rail on a more equal footing with its competition, namely
automobiles, buses, and airplanes. Like highways and runways, the government can
provide rail track as a public good. In theory, by placing the high fixed cost of
providing and maintaining track under a separate body, train operating companies can
more fairly compete with their intermodal rivals. Vertical separation, like geographic
and functional division, also enhances the clarity of government expenditures. Costs
are more clearly separated and public subsidies more clearly directed toward specific
purposes. A drawback of vertical separation is that it distances the entity providing
infrastructure from its true customers (the passengers) by inserting a train operating
company as its direct customer. Another disadvantage is that it may hinder long term
investment planning because two independent organizations may have difficulty
coordinating their plans.
Regardless of how governments chose to divide their railways, horizontally or
vertically, they also faced the choice between public or private ownership. In the
situation of complete public ownership and control, the railroad is a government
department. The railroad has no independence from government control and is fully
financed by budgetary transfers.9 Examples of this archetype were the railroads of
the former socialist countries. Before reform, the national railroads of Germany and
Japan were also de facto government departments. A second situation is a railroad
that is structured as a public corporation. In this scenario, managers are given more

8Western Transportation Advisory Council, Railway Structure Models, Discussion Paper,
Dec. 1997, p.5. Available at [].
9Javier Campos and Pedro Cantos, Rail Transport Regulation, World Bank, p. 14. Available
at [].

autonomy to make entrepreneurial decisions but their decisions must still pass
government approval. The government may also introduce a plan whereby subsidy
levels are targeted for reduction. In a joint stock company arrangement, the railroad
is set up under the country’s corporate law. The railroad’s stock may be majority
owned by the government or by the private sector. In this regulatory scheme,
managers are more insulated from politically directed decision making. In a joint
stock company arrangement, privatization occurs as the shares of stock are sold to
the public. An alternative course of privatization is franchising rail services to
private companies. Franchising allows governments to “retain ultimate control over
the infrastructure” (through a regulatory body) “while the private sector carries out
the operating functions and competes for customers.”10 Table 1 illustrates different
levels of privatization.
Table 1. Classification of Railway Companies based on Levels
of Legal Independence
Levels of
Privatization Description E xamples
Level-1 State-owned companies withoutRailways of former socialist
commercial statutescountries
Level-2State-owned companies withSNCF (France)
commercial statutesVIA Rail (Canada)
Level-3Joint-stock companies, majorityDB AG (Germany) JR
state ownedHokkaido, JR Shikoku, JR
Kyushu (Japan)
Level-4Joint-stock companies, majorityJR East, JR Central, JR West
privately owned(Japan)
Level-5Fully privately owned joint-stockTrain Operating Companies
Source: Reproduced with modification from Andrea Obermauer, “National Railway Reform
in Japan and the EU,” Japan Railway & Transport Review, Dec. 2001.
Note: See text for spelling out of acronyms.
The degree of privatization chosen reveals much about the government’s aim
in railway restructuring. The extent of legal independence granted shows how much
policymakers are willing to reduce their influence on the former national railroad.11
In addition, as the degree of privatization increases, a trade-off exists between
financial and efficiency objectives on the one hand and social and equity objectives

10Louis Thompson and Karim-Jacques Budin, “Global Trend to Railway Concessions
Delivering Positive Results,” Private Sector, World Bank, Dec. 1997.
11Andrea Obermauer, “National Railway Reform in Japan and the EU,” Japan Railway &
Transport Review, Dec. 2001, p. 24.

on the other.12 A high level of privatization reveals a premium placed on financial
goals. In order to attract private capital (and provide sufficient returns) a privatized
railroad obviously must be profitable. To be profitable, a private railroad may need
to abandon money losing routes. Usually these routes are in rural areas because low
population density makes it difficult for the railroad to generate enough traffic to
cover its operating costs. To the extent that the railroad can attract private capital, it
reduces the financial burden on the state. A privatized railroad is also going to put
a premium on efficiency. It has to continually pursue a cost savings strategy. On the
other hand, a railroad kept under government control usually suggests a premium
placed on public service goals. There is less risk, for example, that the railroad will
abandon unprofitable rural routes. The government can subsidize those routes it
deems socially beneficial. State ownership also eliminates the risk of service
disruption if a private rail provider goes bankrupt. However, the financial burden on
the state will likely be greater under a state owned company.
Another key element of rail regulatory regimes is the role of competition.
Industry observers assert that privatization alone does not necessarily ensure
improved efficiency. Competition is at least as important. Theoretically, the
separation of operations from infrastructure could lead to competition on the track.
More than one train operator could run trains over the same track. In reality, there
is little experience with this form of competition. Train scheduling and slot
allocation difficulties are hindrances. In a franchising or concessioning arrangement,
competition can be created for the track. Companies can compete for the track based
on the level of service and financial support they require. The company awarded the
franchise is given exclusive operation on the track. A third form of competition is
intermodal, competition between modes. Competition from the automobile, bus, and
airplane also can bring about efficiency gains by the railroad sector.
Selected Country Experiences
The following section explains in more detail the data provided in Table 1.
Individual country experiences are presented below in order of increasing levels of
privatization. The degree of government financial support for these railroads will be
examined in the next section.
Canada. Canada’s experience in intercity passenger rail is interesting because
it is analogous to the U.S. experience. VIA Rail, Canada’s intercity passenger
service, was formed in 1977 to relieve Canada’s two freight railroads of their money-
losing passenger services. VIA Rail became a Crown corporation in 1978 and is
owned by the Ministry of Transport. The Ministry appoints VIA Rail’s board of
directors, its CEO, and approves its annual budget. Initially, VIA Rail used the
freight railroads’ employees, their stations, and their maintenance facilities. In order
to gain better control over its costs, VIA Rail took over these segments from the
freight railroads beginning in 1985. Like Amtrak, VIA Rail pays the freight railroads
for the use of track and right-of-way.

12Javier Campos and Pedro Cantos, Rail Transport Regulation, World Bank, p. 17.

Privatization of passenger rail services is a topic of debate in Canada. In 1999,
a plan for privatization was proposed. The transport minister proposed dividing
VIA’s network into three operating franchises and awarding bids to private interests.
However, this plan was shelved due to parliamentary and local opposition.
France. Compared with its European Union (EU) neighbors, France’s
reorganization of its railroad has been relatively minor. Its restructuring has more to
do with complying with EU directives than an effort to dramatically reform its
In 1991, EU directive 91/44013 outlined initial steps EU member countries
should take in order to facilitate a single European market for rail services. The
commission envisioned a trans-European rail network with interoperability and
technical harmonization of networks across borders. Its initial goal is creating a
seamless network for rail freight services. The first objective is to separate the
management of railway infrastructure from train operations. Accounting separation
is compulsory, while organizational separation is optional. Vertical separation is
intended to lead to open access to the networks by member states for more efficient
international transport of goods. The 1991 directive, as well as subsequent
directives, does not require member states to privatize their railroads.
France complied with this directive in 1997 by creating the RFF (Reseau Ferre
de France, Rail Network of France) to oversee the track, signals, and other
infrastructure. Train operations were kept in the hands of the SNCF (Societe
Nationale des Chemins de Fer Francais, French National Railway Company). Both
of these institutions are state-owned and are not likely to be privatized in the near
future. A distinguishing feature of France’s railway is that it retains a “national”
focus. Geographic or market sector separation, such as separation of freight from
passenger service, was not a part of the railway’s reorganization. France’s approach
to rail restructuring reflects its strong orientation towards a ‘public service’ ethic.
Germany. Germany’s approach to restructuring can more aptly be characterized
as “marketization” rather than “privatization”.14 The intent was to allow management
to run the railroad more like a private business, although government financial
support was to continue. A unique circumstance to the German experience was the
unification of East and West Germany in 1990. With unification, rail policymakers
also had to deal with the large debt and investment backlog of the former East
German railroad (DR). The two rail systems were merged in 1994, forming the
Deutsche Bahn AG (DB AG). DB AG was set up as a holding company (a joint-
stock company) under private company law. Five subsidiary companies were created
along functional lines:
!DB Reise and Touristik is responsible for long-distance intercity trains,
!DB Regio is responsible for commuter trains,

13The Development of the Community’s Railways, available at
[ ex/en/index.html ].
14James A. Dunn, Jr. and Anthony Perl, “Toward a ‘New Model Railway’ for the 21st
Century: Lessons from Five Countries,” Transportation Quarterly, Spring 2001, p. 49.

!DB Cargo is responsible for freight service,
!DB Netz is responsible for construction and maintenance of track,
!DB Station and Service is responsible for passenger stations.
The government owns 100% of the stock of DB AG. After three consecutive
years of showing a profit, each of the companies can be opened up to private
ownership. However, the government will always own 50.1% of DB Netz, the
infrastructure entity. Initially, the government was preparing for an initial public
offering in 2003. The date has since been moved to 2005. The British experience
with Railtrack (discussed later in this section) appears to have had some effect on
Germany’s timetable.
Staff reduction was an integral part of Germany’s rail reform. The employment
load was greatly enlarged by the unification with DR. In 1993, before reforms were
initiated, the combined staff of East and West German railway was 350,000.15 In
2000, DB AG employed 230,000, a reduction of 34%. Rail policymakers created a
“sell-and-lease-back” arrangement for employees.16 Under the reorganization plan,
railroad staff were formally transferred to the Federal Railway Property (BEV), a
public organization, which paid their salaries. DB AG reimburses the BEV only for
the staff it employs.
Japan. A distinguishing feature of Japan’s restructuring experience is that its
railroad remains vertically integrated. In 1987, the government dissolved Japan
National Railways (JNR) into eight privately structured corporations that were to be
regulated by special laws. Freight was separated from passenger service. Passenger
service was split into three railroads on the main island of Honshu: JR East, JR
Central, and JR West. Passenger service on the three smaller islands was split into
JR Hokkaido, JR Shikoku, and JR Kyushu (one for each island). The eighth body
created was the Japan National Railways Settlement Corporation (JNRSC). JNRSC
was created to settle the accumulated debt of JNR through the sale of stock in JR
East, JR Central, and JR West and the sale of surplus land from the former JNR.
In the 1990s, the majority of stock of the three main-island railroads was sold
to private investors. As of 2000, the Japanese government owned 12.5% of JR East,
39.7% of JR Central, and 31.5% of JR West.17 The government still owns 100% of
the shares of the three smaller island railways, JR Hokkaido, JR Shikoku, and JR
Kyushu. Japan’s approach to privatization of its intercity service was influenced by
the example of its commuter rail operators. Since the 1950s, more than one hundred
commuter railroads have operated profitably as private companies.
Japan’s railways employ about 45-50% less workers than it did before reforms
were initiated in 1987. The JNRSC found employment for redundant staff in private

15Peter Hafner, “The Effects of Railroad Reform in Germany,” Japan Railway & Transport
Review, September 1996, p.27.
16Carsten Lehmann, “Germany,” in Changing Train: Railway Reform and the Role of
Competition: The Experience of Six Countries, ed. D.M. van de Velde, 1999, p. 148.
17Ryu Imahashi, “Regulatory Reform and the Railway Industry,” Japan Railway &
Transport Review, July 2000, p.8.

firms, local government, or other central government offices. Other staff were given
incentives to take early retirement or severance if they could not be placed with other
Argentina. In 1989, the federal government embarked on a plan to reduce the
budget deficit by privatizing major state-owned enterprises. Ferrocarriles
Argentinos (FA), the state-owned railway, was the single largest contributor to the
deficit. FA included national freight, intercity passenger, and Buenos Aires
commuter services but freight was the priority in the restructuring process. The first
step was to identify profitable and unprofitable routes and to award concessions to
the private sector through competitive bids for those segments deemed commercially
viable. In the intercity passenger market, only one route was found to be
commercially viable. The Buenos Aires- Mar del Plata line links the capital city with
a popular beach resort. It is the most densely traveled intercity passenger line in the
country. Initially, this line was offered for concession under a 30 year term and four
groups responded to the bid. However, the Province of Buenos Aires offered to take
over this service and the federal government transferred the rolling stock and other
assets necessary to run the service to the province.18
In 1992, the federal government announced that it would no longer subsidize
intercity passenger service. The government believed that the highway network and
the private bus industry provided adequate intercity passenger mobility. The federal
government offered the provinces the option of funding intercity passenger rail
service themselves if they wanted service to continue. Most provinces rejected this
offer and as a result, about 70% of the services were discontinued.
Mexico. Like Argentina, freight rather than passenger service was the focus of
rail reform in Mexico. In the early 1990s, immediately before privatization, the
government-owned Mexican National Railroad (Ferrocarriles Nacionales de Mexico,
FNM) captured only 1.5% of the passenger market and 15% of the freight traffic.
During the initial privatization phase of the freight sector in 1995 and 1996, the
government maintained that its financial support for intercity passenger service
would continue. However, the government has since announced that its program of
building rural roads connecting communities that previously were only connected by
rail would gradually phase out the need for intercity passenger rail. The federal
government has declared that intercity passenger rail is underutilized and too costly
to subsidize. It expects that the only passenger service it will continue to support is
the Chihuahua-Pacific “Copper Canyon” route which is popular with tourists. The
terrain in this region may be too rough for highway construction. In November 1999,
the government liquidated FNM.
Although the concession process in Mexico was primarily concerned with
freight traffic, it is worth describing because it took a unique form. The freight
service of the former FNM was divided into three geographic divisions: Pacific-
North, Northeast, and Southeast. These concessions were offered as vertically

18Jorge C. Kohon, “Argentina Railways Case Study,” Chapter 7 in Best Methods of Railway
Restructuring and Privatization, World Bank, p. 161. Available at
[ h t t p : / / www.wor l dbank.or g/ ht ml / f pd/ t r anspor t / publ i cat / b35.pdf ] .

integrated services. The buyers included Mexican transport companies, Mexican
industrial interests, and two U.S. freight railroads. A fourth concession was set up for
a rail terminal and network that linked to Mexico City. The Mexico City concession
was sold to the other three concessions (25% each). The government retained control
over the remaining 25%. Rather than selling the concessions outright, the
government first converted the concessions into stock companies. The government
then sold the controlling interest in the stock by sealed bid. The remaining stock was
either purchased by the concessionaire or offered on the stock exchange.19
United Kingdom. Britain’s plan of rail reorganization is often described as the
most ambitious and the most elaborate of all the new rail regulatory arrangements.
British Rail was the last in a long string of public utilities to be privatized in England.
In 1994, British Rail was divided into over 70 companies. Railtrack was formed to
own and operate the track, stations, and rail yards. The source of Railtrack’s income
was the track access fees it charged the train operating companies to run over its
track. These infrastructure charges were intended to make Railtrack self-sufficient
and provide a reasonable return to attract private investors. In May 1996, Railtrack’s
stock shares were sold to the public. Twenty-five Train Operating Companies
(TOCs) were established and awarded franchises to run the trains over designated
geographic regions. The TOCs were awarded their franchises for periods of seven
to fifteen years. Franchise awards were based on the level of government subsidy the
TOCs would require and the amount of services they were willing to offer. The
TOCs were not required to own any physical assets, such as track or rolling stock, to
allow for easier entry and exit in the market. Eighteen of the franchises were sold to
private intercity bus firms. Three rolling stock companies (ROSCOs) were created
to own and maintain the existing passenger cars and locomotives. These were leased
to the TOCs. About a dozen private companies compete for the contracts to perform
track renewal and maintenance and rolling stock heavy maintenance. Two regulatory
bodies were created. The Office of Passenger Rail Franchising (OPRAF) awards the
TOC franchises and the Office of Rail Regulator (ORR) oversees Railtrack and
establishes service obligations for the TOCs.
Government Financial Support for Passenger
Debt Write-Off
When examining the financial performance of newly restructured railways, it
is important to recognize that many were given a “fresh start” in terms of their profit
and loss accounts. Central governments often took responsibility for the accumulated
debt of the previous national railroad in order to create a viable capital structure for
the new railway.
In Japan, on the eve of restructuring in 1987, the national railroad had
accumulated a debt of about US $300 billion. Roughly 60% of this debt was

19Louis Thompson and Karim-Jacques Budin, “Global Trend to Railway Concessions
Delivering Positive Results,” Private Sector, World Bank, Dec. 1997.

absorbed by the JNRSC while 40% was allocated among the three main- island
railroads. The JNRSC was expected to liquidate a portion of debt by selling JNR
surplus land and selling the stock of the three main island railroads. The remainder
is to be paid by the taxpayers. Since 1987, the debt has grown. Land sales were
delayed due to fears of accelerating inflation during the 1980s. The land has since
decreased in value. Although it is inevitable that taxpayer money will be needed to
repay a large portion of the debt, no repayment plan has been offered by the
government, leaving the debt issue unresolved.20
Accumulated debt also was transferred during rail reform in Germany and
France. In Germany, an intermediary body similar to the JNRSC was created to
transfer the debts of both the West German (about US $28 billion) and East German
(about US $7 billion) railroads. The Bundeseisenbahnvermogen (Federal Railway
Property, or BEV) absorbed 100% of this debt.
In France, the RFF absorbed about 65% of the accumulated debt. The
remainder of the debt was placed on the books of the SNCF. By the mid 1990s, the
national railroad had accumulated a debt equivalent to about US $39 billion.
Government Support for Infrastructure
Regardless of the regulatory regime created, governments appear to concede the
need for public support of rail infrastructure projects. Even strongly market-oriented
governments have accepted some kind of public support for new construction.21 In
order for rail to maintain significant market share in intercity passenger travel,
policymakers appear to share the view that public investment in expensive high speed
track is required. As expressed by one industry observer,
“... one vital question remains unsolved in every country - none of the current
restructuring schemes seems able to ensure the huge investment that railways22
badly need for survival.”
Construction of Japan’s high-speed network, the Shinkansen, was paid for
entirely by the government until 1987. Beginning in the 1990s, a cost share
arrangement was instituted between the central government, local governments, and
the railway lines for construction of new Shinkansen lines. The specifics of the cost
share formula appears to be a point of negotiation on a case by case basis. Although
the central and local governments bear a considerable amount of the cost of
construction, now that the high-speed network is moving into lower density corridors,
the railroads have shown reluctance to build new lines because of the financial
burden they will incur.

20Fumitoshi Mizutani and Kiyoshi Nakamura, “Japan Railways Since Privatization,” Chapter
12 in Privatization and Deregulation of Transport, ed. by Bill Bradshaw and Helen Lawton
Smith, 2000, p. 229.
21James A. Dunn, Jr. and Anthony Perl, “Toward a ‘New Model Railway’ for the 21st
Century: Lessons from Five Countries,” Transportation Quarterly, Spring 2001, p.55.
22T. Suga, Editorial, Japan Railway & Transport Review, June 1994.

For those countries that have adopted a vertical separation model, the degree of
government support for infrastructure can be compared by examining the price
setting mechanism for track access charges. In some countries, infrastructure charges
are intended to make up the difference between total infrastructure costs and the
government’s contribution.23 However, this objective may conflict with other policy
objectives, such as promoting rail use or setting charges so that they are comparable
with other modes.
In France, the government capped the fee that RFF could charge SNCF for track
access in the first two years after reorganization. The price ceiling was kept well
below the level RFF would need to pay for infrastructure. Since 1998, the cap on
access charges has increased. In 2002, SNCF expects to pay double the amount it
paid to RFF in 1998. The charge level is a point of contention between SNCF and
RFF. SNCF finds them to be too high while RFF finds them to be too low.24 Access
charges still fall short of what RFF needs for track maintenance costs and the
government supplies the difference in subsidies.
The central government is still investing substantial sums for upgrades and
construction of new TGV (Trains a Grande Vitesse, Trains of Great Speed) lines.
France’s transport plan calls for the eventual transfer of all intercity passenger rail
from conventional rail to high-speed rail while conventional rail will be used for
freight and regional passenger service.
Germany’s track access charges are supposed to cover only the costs for track
operation and maintenance. Investments in new track, upgrading, and major
replacement of track are financed by interest free loans or grants from the state
budget and by DB AG’s own capital.
In the United Kingdom, Railtrack is allowed to set relatively high track access
charges which the TOCs pay with the help of public subsidy. Government support
for infrastructure is provided indirectly through direct subsidies to the TOCs as well
as direct grants to Railtrack. In the Ten Year Transport Plan published in July 2000,
the rail regulator expected total railway investment over the following ten years to
be £49 billion. Private capital was expected to supply £34 billion of this amount.
Railtrack was expected to be a major source of private sector involvement.25 In
October 2001, Railtrack was declared bankrupt. It has accumulated a debt of about
US $5 billion.
Rail policymakers in Britain are reconsidering their options for rail
infrastructure investment. Many commentators have observed that Railtrack was
probably not given enough incentive to invest in its infrastructure. They note that

97% of Railtrack’s track access income came from fixed payments by the TOCs.

23Bertil Hylen, An Examination of Rail Infrastructure Charges, National Economic Research
Associates, prepared for the European Commission, 1998.
24“French rail reform looks set to stay,” International Railway Journal, Jan. 1, 2002, p.12.
25Bill Bradshaw, “Lessons from a Railway Privatization Experiment,” Japan Railway &
Transport Review, Dec. 2001, p. 6.

Only 3% of its income varied with the number of trains running on the track.
Railtrack has been criticized for adopting a strategy of making incremental repairs
to track rather than overhauling and upgrading major sections of track. Because a
large portion of its income was fixed, Railtrack had no incentive to try to increase the
number of trains running by investing in wholesale track upgrades.
In Canada, VIA Rail’s passenger routes are run on the freight railroads’ tracks.
The two Canadian freight railroads are allowed to charge VIA Rail access charges
that cover their full costs. The Canadian freight railroads receive virtually no direct
government financial support for infrastructure investment.
Government Support for Operations
While governments may accept the need for public support for construction of
(high-speed) rail track, one of the stated goals of railway reform has been to reduce
operating subsidies if not eliminate them entirely.
In Japan, the three main island railroads are able to cover operating costs from
operating revenues and do not receive operating subsidies from the government.
The Shinkansen lines are generally the most financially viable in terms of covering
their operating costs but the three main island railroads also operate unprofitable
conventional lines. Significant commercial revenue is also derived from non-rail
businesses the railroads operate along side their track, such as offices, department
stores, housing, and recreational facilities.
The three smaller island railroads have not been able to cover their operating
costs. Due to their relatively small populations, it was not expected that they would
be able to do so. They receive direct subsidies in the form of “Management Stability
Funds.” These funds are intended to cover their annual operating losses.
In France, the SNCF usually roughly breaks even. The intention of transferring
most of the accumulated debt to RFF was to enable the SNCF to achieve profitability.
The SNCF achieved operating profits for the first time in 2000. However, this result
was primarily due to a rise in ticket receipts from a stronger overall economy. SNCF
has not shown an ability to significantly reduce costs which makes its profitability
dependent on increasing traffic. SNCF receives an “off-budget” subsidy by the fact
that the RFF’s track access fees are capped at below cost recovery levels.
In Germany, the five subsidiaries have to achieve operating profits for three
consecutive years before the government will sell their stock to the private sector.
Initially DB AG was set to go public in 2003 when operating subsidies were
scheduled to end. The timetable has been pushed back to 2005. In the first few years
after reform, DB AG reported annual “profits” but this surplus was aided by cash
streams from the federal and state governments. Cost accounting methods also
played a role,
“the argument that instant success of railway reform was politically mandatory
also applies here: with the debt taken away and depreciation cost for capital

assets drastically reduced, DB was able to celebrate black numbers [profits]26
within the first year after restructuring.”
To support regional rail services in Germany, a portion of the federal gasoline
tax receipts are transferred to the sixteen Landers (equivalent to U.S. states) to assist
them in funding contracts with DB-Regio.
In the United Kingdom, the TOCs are awarded franchises based in part on the
level of subsidy they will require. The immediate effect of the reform package was
actually a large increase in subsidy levels because the TOCs were required to pay
commercial rates for the use of track and rolling stock. Subsidy levels almost
doubled, from £1.07 billion in 1993/1994 (pre-reform) to £2.19 billion in 1996/1997
(post-reform). Based on bid proposals, operating subsidies totaled £1.8 billion in27
1998 and are scheduled to decline on a sliding- scale to £1.1 billion by 2003. Some
observers are skeptical that the TOCs will achieve their promised subsidy reductions.
They note that their costs are largely fixed because their user charges with Railtrack
and the ROSCOs are fixed. TOC profitability will depend on their ability to increase
ridership and reduce costs. On low density rural routes, it is expected that the TOCs
will always require subsidy payments.
In Canada, VIA Rail still relies on government subsidy but it has shown
improvement in its cost recovery ratio through the 1990s. VIA Rail’s operating
revenues cover about half of its total costs. Operating subsidies have decreased from
CAN $561 million in 1989 to CAN $169 million in 1999.
Railway restructuring is still a work in progress in many countries and industry
experts are tentative in reaching definitive conclusions about the success of reforms
thus far. However, some common themes can be observed. One observation
common in most country experiences is that railway reorganization has required a
substantial political and financial commitment that has to be sustained over an
extended period. Rail reform has usually been carried out in transitional phases over
several years. In Japan, the reform plan was carried out over a decade and proceeded
through two successive administrations. In Germany, rail restructuring required
strong political support to amend the German constitution. However, as rail analysts
point out, the United States is also familiar with the time required for reorganizing
a railroad. In 1976, Congress created the Consolidated Rail Corporation (Conrail)
from six bankrupt northeast freight railroads. Over a decade later, in 1987, Conrail
was returned to the private sector when the federal government sold its ownership
interest in an initial public offering. Those advocating a major overhaul of U.S.
passenger rail regulation point to elements of Conrail’s reorganization they believe
could be applied to Amtrak.

26Carsten Lehmann, “Germany,” Chapter 4 in Changing Trains: Railway Reform and the
Role of Competition: The Experience of Six Countries, ed. by D.M. van de Velde, 1999,
27James A. Dunn, Jr. and Anthony Perl, “Toward a ‘New Model Railway’ for the 21st
Century,” Transportation Quarterly, Spring 2001, p. 47.

Rail reorganization also took mixed forms of structure and ownership depending
on the country involved. Each country created its own unique form of rail regulation,
reflecting political and cultural values. Additionally, in many cases, the initial reform
plan had to be altered because of unforeseeable developments. Experts note that
reform models that are flexible and straight forward are more likely to succeed than
overly complex and rigid frameworks.
One circumstance unique to the case of passenger rail in the United States
compared with Japan and Europe is the fact that 97% of Amtrak’s route mileage runs
on track owned and maintained by the freight railroads. The only track Amtrak owns
is the Northeast Corridor, about 730 miles of track between Washington, D.C. and
Boston. In Japan and Europe, in the case of routes with conventional track, freight
railroads run on track owned by the passenger railways. High-speed passenger
service runs on dedicated track. U.S. freight railroads, as represented by the
Association of American Railroads, believe that high speed rail can only be properly
run on separate, dedicated track with no grade crossings. The freight railroads
oppose having more than one entity providing passenger service and they oppose
having Amtrak’s right of access, access rates, and operating priority transferred or
franchised to multiple entities.28 Because U.S. freight railroads are perhaps the most
commercially viable and self-sufficient railways in the world, many experts
recommend that any proposals regarding Amtrak should not threaten the economic
health of the freight carriers.
Another theme applicable to most rail reorganizations is that the reform plan
involved increasing the degree of independence of the rail entity from political
influence. Rail policymakers appeared to equate improving the economic
performance of the railroad with the need to insulate rail managers from politically
directed decision-making. Political intervention in rail management decisions has
also been an issue raised in the debate over Amtrak. Among the items the Amtrak
Reform Council has listed as a root cause of Amtrak’s poor performance is political
pressure, 29
Direct susceptibility to political pressures on major and minor
management decisions, which provides strong incentives to make
decisions that are politically expedient in the short run, but financially
crippling in the long run.
The Amtrak Reform and Accountability Act of 1997 contained provisions
designed to enable Amtrak to increase operating efficiency, such as repealing the
mandate that Congress approve changes in the criteria that Amtrak uses to evaluate
routes and services, repealing the requirement that Amtrak provide rail passenger
service requested by states and authorities, and repeal of a ban on contracting out for

28 U.S. Congress. Senate. Committee on Commerce, Science, and Transportation, S. 1991,
The National Defense Rail Act, 107th Cong., 2nd sess., Mar. 14, 2002. Hearing testimony of
Edward Hamberger, Association of American Railroads.
29Amtrak Reform Council, “An Action Plan for the Restructuring and Rationalization of the
National Intercity Rail Passenger System,” Feb. 7, 2002, p. 5. Available at
[ h t t p : / / www.amt r akr e f o r mcounci l . go v/ ] .

services other than food and beverage. Amtrak’s critics contend that Amtrak has not
taken full advantage of these operating reforms because of political realities.
Amtrak’s final budget is approved by Congress. Amtrak supporters point to
Amtrak’s internal reorganization that began in 1995. As part of a restructuring plan,
Amtrak has reduced staff, eliminated or reduced the frequency of service on certain
routes, and decentralized into three geographically-based Strategic Business Units
(SBUs). The SBUs are designed to increase revenues from either corridor, long-haul,
or regional train services. Amtrak has also contracted out the maintenance of Acela
high-speed trains in the Northeast corridor.
As stated earlier, a shared goal of most restructuring plans is to increase the
transparency of government financial support for railways. By eliminating cross-
subsidization, the intent of policymakers is to make railroads more accountable.
Amtrak has been criticized by government officials for lack of clarity in its
accounting statements. The DOT Inspector General has called on Amtrak to provide
more specific and detailed information on a project by project basis in its yearly
budget requests. In a recent congressional hearing, the IG testified,30
The lack of clarity and specificity in its budget request may be symptomatic
of Amtrak’s unwillingness or inability to provide detailed information for
effective decision making. Despite recommendations by the Amtrak
Reform Council to break out financial results from train operations and
owned infrastructure, and our repeated requests for detailed financial
information on its mail and express business, Amtrak resisted implementing
a financial reporting system that provided the information. The absence of
this important data makes it difficult to arrive at good business decisions
and to pinpoint responsibility and accountability for achieving measured
Another lesson apparent in the foreign experience that is applicable to the debate
about Amtrak is that regardless of the regulatory regime adopted, intercity passenger
rail requires a substantial level of public capital funding. Even if exceptional routes
in high density corridors are successful in becoming operationally self-sufficient, they
still require an external source for the enormous investment required for track
infrastructure. The National Association of Rail Passengers estimates that the United
States spends $3.28 per capita (in 1999 U.S. dollars) on mainline rail spending,
compared with $67.66 in France, $36.98 in Britain, and $18.60 in Germany.31
Amtrak estimates that it would need $1 billion to $1.5 billion in capital each year for
the next 20 years just to maintain the current system and an additional $0.5 billion32
each year to begin development of new high-speed corridors. Although

30U.S. Congress. Senate. Committee on Commerce, Science, and Transportation, S. 1991,
The National Defense Rail Act, 107th Cong., 2nd sess., Mar. 14, 2002. Hearing testimony of
Kenneth Mead, Inspector General, U.S. Dept. of Transportation.
31National Association of Rail Passengers, “World Mainline Rail Spending Per Capita,”
available at [].
32U.S. Congress. Senate. Committee on Commerce, Science, and Transportation, S. 1991,

restructuring may provide opportunities for increasing productivity and efficiency,
many rail analysts contend that a more critical issue facing Congress is the high level
of government spending a viable intercity passenger rail system requires.

The National Defense Rail Act, 107th Cong., 2nd sess., Mar. 14, 2002. Hearing testimony of
Kenneth Mead, Inspector General, U.S. Dept. of Transportation.