    Intercity Passenger Rail: Issues Associated with the Recent
    Settlement between Amtrak and the Consortium of Bombardier and
    Alstom (01-DEC-04, GAO-05-152).

    As part of the Acela high-speed rail program, the National
    Railroad Passenger Corporation (Amtrak) executed contracts in
    1996 with train manufacturers Bombardier and Alstom to build 20
    high-speed trains--called trainsets--and 15 electric
    high-horsepower locomotives; construct three maintenance
    facilities; and provide maintenance services for the Acela
    trainsets. The trainsets, locomotives, and facilities contracts
    totaled $730 million. Bombardier and Alstom, referred to as the
    Consortium, created the Northeast Corridor Management Service
    Corporation (NecMSC) to manage the facilities and maintain the
    trainsets, including supervising Amtrak maintenance employees.
    Amtrak pays NecMSC for its management and maintenance services.
    Concerns about the quality of the Consortium's work and Amtrak's
    withholding of $70 million in payments resulted in the parties
    suing each other, each seeking damages of $200 million. After
    entering into negotiations at the end of 2002, officials from the
    Consortium and Amtrak signed a settlement agreement in March
    2004. In general, under the settlement, the Consortium must
    complete modifications to the trainsets and locomotives, achieve
    established performance requirements, provide training to Amtrak
    staff, and provide and extend warranties. In addition, Amtrak
    agreed to release up to $42.5 million of the $70 million
    previously withheld to the Consortium and will assume facility
    management and trainset maintenance responsibilities as soon as
    2006, rather than in 2013 as originally planned, if the
    Consortium satisfactorily completes its commitments under the
    settlement agreement. Amtrak has received substantial federal
    funding in the last several years, and there is considerable
    congressional interest in Amtrak's financial
    performance--particularly in the Acela route in the Northeast
    Corridor, since it generates more revenue for Amtrak than all of
    its other routes combined. Beginning in fiscal year 2003, the
    Congress authorized the Secretary of Transportation, through the
    Federal Railroad Administration (FRA), to provide oversight of
    Amtrak's use of federal funds and required that Amtrak submit a
    business plan to the Secretary and the Congress prior to
    receiving funds. Because of the importance of the settlement
    agreement to the Acela program and the continued interest of the
    Congress in Amtrak's financial performance, the Chairman, Senate
    Committee on Commerce, Science, and Technology, asked us to
    review the settlement, specifically to (1) delineate the costs
    Amtrak incurred to prepare for and settle its lawsuit with the
    Consortium and the estimated costs Amtrak avoided by settling
    rather than pursuing further litigation, (2) determine the
    responsibilities of Amtrak and the Consortium under the
    settlement and the associated benefits and future costs, and (3)
    identify key challenges related to the settlement and the actions
    Amtrak and the Consortium are taking to address these challenges.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-152
        ACCNO:   A13917
      TITLE:     Intercity Passenger Rail: Issues Associated with the
    Recent Settlement between Amtrak and the Consortium of Bombardier
    and Alstom
         DATE:   12/01/2004
      SUBJECT:   Accountability
    	     Dispute settlement
    	     Maintenance services contracts
    	     Railroad industry
    	     Manufacturing contracts
    	     Legal fees
    	     Litigation
    	     Claims settlement

    ******************************************************************
    ** This file contains an ASCII representation of the text of a  **
    ** GAO Product.                                                 **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
    **                                                              **
    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************
    GAO-05-152

         * Report to the Chairman, Committee on Commerce, Science, and
           Transportation, U.S. Senate
              * December 2004
         * INTERCITY PASSENGER RAIL
              * Issues Associated with the Recent Settlement between Amtrak and
                the Consortium of Bombardier and Alstom
         * Contents
              * Results in Brief
              * Conclusions
              * Recommendations for Executive Action
              * Agency Comments and Our Evaluation
         * Comments from the National Railroad Passenger Corporation
         * Review of the Settlement between Amtrak and the Consortium of
           Bombardier and Alstom

    Report to the Chairman, Committee on Commerce, Science, and
    Transportation, U.S. Senate

    December 2004

    INTERCITY PASSENGER RAIL

    Issues Associated with the Recent Settlement between Amtrak and the
    Consortium of Bombardier and Alstom

    Contents

    Abbreviations

    December 1, 2004Letter

    The Honorable John McCain Chairman, Committee on Commerce,    Science, and
    Transportation United States Senate

    Dear Mr. Chairman:

    As part of the Acela high-speed rail program, the National Railroad
    Passenger Corporation (Amtrak) executed contracts in 1996 with train
    manufacturers Bombardier and Alstom to build 20 high-speed trains-called
    trainsets-and 15 electric high-horsepower locomotives; construct three
    maintenance facilities; and provide maintenance services for the Acela
    trainsets. The trainsets, locomotives, and facilities contracts totaled
    $730 million.1 Bombardier and Alstom, referred to as the Consortium,
    created the Northeast Corridor Management Service Corporation (NecMSC) to
    manage the facilities and maintain the trainsets, including supervising
    Amtrak maintenance employees. Amtrak pays NecMSC for its management and
    maintenance services.

    Concerns about the quality of the Consortium's work and Amtrak's
    withholding of $70 million in payments resulted in the parties suing each
    other, each seeking damages of $200 million. After entering into
    negotiations at the end of 2002, officials from the Consortium and Amtrak
    signed a settlement agreement in March 2004. In general, under the
    settlement, the Consortium must complete modifications to the trainsets
    and locomotives, achieve established performance requirements, provide
    training to Amtrak staff, and provide and extend warranties. In addition,
    Amtrak agreed to release up to $42.5 million of the $70 million previously
    withheld to the Consortium and will assume facility management and
    trainset maintenance responsibilities as soon as 2006, rather than in 2013
    as originally planned, if the Consortium satisfactorily completes its
    commitments under the settlement agreement.2

    Amtrak has received substantial federal funding in the last several years,
    and there is considerable congressional interest in Amtrak's financial
    performance-particularly in the Acela route in the Northeast Corridor,
    since it generates more revenue for Amtrak than all of its other routes
    combined. Beginning in fiscal year 2003, the Congress authorized the
    Secretary of Transportation, through the Federal Railroad Administration
    (FRA), to provide oversight of Amtrak's use of federal funds and required
    that Amtrak submit a business plan to the Secretary and the Congress prior
    to receiving funds.3 Because of the importance of the settlement agreement
    to the Acela program and the continued interest of the Congress in
    Amtrak's financial performance, you asked us to review the settlement,
    specifically to (1) delineate the costs Amtrak incurred to prepare for and
    settle its lawsuit with the Consortium and the estimated costs Amtrak
    avoided by settling rather than pursuing further litigation, (2) determine
    the responsibilities of Amtrak and the Consortium under the settlement and
    the associated benefits and future costs, and (3) identify key challenges
    related to the settlement and the actions Amtrak and the Consortium are
    taking to address these challenges.

    To assess Amtrak's settlement costs, we reviewed and analyzed Amtrak
    financial documents, verified the consistency and completeness of these
    data, interviewed Amtrak officials, and determined that the information
    was sufficiently reliable for our purposes. To assess Amtrak and
    Consortium settlement responsibilities, benefits, and future costs, we
    reviewed and analyzed the original contracts, lawsuits, settlement
    agreement, and other information, and we interviewed Amtrak, Consortium,
    and NecMSC officials. To assess the challenges related to Amtrak assuming
    responsibility for high-speed trainset management and maintenance, we
    reviewed and analyzed management responsibilities, maintenance
    responsibilities, and settlement obligations as delineated in the
    settlement and other agency documents. We supplemented this information by
    interviewing Amtrak, Consortium, NecMSC, and FRA officials.

    On September 17, 2004, we briefed your staff on the results of our work to
    date. Appendix II contains a modified version of the materials we
    presented at that time.

    We conducted our work from June 2004 through November 2004 in accordance
    with generally accepted government auditing standards.

    Results in Brief

    Amtrak incurred additional costs to prepare for and settle with the
    Consortium, but it also avoided potentially costly litigation expenses. As
    a result of the settlement, Amtrak released a portion of the $70 million
    it had previously withheld to the Consortium. To prepare for the
    settlement, Amtrak estimates it spent more than $1 million on external
    legal counsel, consulting, and mediation services.4 Amtrak does not track
    its internal legal costs, though one official estimates that seven
    employees were primarily involved in negotiating the settlement. Although
    Amtrak incurred costs related to the settlement, according to Amtrak
    officials, it avoided at least $20 million in future litigation costs by
    settling rather than pursuing its suit in court.

    As a result of the settlement, both Amtrak and the Consortium have new
    responsibilities with regard to the trainsets, and each has derived
    benefits and potential costs. Both Amtrak and the Consortium must fulfill
    certain responsibilities in order to correct trainset problems and to
    transfer facility management and trainset maintenance operations from the
    Consortium to Amtrak by the conditional transition date of October 1,
    2006. Before the transition date, Amtrak is required to create a
    transition plan as part of the settlement agreement, hire staff for
    facilities management and trainset maintenance, and determine a parts
    procurement plan for the trainsets. For its part, the Consortium is
    required to complete modifications to the trainsets and locomotives; train
    Amtrak staff; meet performance requirements for speed, comfort, and
    reliability; transfer technical information and third-party contract
    rights to Amtrak; and provide trainset parts information, permits, and
    licenses. After the transition date, Amtrak will conditionally assume
    facility management and trainset maintenance responsibilities, but the
    Consortium will be required to provide technical support and information
    technology updates, and honor warranty obligations. An important benefit
    of the settlement is the improved working relationship between Amtrak and
    the Consortium. According to Amtrak and Bombardier officials, all parties
    are now cooperating to address trainset problems and to complete
    management and maintenance responsibilities necessary for the transition
    to occur. Amtrak may incur additional future costs related to the
    settlement. For example, it is obligated to release remaining funds
    withheld to the Consortium (up to the $42.5 million) if the Consortium
    meets certain requirements such as completing the specified trainset
    modifications by the October 1, 2006, transition date. Amtrak's internal
    costs will increase when it assumes trainset maintenance responsibilities;
    however, since it will no longer have to pay a contractor to manage its
    trainset maintenance function, it is unclear whether Amtrak will realize a
    net savings or incur a cost increase from this transition.

    A successful transition depends on whether Amtrak and the Consortium can
    address the numerous challenges to meet their settlement responsibilities.
    For example, the Consortium must complete an extensive list of
    modifications, some of which are complex, and also meet performance
    requirements for reliability, speed, and comfort before Amtrak will assume
    maintenance responsibilities. Certain modifications may not be completed
    by October 1, 2006, and Amtrak has concerns that other modifications may
    affect service reliability. In addition, Amtrak must secure a workforce
    with the technical expertise needed to maintain the trainsets; develop a
    cost-effective supply chain for trainset parts; provide sustained,
    adequate funding for trainset maintenance; and effectively integrate the
    maintenance of high-speed trainsets into its current organization.
    Although Amtrak and the Consortium are taking actions to address these
    challenges, Amtrak does not have a comprehensive implementation plan that
    provides a "blueprint" of important steps, milestones, contingency plans,
    funding strategies, and other measures necessary to successfully complete
    the transition.

    Conclusions

    Achieving a successful transition is critical to Amtrak's financial
    well-being, given that the Acela program is such a significant source of
    its revenue. Because of the importance of the Acela program to Amtrak, it
    is critical that Amtrak effectively address each of the key challenges it
    faces. To date, however, Amtrak has not prepared a comprehensive
    implementation plan that addresses each of the key challenges related to
    the settlement in a structured and well-planned way. Such a plan would
    also serve as a basis for monitoring the progress of actions under way and
    holding the parties accountable for achieving desired results. The absence
    of such a plan could jeopardize the successful implementation of the
    settlement, which in turn could negatively affect Amtrak's financial
    performance. We believe FRA, as part of its existing oversight
    responsibilities of Amtrak, should see that a comprehensive plan is
    completed and closely monitor the settlement's implementation to ensure
    that results are being achieved as planned.

    Recommendations for Executive Action

    To help ensure a successful implementation of the settlement agreement, we
    are making the following two recommendations. First, we recommend that the
    President of Amtrak, working with Amtrak's Board of Directors, develop a
    comprehensive implementation plan. This implementation plan should address
    the key challenges and include important milestones for achieving each of
    the critical tasks associated with the key elements of the settlement, a
    risk analysis showing the potential impacts if tasks and milestones are
    not achieved, methods to accurately evaluate and measure progress,
    contingency plans should tasks and milestones not be met, and funding
    strategies to support new maintenance responsibilities. The plan should be
    included in any business plan later submitted to the Secretary of
    Transportation.

    Second, the Secretary of Transportation should direct the Acting
    Administrator of FRA to review and monitor Amtrak's implementation of its
    comprehensive plan for implementing the settlement agreement as part of
    FRA's overall responsibilities to oversee Amtrak's activities.

    Agency Comments and Our Evaluation

    We provided a draft of this report to the Department of Transportation
    (DOT), Amtrak, Bombardier, and Alstom for their review and comment. DOT
    generally concurred with the report and its recommendation to DOT. Alstom
    made no comments on the report.

    Both Bombardier and Amtrak noted in their comments that the Acela
    trainsets are not yet required to meet the 17,500 miles between service
    failures performance requirement-a point we acknowledge. Yet, there
    appears to be a difference between the two as far as the criteria for
    meeting this requirement. Bombardier stated that its reliability growth
    plan requires that the trainsets achieve an average of 17,500 miles
    between service failures in May 2005. According to Bombardier, the
    trainsets are presently achieving a higher level of reliability than they
    predicted. Bombardier also stated that the Consortium must prove to Amtrak
    that the trainsets are capable of meeting the minimum performance
    requirement for a reasonable period of time during a 24-month
    demonstration period. On the other hand, Amtrak stated that the
    reliability standard is calculated on a 6-month rolling average and must
    be sustained over a 24-month period. Amtrak believes that it and the
    Consortium do not differ in their understanding of the performance
    requirement. However, we have had several meetings with both parties on
    this issue, and it appears there is a considerable difference in
    interpretation. We believe that reconciling this difference is important
    to the success of the transition and that it should be specifically
    clarified in writing to ensure both parties have the same understanding.

    Amtrak provided its comments in a letter from its President and Chief
    Executive Officer (see app. I). In general, Amtrak took strong issue with
    our report's conclusion that Amtrak does not have a comprehensive plan
    that provides a blueprint for important steps, milestones, contingency
    plans, and other measures to successfully complete the transition. Amtrak
    believes that after execution of the settlement agreement in March 2004,
    Amtrak developed and implemented a comprehensive process to monitor and
    enforce the Consortium's compliance with the terms of the settlement, and
    to ensure the successful transition of high-speed trainset maintenance to
    Amtrak. Amtrak feels there are plans and procedures in place to address
    issues associated with items such as budget and funding requirements,
    securing and training a competent workforce, and procuring parts and
    supplies.

    We agree that Amtrak has developed a substantial amount of information
    about the transition and recognize that meetings are being held both
    internally within Amtrak and externally with Consortium representatives.
    We also acknowledge that Amtrak has compiled a critical path schedule for
    monitoring the status and completion of open technical issues. However,
    while these are important elements of transition planning, they do not
    represent a comprehensive plan for managing and implementing the
    settlement. Such a plan should include such things as milestones for
    achieving critical tasks, a risk analysis showing the potential impacts if
    tasks and milestones are not achieved, accountability measures and
    contingency plans should tasks and milestones not be met, and funding
    strategies to support new maintenance responsibilities. Officials from
    Amtrak's Inspector General's office told us that they also would like to
    see a more detailed and comprehensive transition plan as a way to better
    coordinate all efforts necessary to monitor progress and implement a
    successful transition. As we reported earlier this year, comprehensive
    plans are important in order to effectively manage large projects, such as

    implementing this settlement.5 A comprehensive plan is also necessary
    given the critical importance of the Acela program to Amtrak's business.
    We believe it is imperative that Amtrak's Board of Directors and others
    have such a plan to successfully monitor implementation of the settlement,
    to assess the impact on the corporation should transition efforts
    experience difficulties, and maintain accountability for transition of the
    Acela maintenance function to Amtrak.

    Amtrak also noted in its comments that its estimate of its costs to manage
    the trainset maintenance function in-house will be no greater than the
    current cost of paying NecMSC to perform maintenance work, based on its
    estimates of protections built into the settlement. However, as Amtrak
    acknowledges, there is uncertainty on this issue, and we believe that
    specific aspects of this issue have yet to be resolved. For example, the
    cost to complete major overhauls to the trainsets is largely unknown, as
    efforts continue to identify the full scope of work to be completed and
    those who will perform the work. As a result, we believe our report
    correctly describes the uncertainties that exist in this area.

    Amtrak said in its comments that it does not believe that developing an
    effective supply chain to provide maintenance was a significant challenge
    because of long-standing relationships with suppliers and the protections
    provided under the settlement. We acknowledge that as a result of the
    settlement, Amtrak may benefit from new contracts with providers used for
    its conventional service and may be able to maintain or build on existing
    supplier relationships for an effective supply chain. However, we believe
    that this effort is a challenge in that Amtrak must successfully complete
    numerous tasks and an extensive cost analysis in conjunction with
    selecting a parts procurement plan by January 2006. For example, if it
    chooses the inventory option, Amtrak will need to hire additional staff to
    manage the parts procurement process and incorporate the inventory into
    its existing system, which, according to Amtrak procurement officials, can
    be a complicated task. Also, in a recent meeting with officials from
    Amtrak's Office of the Inspector General, they told us that part of the
    supply chain process-an audit of parts prices-is already behind schedule.
    As a result, we continue to believe that our assessment of the difficulty
    of dealing with its supply chain will remain a challenge.

    Finally, as part of its comments, Amtrak requested that we redact certain
    sections of our report that it considered to be proprietary. To address
    this comment, we consulted with Amtrak, Bombardier, and Alstom and
    developed this report that deletes or modifies information they considered
    to be proprietary. After reviewing a draft of this report, each
    organization confirmed that it did not contain proprietary information.

    We are sending copies of this report to congressional committees with
    responsibilities for intercity passenger rail issues, the President of
    Amtrak, the Secretary of Transportation, the Acting Administrator of the
    Federal Railroad Administration, the Director of the Office of Management
    and Budget, and representatives of Bombardier and Alstom. We will also
    make copies available at no charge on the GAO Web site at
    http://www.gao.gov. If you have any questions about this report, please
    contact me at (202) 512-8984 or by e-mail at heckerj@gao.gov, or Randall
    B. Williamson, Assistant Director, at (206) 287-4860 or by e-mail at
    williamsonr@gao.gov. Other key contributors to this report were Edda
    Emmanuelli-Perez, Kara Finnegan Irving, Bert Japikse, Rick Jorgenson,
    Tyler Kruzich, Denise McCabe, and SaraAnn Moessbauer.

    Sincerely yours,

    JayEtta Z. Hecker Director, Physical Infrastructure

    Comments from the National Railroad Passenger CorporationAppendix I

    Review of the Settlement between Amtrak and the Consortium of Bombardier
    and AlstomAppendix II

    (544099)
    *** End of document. ***