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					 

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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 [email protected], or Randall
B. Williamson, Assistant Director, at (206) 287-4860 or by e-mail at
[email protected]. 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. ***