Amtrak: Management and Accountability Issues Contribute to	 
Unprofitability of Food and Beverage Service (09-JUN-05,	 
GAO-05-761T).							 
                                                                 
Amtrak has provided food and beverage service on its trains since
it began operations in 1971. Amtrak has struggled since its	 
inception to earn sufficient revenues and depends heavily on	 
federal subsidies to remain solvent. While a small part of	 
Amtrak's overall expenditures, Amtrak's food and beverage service
illustrates concerns in Amtrak's overall cost containment,	 
management and accountability issues. This testimony is based on 
GAO's work on Amtrak's management and performance as well as	 
additional information gained from Amtrak and other		 
transportation providers. This testimony focuses on (1) the	 
provisions written into Amtrak's contract with Gate Gourmet to	 
control costs, (2) the types of management controls Amtrak	 
exercises to prevent overpayments, and (3) the information Amtrak
collects and uses to monitor the service and to report to	 
stakeholders such as its Board of Directors.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-761T					        
    ACCNO:   A26257						        
  TITLE:     Amtrak: Management and Accountability Issues Contribute  
to Unprofitability of Food and Beverage Service 		 
     DATE:   06/09/2005 
  SUBJECT:   Accountability					 
	     Contract administration				 
	     Contractor payments				 
	     Contractors					 
	     Cost analysis					 
	     Cost control					 
	     Financial analysis 				 
	     Food services					 
	     Food services contracts				 
	     Internal audits					 
	     Internal controls					 
	     Monitoring 					 
	     Performance measures				 
	     Railroad industry					 

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GAO-05-761T

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Railroads, Committee on Transportation and
Infrastructure, House of Representatives

For Release on Delivery
Expected at 9:30 a.m. EDT AMTRAK

Thursday, June 9, 2005

 Management and Accountability Issues Contribute to Unprofitability of Food and
                                Beverage Service

Statement of JayEtta Hecker, Director Physical Infrastructure Issues

GAO-05-761T

[IMG]

June 9, 2005

AMTRAK

Management and Accountability Issues Contribute to Unprofitability of Food and
Beverage Service

                                 What GAO Found

Amtrak's financial records show that for every dollar Amtrak earns in food
and beverage revenue, it spends about $2-a pattern that has held
consistent for all 3 years GAO reviewed. In GAO's estimation, Amtrak has
lost a total of almost $245 million from fiscal year 2002 through fiscal
year 2004 on food and beverage service. Since 1999, Amtrak has contracted
out the responsibility to Gate Gourmet International (Gate Gourmet) for
managing commissaries and for ordering and stocking all food and beverages
and related items managing under a contract that expires in September
2006.

Amtrak's current cost reimbursable contract with Gate Gourmet creates, if
anything, an incentive to increase Amtrak's costs unless properly
monitored. Gate Gourmet can charge Amtrak for the cost of the food and
beverage items, as well as management, labor, and other expenses. Without
defined controls and management, this type of contract structure provides
little incentive for a contractor to reduce or contain costs to provide
better value to its customer.

GAO found five different management controls that Amtrak did not fully
exercise regarding oversight of its food and beverage service. These
controls include: (1) requiring an independently audited financial report,
(2) auditing for all applicable rebates and discounts that Gate Gourmet
could have applied to food and beverage items purchased for Amtrak, (3)
adequately monitoring purchase price information for its food and beverage
items, (4) not considering Amtrak's food and beverage labor costs, as a
part of product markups, and that (5) not utilizing Amtrak's procurement
department in negotiating the current contract.

Information that could provide both internal and external accountability
for the food and beverage function is limited. Amtrak does not include any
information about its food and beverage expenses in any of its internal or
external reports, including its monthly performance reports, its internal
quarterly progress reports or its annual consolidated financial
statements. This lack of information makes it difficult for internal and
external stakeholders to gauge the profit or loss of the operation as well
as to assign accountability.

Amtrak food and beverage revenues and expenses, fiscal years 2002 to 2004

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to testify on issues concerning the National
Railroad Passenger Corporation's (or Amtrak) food and beverage service,
which will clearly illustrate Amtrak's challenges in controlling its
costs. Since Amtrak started operations in 1971, Amtrak has struggled
financially, and has depended on a federal subsidy of more than $1 billion
a year since fiscal year 2003 to remain solvent. For fiscal years 2002
through 2004, Amtrak's food and beverage expenses were about $487
million-or only about 5 percent of the company's total expenditures.
However, during that same time period, Amtrak's food and beverage service
earned about $243 million in revenue. This means that Amtrak spends about
$2 to earn $1 in food and beverage revenue. Of Amtrak's total food and
beverage expenditures, about 53 percent was for labor costs for Amtrak
employees serving the food, about 38 percent was for food costs and fees
to Gate Gourmet International (Gate Gourmet)-the contractor for food and
beverages and operation of Amtrak commissaries-and about 9 percent for
other Amtrak costs.

At your request, my statement today relates primarily to the contractor's
portion of this expense, as well as Amtrak's oversight and control over
its food and beverage service, and what Amtrak is doing to oversee and
control contract costs. I will specifically address what we have learned
in examining three major types of cost controls: (1) the provisions
written into Amtrak's contract with Gate Gourmet1 to control costs, (2)
the types of management controls Amtrak exercises to prevent improper
payments, and (3) the information Amtrak collects and uses to monitor the
service and to report to stakeholders such as its Board of Directors. We
also talked with three other passenger transportation providers to get
background and comparison information on their food and beverage services.
The information I will present is based on completed work done in the
course of our ongoing review of Amtrak's management and performance which
we will report on later this year. We also collected supplemental
information from Amtrak, and on the food and beverage operations of VIA
Rail Canada (VIA Rail) and the Alaska Railroad, two other providers of
intercity passenger rail, and two major U.S. air carriers-Northwest
Airlines and American Airlines.

1Gate Gourmet International was formerly known as Dobbs International
prior to January 1, 2001.

In summary, we found that:

o  	The provisions of the contract for food and beverage services provide
little incentive for Gate Gourmet to reduce or contain the costs of food
and beverages. The contract is a cost reimbursable contract, and under it,
the contractor can charge for the costs of items purchased, in addition to
management and other fees. Given the way Amtrak is managing the contract,
none of the contractor's profit is tied to controlling costs. Although the
contract included a discussion of performance standards, these standards
and related measures were never created, even though they were required 45
days after the contract was signed in January 1999. Performance standards
would have allowed for performance incentives and penalties. If these
incentives had been developed, then they could have been used to pay Gate
Gourmet based on such things as finding lower-priced food products of
similar quality to what is being purchased now.

o  	Amtrak is not fully exercising prudent management techniques to
control its food and beverage costs and prevent potential improper
payments. We found three examples of this mismanagement at Amtrak. First,
Amtrak has never required the contractor to submit an annual report (which
would be independently audited) of budget variances for key line items,
even though the contract requires such a report. Such a report could
detect improper payments by Amtrak to Gate Gourmet for food and beverage
items. Second, Amtrak has never audited the contractor's purchase
data-which is allowed under the contract-to ensure that the contractor is
passing along any discounts or rebates the contractor receives on items
purchased. For example, Gate Gourmet reported passing along about $550,000
in rebates and discounts on purchases for Amtrak totaling about $6.5
million out of $90 million total purchases for Amtrak from fiscal year
2002 through fiscal year 2003.2 Finally, Amtrak does not adequately
monitor purchase prices reported by the contractor to identify variances
or products with high costs. To further test purchase data, we
nonstatistically selected 37 payment transactions and reviewed the
underlying supporting documentation and found evidence of widely variable
product prices. For example, Amtrak paid between $0.43 and $3.93 per
12-ounce bottle of Heineken beer. (See fig. 1.)

2Fiscal year 2004 audited financial information was not available when we
conducted our analysis.

Figure 1: Amount Amtrak Paid for a 12-Ounce Beer, Fiscal Years 2002 and
2003

Purchase price in dollars

4.0 $3.93

3.5

3.0

2.5

2.0

1.5

1.0

0.5 $0.43

0.0

Beer

Sources: GAO analysis of Amtrak data; Corel (clip art).

o  	The level of information Amtrak collects and uses to monitor its food
and beverage service and report results to external or internal
stakeholders inhibits accountability for its performance. Externally,
Amtrak does not report food and beverage expenditure information in its
monthly performance reports or its annual consolidated financial
statements. While Amtrak reports the combined revenue of its food and
beverage services in its monthly performance reports, it does not do so
for its food and beverage expenses. By combining revenue, it is difficult
for managers to determine the amount of revenue attributable to food
services compared to beverage services. By not reporting expenses, it is
difficult to determine how much is spent on food and beverage service.
This lack of information inhibits Amtrak's ability to assign
accountability for performance internally or allow for any external
accountability to key stakeholders. Other transportation companies we
studied have a different accountability structure for their food and
beverage service. Because VIA Rail has a fixed subsidy from the federal
Canadian government, VIA Rail's management has an inherent incentive to
control its costs in all areas of its operation, including its food and
beverage service. The Alaska Railroad receives biweekly reports from its
contractor detailing its labor and food costs that show, among other
things, contractor performance against the contractual cost caps.

Background

How Does Amtrak Operate Its Food and Beverage Service?

Food and beverages have been served onboard Amtrak trains since Amtrak was
created. Amtrak's eleven commissaries are located around the country and
are responsible for receiving, warehousing and stocking food, beverages,
and other items for Amtrak's onboard dining and cafe service. Until
January 1999, Amtrak ran these commissaries with its own employees. Since
then, Amtrak has contracted out the responsibility for the commissaries
and for ordering and stocking all food, beverages, and related items under
a contract that expires in September 2006.3 Gate Gourmet (the contractor),
is also a supplier of food and beverages to several major airlines. During
fiscal years 2002 through 2004, the 3-year period we focused on in our
audit work, Amtrak paid Gate Gourmet between $59 and $64 million a year in
reimbursements and fees.4 Gate Gourmet personnel operate Amtrak-owned
commissaries and order, receive, store, and stock trains with food,
beverages, and other related items such as table linens and napkins. Food
and beverage stock are charged to Amtrak employees who account for the
food en route. When a train arrives at its final destination, all
remaining stock items are returned to a commissary. Gate Gourmet charges
Amtrak for the items used, as well as for labor, management, and other
fees. The contract requires that Gate Gourmet provide Amtrak an
independently audited annual report within 120 days following the
expiration of each contract year.

Amtrak's model for handling its food and beverage service is similar to
other passenger transportation companies, with some important differences.
Northwest Airlines has outsourced their kitchen and commissary operations
and have food and beverages delivered to each airplane before each flight.
VIA Rail Canada, Canada's national passenger railroad, serves food on most
of its trains and owns and operates its own commissaries. Food and other
items are delivered to each train, consumed during the train's run and
restocked at the destination. The Alaska Railroad, however, has a private
contractor that orders, stocks, delivers, prepares, and serves all of its
food and beverages on its trains using their

3There is an option for a 5-year extension.

4Gate Gourmet has contracts with food and non-alcoholic beverage suppliers
for Amtrak's food and beverage service. Gate Gourmet purchases alcoholic
beverages from distributors but Amtrak is directly billed as Amtrak holds
the liquor license to serve alcohol on its trains.

own labor force. With certain exceptions and limits, all food and beverage
revenues and expenses are the responsibility of the contractor.5

How Much Is Amtrak Losing on Food and Beverage Operations?

Amtrak's financial records show that for every dollar Amtrak earns in food
and beverage revenue, it spends about $2-a pattern that has held
consistent for all 3 years we reviewed. (See table 1 and fig. 2.) Amtrak's
financial records also indicate that Amtrak has lost a total of almost
$245 million for fiscal year 2002 through fiscal year 2004 on food and
beverage service. Section 24305(c)(4) of Title 49, United States Code,
states that Amtrak is not to operate a food and beverage service whose
revenues do not exceed the cost of providing such service. About half of
the total food and beverage expenditure is labor cost for Amtrak staff who
prepare and serve the food aboard the trains. About 38 percent is
reimbursements and fees to Gate Gourmet, representing the cost of food and
other products in addition to other fees paid to Gate Gourmet. About 9
percent is for other Amtrak costs. While Amtrak's labor costs for its food
and beverage service are significant, these costs are part of Amtrak's
overall labor cost structure, and as such, are beyond the scope of work we
did for this testimony. However, a recent Amtrak Inspector General report
suggested that Amtrak could save money on its food and beverage labor if
the cost of this labor was similar to that of the restaurant industry.6

5Under the Alaska Railroad contract, the contractor is guaranteed a 5
percent profit margin. If food and beverage sales do not provide this 5
percent margin, then Alaska Railroad makes up the difference. If margins
exceed 5 percent, then the contractor and Alaska Railroad split the excess
amount.

6Evaluation Report: Food and Beverage Financial Performance, Report
E-05-03, Amtrak Inspector General.

  Table 1: Amtrak's Estimated Food and Beverage Revenue and Expenses (by Major
                      Category), Fiscal Years 2002 to 2004

Percent of Total 2002 2003 2004c Total Expense (%)

  Total food and beverage revenues a $ 84,100,000 $ 78,400,000 $ 80,400,000 $
                                  242,900,000

                                Expense Category

Amtrak Labor Costs $ 83,768,416 $ 83,257,574 $ 89,162,529 $ 256,188,519

Payments to Gate Gourmet $ 63,754,973 $ 59,769,085 $ 61,893,852 $
182,422,910

All Other Amtrak Food and Beverage

b

Expenses $ 16,961,343 $ 15,775,092 $ 13,123,348 $ 45,859,910

Total Food and Beverage
Expenses $ 164,489,732 $ 158,801,751 $ 164,179,729 $ 487,471,212 100.0

Profit or (Loss) $ (80,389,732) $ (80,401,751) $ (83,779,729) $
(244,571,212)

Source: GAO analysis of Amtrak data.

Notes

aRevenues include a portion of first class ticket revenue dedicated toward
food and beverage revenues.

b"All Other" expenses include such items as utilities, office supplies,
crew meals, and reusable support items such as crockery and glassware.

cAll 2004 figures are unaudited.

Figure 2: Amtrak Food and Beverage Revenues and Expenses, Fiscal Years
2002 to 2004

Dollars in millions

200

150

100

50

0 2002 2003 2004 Fiscal Year

Total food and beverage revenues

Total food and beverage expenses

Source: GAO analysis of Amtrak data.

Amtrak has responded to these continued losses with some incremental
reductions in food and beverage service. On July 1, 2005, Amtrak plans to
discontinue food and beverage service on its routes between New York City
and Albany, New York, which would allow Amtrak to close its commissary in
Albany. An official in Amtrak's Office of Inspector General stated that
Amtrak lost between $6 to $8 per person on food service on those routes
and that closing the commissary will save Amtrak about $1 million per
year. However, achieving additional savings by closing commissaries could
be limited, as Amtrak's other commissaries serve multiple Amtrak trains
that would continue to offer food and beverage service. In other words,
closing a commissary could affect multiple trains on multiple routes.
According to an Amtrak procurement official, a team consisting of members
of Amtrak's procurement, legal, financial and

transportation departments is currently working to identify ways to reduce
Amtrak's costs in its next commissary contract.7

Other transportation companies have taken actions to better control their
food and beverage costs in recent years. For example, Northwest Airlines
officials stated that they pay particular attention to food and beverage
expenses. Since 2002, Northwest has reduced its food costs by 4 percent.
This has been achieved by reducing or eliminating complimentary food
service for coach passengers on domestic flights (even to the point of
eliminating pretzels on these flights), aggressive pricing of food
products and flexible budgeting that adjusts each month to reflect
increases or decreases in ridership.8 VIA Rail officials told us they have
considerable flexibility in hiring its onboard service personnel to adjust
its labor force to respond to peak and off-peak tourist seasons for its
long-distance trains. In addition, VIA Rail officials said they have
considerable flexibility in how onboard service staff are used; in
essence, all onboard service staff can be used wherever and whenever
needed. The Alaska Railroad restructured the contract with its food and
beverage service provider to allow for food price fluctuation within
defined limits.

One way to control costs is to build provisions into a contract that
motivate a contractor to keep costs as low as possible. Amtrak's current
cost reimbursable contract with Gate Gourmet creates, if anything, an
incentive to increase Amtrak's costs unless properly monitored. Under the
contract, Gate Gourmet receives a number of reimbursements, including
commissary, labor, and insurance costs, in addition to an operating fee.
The operating fee is defined in the contract as 5 percent of the total
actual cost of the onboard food and beverage items. This fee is an
incentive for the contractor to increase Amtrak's food and beverage costs.
These costs can change in each yearly operating budget. This operating
budget is subject to review by Amtrak and is mutually agreed to by both
Amtrak and Gate Gourmet.

Incentives can also be written into a cost reimbursable contract to
control costs and enhance performance. Although the contract included a

  Current Contract Does Not Provide Incentives to Reduce or Contain Costs

7The current contract expires on September 30, 2006.

8Northwest officials noted that in lieu of complimentary food service for
coach passengers they have instituted a "Buy On Board" program which
offers certain food items for sale to passengers.

discussion of performance standards, these standards and related measures
were never created, even though they were required 45 days after the
contract was signed in January 1999. Performance standards would have
allowed for performance incentives and penalties. If these incentives had
been developed, then they could have been used to pay Gate Gourmet based
on such things as finding lower-priced food products of similar quality to
what is being purchased now, or identifying ways the food and beverage
service could be operated more economically or efficiently.

Other factors may not provide the needed incentives for Gate Gourmet to
aggressively seek to reduce Amtrak's food costs. Under current contract
provisions, Gate Gourmet can charge Amtrak for food prepared in Gate
Gourmet facilities and delivered to Amtrak's commissaries. The contract
provides considerable pricing flexibility to Gate Gourmet for these items
with no detailed definitions or price caps. This makes it difficult to
determine whether or not Amtrak is being charged a reasonable price. In
addition, the contract also provides that Gate Gourmet deduct any trade or
quantity discounts on items purchased for Amtrak either immediately from
Amtrak's invoices or retroactively based on the proportion of Amtrak's
purchases. Discounts applied retroactively are to be applied by Gate
Gourmet in "good faith" and retroactive payments are "an approximation and
that [Gate Gourmet] cannot guarantee exactness." The contract stipulates
these payments are subject to an audit by Amtrak. However, these audits
have never been conducted.

In contrast, while Northwest Airlines has cost plus contracts with its
largest food and beverage contractors (including Gate Gourmet),
Northwest's management of them is different. Northwest's caterer contracts
have labor and other rates specified in the contract. According to
Northwest's food and beverage officials, they know quickly if they change
their menu, how much their suppliers will charge them-even to the addition
or subtraction of a leaf of lettuce served as part of an entree. In
addition, Northwest officials stated that each price charged by its
contractors is checked and invoices are audited.

Management Controls 	We identified five types of management controls that
Amtrak did not fully exercise regarding oversight of its food and beverage
service. These

  Over Food and Beverage Operations Not Fully Exercised

include the following:

o  	Requirement for an annual report has never been enforced. Amtrak's
contract requires Gate Gourmet to provide an independently audited annual
report within 120 days following the expiration of each contract year;
this report must also be certified by Gate Gourmet officials. This report
is to provide actual and budgeted amounts for key line items and to
provide a narrative explanation for any actual to budget variance greater
than one percent in the aggregate for all commissaries. However, Gate
Gourmet has not provided this report during the five completed years the
contract has been in place. Amtrak food and beverage officials could not
provide us with a reason as to why they had decided not to enforce this
provision. They told us that they relied on contractor-provided monthly
operating statements and on reports from Amtrak's Inspector General
instead. Our review found that the monthly operating statements lacked
critical information that was to be included in the annual report, were
prepared by the party seeking reimbursement, and, perhaps more
importantly, were not independently reviewed or audited. By contrast, the
annual report was to be certified by contractor officials and audited by
an independent certified public accountant. The Inspector General's
reports, while providing management with information on some aspects of
Amtrak's food and beverage service activities, should not be viewed as a
substitute for a comprehensive audit and report.

o  	Audits of discounts and rebates were not conducted. The contract
provides that Amtrak audit Gate Gourmet's allocations of trade and
quantity discounts received from purchases of food and beverages. However,
Amtrak has never conducted an audit of the discounts credited to it, nor
has it requested that the contractor certify that all of the discounts
that Amtrak should receive have been credited to its account.

Information we reviewed indicates that such audits may yield savings for
Amtrak. For example, Amtrak officials advised us that discounts and
rebates totaling over $550,000 for fiscal years 2002 and 2003 had been
credited on gross purchases of about $6.5 million.9 However, total Gate
Gourmet purchases exceeded $90 million for the 2-year period-roughly 13
times the amount of purchases the contractor reported as being subject to
discounts and rebates. Because Amtrak did not require an independent

9Audited 2004 financial information was not available during our analysis.

audit or otherwise analyze the trade and quantity discounts received,
Amtrak does not know whether or not it received all of the discounts and
rebates to which it was entitled. Amtrak could not provide us with reasons
supporting its decision or its consideration of this issue.

o  	Adequate monitoring of purchase price information needs improvements.
Amtrak did not adequately monitor its purchase price information for food
and beverage items purchased by Gate Gourmet. Amtrak officials said they
monitored contractor purchases using daily price reports that listed unit
prices for purchases ordered the previous day and the price the last time
the item was ordered. However, given the importance of purchase orders in
a food and beverage operation, internal controls need to be developed to
systematically monitor and analyze purchase information. These controls
should then be monitored on a regular basis to assess the quality of
performance over time.10 For example, controls should include processes to
identify unit price variances over established or pre-set amounts and
actions taken to document followup work performed. Although Amtrak had
some processes that compare prices, the process was not robust enough to
include a record of price trends or follow up actions taken such as
corrections of amounts billed. Our testing of this control showed that if
Amtrak had approached this review in a more rigorous manner, it may have
identified discrepancies warranting further investigation. For example:

o  	Monitoring of Purchase Order Pricing: Using data mining11 and other
audit techniques, we selectively reviewed more than $80 million of
purchase order information for fiscal years 2002 and 2003 and found that
the contractor was generating purchase orders with significant variances
in unit prices. For example, in 2003, the purchase order price of a
10-ounce strip steak ranged from $3.02 to $7.58.

o  	Monitoring of Actual Product Price Charged by Gate Gourmet: When
Amtrak officials told us that purchase order information did not always

10GAO, Internal Control Standards: Internal Control Management and
Evaluation Tool, GAO-01-1008G (Washington, D.C.: Aug.1, 2001).

11Data mining applies a search process to a data set, analyzing for
trends, relationships, and interesting associations. For instance, it can
be used to efficiently query transaction data for characteristics that may
indicate potentially improper activity.

reflect actual amounts paid,12 we tested actual prices paid by Amtrak to
Gate Gourmet. To test purchase order data, we nonstatistically selected 37
payment transactions and reviewed the underlying supporting documentation
and found evidence of widely variable product prices. For instance, in
fiscal years 2002 and 2003, payments of over $400,000 for 12-ounce
Heineken beer varied from $0.43 to $3.93 per bottle.

o  	Amtrak product pricing excludes labor costs. Our work revealed that
Amtrak's product price to the customer does not take into account over
half of Amtrak's total food and beverage costs. Amtrak's target profit
margin is 67 percent for prepared meals and 81 percent for controlled
beverages. These target profit margins are expressed as a percentage of
sales over the item product cost charged to Amtrak. However, these target
profit margins do not take into account Amtrak's on-board labor costs,
which our work has determined is estimated at over half of Amtrak's food
and beverage total expenditures. Amtrak's current food and beverage
product pricing seems to ensure that its food and beverage service will
not be profitable.

o  	Available procurement expertise not brought to bear. Finally, Amtrak's
procurement department was not involved in the negotiation of the original
contract.13 The current contract was signed by officials of Amtrak's now
defunct Northeast Corridor Strategic Business Unit.14 The contract's
initial period was for about 7 years (January 29, 1999, to September 30,
2006), with a 5-year extension option. In addition, another agreement to
supply Amtrak's Acela train service for food and beverage items from Gate
Gourmet's flight kitchens was made verbally between

12For example, a price change may have occurred between the time an item
was ordered and when it was delivered. Record keeping errors may also have
occurred and unit prices in the inventory system may, for example, be
based on a different pack size than that received or from that used for
the last purchase.

13Since the original contract, Amtrak's procurement department plans to
take the lead role in any future renewal, bidding and negotiating the next
iteration of the outsourced commissary contract.

14According to Amtrak, Strategic Business Units (or "SBU"s) were a method
for better managing performances and differences in businesses or markets
within a company and were designed to anticipate and facilitate rapid
response to change, place decisionmaking close to the customer, and
establish authority and accountability. Amtrak established 3
SBU's-Northeast Corridor, Intercity, and West. The SBU's were largely
self-contained units that had their own chief executive officers, handled
their own train service, procured their own materials and supplies, and
handled their own financial management and planning.

  Information for Accountability Is Limited

Amtrak's former president and the president of Gate Gourmet. Amtrak does
not have any documentation for the contract terms for this service.

In contrast to Amtrak, other transportation companies we interviewed
closely monitor their invoices and contractor payments through periodic
audits or have given the responsibility for costs and pricing to the
contractor. For example, Northwest Airlines officials stated that they
conduct regular audits of "every [food and beverage] price" they are
charged from their contractors and have found errors in either prices or
labor charges in their contractor invoices. VIA Rail selectively audits
their food supplier invoices that are attached to every billing statement
they receive. Finally, the Alaska Railroad food and beverage business
model gives responsibility for food and labor costs to the contractor,
subject to contractual limits.

Finally, information that would provide accountability over this service,
both internally and externally, is limited. We noted that while Amtrak
reports the combined revenue from its food and beverage services in its
monthly performance reports, it does not identify for stakeholders the
revenue attributable to each service. Amtrak also does not include any
information about its food and beverage expenses in any of its internal or
external reports, including its monthly performance reports, its internal
quarterly progress reports, or its annual consolidated financial
statements. Absent this information, it is difficult for internal and
external stakeholders to determine the amount of expense attributable to
the food and beverage service and to gauge the profit or loss of the
operation. This hinders oversight and accountability.

Other transportation companies we studied have a different accountability
structure for their food and beverage service. Because VIA Rail has a
fixed subsidy from the federal Canadian government, VIA Rail's management
has an inherent incentive to control its costs in all areas of its
operation, including its food and beverage service. VIA Rail controls its
food and beverage costs in many different ways including fixed fee
supplier contracts, item price reports, monitoring of supplier markups and
item prices, and fixed food cost budgets to VIA Rail menu planners.
Northwest Airlines has a flexible monthly food and beverage budget that
increases or decreases with ridership levels. In addition, each supplier
contract has established markups on product prices and its contracts with
food preparation and delivery providers have detailed labor rates that are
all audited for accuracy. The Alaska Railroad receives biweekly reports
from its contractor detailing its labor and food costs that show, among
other

  Conclusions

Recommendations

things, contractor performance against the contractual cost caps. In
addition, the contractor and the Alaska Railroad will conduct annual
audits of its contractor's performance under the contract.

Amtrak's food and beverage service may represent a relatively small part
of the company's operating budget, but it speaks volumes about Amtrak's
need to get its operations in better order. In administering this
contract, basic steps for good management have been ignored or otherwise
set aside. Omissions include not completing agreed-upon provisions of the
contract, not carrying through with basic oversight called for in the
contract, and ensuring that the organization was getting products at the
most reasonable price. Prudence requires a stronger effort, beginning with
carrying out those steps that, under the contract, should have been taken
all along. Amtrak needs to take such steps not only to curb the losses in
this program, but to help convince the public that it is acting as a
careful steward of the federal dollars that continue to keep it operating.

Based on our work to date, we anticipate making recommendations to Amtrak
to improve controls over its food and beverage operations. Since we did
not have sufficient time to obtain Amtrak's comments, as required by
government auditing standards prior to this hearing, the recommendations
remain tentative until that process is complete. At that time, we
anticipate making the following recommendations that Amtrak:

1. Better contain its food and beverage costs through:

o  	Following its own procedures for ensuring proper contracts and
payments;

o  	Enforcing key provisions of the current Gate Gourmet contract
including annual reports that are independently audited by an outside
auditing firm and certified by Gate Gourmet officials and conduct regular
audits of discount and rebates.

2. 	Prepare a written contract for food and beverage service on Acela
trains that specifies the service to be provided, includes incentives to
ensure efficient and effective contractor performance, and includes
regular annual reports and audits.

3. 	Create separate revenue and expenditure reporting and other basic food
service metrics to allow for internal and external accountability

for its food and beverage service and create incentives to reduce costs
and/or increase revenue.

4. 	Comprehensively review the revenue and cost structure of its food and
beverage service to determine the most cost effective solution that can
increase the financial contribution of its food and beverage function.

  Contacts and Acknowledgements

(544106)

Mr. Chairman, this concludes my testimony. I would be happy to answer
whatever questions you or the other members might have.

For further information, please contact JayEtta Z. Hecker at
[email protected] or at 202-512-2834. Individuals making key contributions
to this statement include Greg Hanna, Heather Krause, Bert Japikse,
Richard Jorgenson, Steven Martin, Robert Martin, Irvin McMasters, Robert
Owens, and Randy Williamson.

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