Conrail Sale Points Up Privatization’s Bad Track Record
Selling government-operated enterprises to private investors may be a way of “getting the government off the backs of the taxpayers,” as President Reagan and other conservatives claim so enthusiastically.
But the privatization last week of the government-owned Conrail freight railroad sounds like a raw deal for taxpayers. And surely it isn’t a good example of what the government’s role should be in a relatively free-market economy.
It was the largest sale of government property in U.S. history and raised $1.65 billion for the government. Reagan’s transportation secretary, Elizabeth Hanford Dole, was delighted.
The sale should “break the ground for more privatization,” she said.
However, Dole failed even to mention that Conrail actually cost the government an estimated $7.6 billion. That fact alone should have erased the pride that the Reagan Administration takes in selling the railroad for $1.65 billion.
Since Conrail is now profitable as a government-operated railroad, it should not have been sold to private investors, thus making the taxpayers take a hefty loss. Instead, it should have been retained by the government, at least until the taxpayers’ investment had been repaid.
One trouble with the public perception of the sale is that even relatively recent history tends to be forgotten in the flood of new events. And some other facts strongly suggest the privatization of Conrail actually represented both a failure of private enterprise and a success story of a government-operated enterprise.
The Conrail story began in 1970, when the government created another railroad company, Amtrak. It was formed to help the Penn Central railroad and a few other smaller lines that were making money on their freight operations but losing on their passenger train service between major cities.
Nationalization of the money-losing intercity passenger service meant that the privately owned railroads could keep just the profitable end of their businesses.
That wasn’t enough, though. More government help was needed because the private companies’ commuter lines weren’t doing well, either. So several states began giving state subsidies to the private railroad companies to keep them running because the commuter lines are so essential to the flow of traffic in and around the big cities.
Amtrak isn’t flourishing these days, and the Reagan Administration would like to dump that money-loser. Since that isn’t possible, it is cutting Amtrak subsidies, which isn’t good for the communities served by Amtrak, the passengers who use it or the workers who maintain and operate the trains.
But, in any case, the Administration has not put Amtrak up for sale as it did Conrail. That decision not to privatize Amtrak was presumably based on logic: There’s little hope of finding entrepreneurs who would want to buy it.
For several years, though, Amtrak did serve the purpose for which it was created: It got the money-losing passenger train service off the backs of private enterprise and put it onto those of the taxpayers.
Unfortunately, that help also turned out to be inadequate.
Even though they were left with what was supposed to be the profitable side of their business--the movement of freight--Penn Central and several other Northeastern rail lines went into bankruptcy. They couldn’t handle the effect of deregulation and the increased competition among railroads and from trucking companies.
So once again, the government came to the rescue with another nationalization move.
In 1976, it created Conrail by buying the bankrupt freight operations from Penn Central and the other railroads, paying $2.1 billion for them.
Happily, Conrail turned into a money maker under government auspices, fit once again to be owned and operated by private entrepreneurs and investors who rushed to buy Conrail stock last week.
The turnaround in Conrail’s fortunes was due in large part to a massive infusion of government money: Nearly $4 billion was put up to modernize the rail lines and equipment.
To streamline its operation, Conrail slashed the old work force of 100,000 down to just 35,000. It cost the government additional hundreds of millions to pay off contract obligations to the laid-off workers. That money, along with administrative costs and other expenses, pushed the government investment up to the estimated $7.6-billion level.
The workers who remained on Conrail’s payroll took wage cuts and accepted changes in work rules. In return, Conrail set up an employee stock ownership plan that gave 15% of the railroad to the workers.
And so, by last week, private investors were ready to take some financial risks by buying Conrail, made fit, trim and profitable by the government.
If, as it certainly seems, the privatization of Conrail was less than a blessing for taxpayers, then it ought to slow the trend rather than break ground for more privatization, as Secretary Dole believes.
Workers as Owners--It’s Good Business
Kinsey Reeves was blunt about the ludicrous-sounding financial deal that he offered to his more than 10,000 workers last year in an effort to save the financially troubled PIE-Nationwide, America’s fourth-largest trucking company.
The workers were told that an appraiser had valued the company’s privately held stock at $1.35 a share, and Reeves, PIE’s chief executive, wanted them to buy 36% of the company’s stock for about $50 a share.
Almost all of them agreed.
To pay for their stock, the workers accepted a five-year, 15% pay cut, and the company used that money to create an employee stock ownership plan. In theory, at least, someday the $1.35 stock could go above $50 a share, and the workers might make some money on the deal. But Reeves warned the workers not to count on it.
The PIE employees were not duped by Reeves, nor were they foolish. While they paid far more money for the stock than it was worth, they got an immediately valuable reward: The company stayed in business and they still worked on jobs that paid about $25,500 instead of $30,000 a year.
Most PIE workers are members of the Teamsters Union, which adopted a “hands-off” position on the stock purchase plan.
The union’s contract terms apply not just to PIE but to all member firms of Truck Management Inc., a nationwide association of major trucking companies that negotiates a master contract with the union. The contract terms apply to all employees of the companies.
No one company is allowed to cut wages or benefits of its employees below the contract terms because that would defeat one of its purposes: to make sure that the companies do not attempt to outbid one another for business based on which can pay its workers the least.
But Reeves said there is no contract prohibition against the union members voluntarily buying company stock and thus using their own money to make the stock purchases.
The ESOP at PIE will raise about $40 million a year in much-needed capital. But the workers-as-owners theory brought about some other significant changes.
The employees, aware they were handling equipment that they partially own, became increasingly careful in operating the approximately 19,000 PIE trucks and trailers in all parts of the nation.
There was a 33% reduction in the number of accidents, and that, in turn, reduced the company’s insurance costs by $13.4 million and cut its worker’s compensation costs by $7.2 million.
The company set up labor-management committees to give workers a voice in the company’s decision-making processes. One outgrowth of that was the creation of 32 safety programs, which deal with everything from safety education classes to redesigning equipment to increase safety and efficiency.
Productivity increased significantly, going from 2,200 pounds of cargo per worker each hour to 2,800 pounds. The company went from a $90-million loss in 1985 to a profit of about $2 million by the end of 1986.
It looks as though yet another company has helped confirm the theory that one of the best roads to success is for employers give their workers both a voice and a proprietary interest in the business.
