Last spring, the Federal Railroad Administration (FRA) released a $551 million Request for Proposals (RFP) to procure approximately 130 new bi-level passenger railcars from an American builder. The cars would be used on Amtrak’s intercity routes in California, Illinois, Michigan, Indiana and Missouri as well as potentially for a new line in Iowa.  What is different about this RFP is that it requires that these cars be completely American-made, not simply with the minimum 60% domestic content as required for decades in the public transportation program. The funding for the intercity vehicles is being provided by the FRA’s High-Speed and Intercity Passenger Rail Program, through funding in the American Recovery and Reinvestment Act enacted in 2009.

The FRA hopes to announce the successful car builder some time before the end of 2012. The cars are scheduled to be delivered starting in 2015.

If this announcement sounds like a familiar refrain from the past, it is. It is merely the most dramatic and recent example of federal intervention in the U.S. railcar and bus marketplaces. To be sure, state and local governments attempt to do similar things, though the prohibitions against “local options” have in theory been established in law for about as long as Buy America rules.

Yet, do such provisions help U.S. manufacturing? Reviews by many from the supply side of the industry say not really. They have seen various attempts to strengthen Buy America and other policies introduced over the years, all designed to bolster them and other U.S. suppliers. Their comments suggest, that at best, these attempts have only modest impacts toward their goals. Some observers contend that a few of these policy changes may have actually reduced U.S. jobs.

More jobs, lower costs?
The FRA’s tender also employs several other features designed to bolster American companies and jobs — and many of these have also been tried in various ways. First, the RFP includes the new uniform vehicle standards that many federal and private sector officials alike believe will drive down lifecycle costs and allow more manufacturers and suppliers to compete, fostering a healthy competition while helping to lower barriers to market entry and encourage growth in the U.S. domestic supply chain for passenger rail equipment. The common design should also make it easier to train personnel, source and inventory parts, and lower maintenance and rehabilitation costs in the aftermarket and field service support, which in turn should also reduce overall lifecycle costs and improve equipment reliability and overall quality. It remains to be seen, however, whether such standards can help meet the more stringent Buy America goals.

The car design also includes the latest industry crashworthiness and other safety standards that were developed as part of the FRA/FTA-funded APTA Standards Development program. Of course, the cars will also be compliant with the Access Board’s latest accessibility standards pursuant to the Americans with Disabilities Act.

The effort to purchase standardized equipment is led by the Passenger Rail Investment and Improvement Act Section 305 Next Generation Corridor Equipment Pool Committee, comprising state transportation officials; leadership of the FRA; management representatives of Amtrak and affected host freight railroad companies; passenger railroad equipment manufacturers and suppliers; and commuter railroad staff.  The committee has also completed specifications for high-performance diesel locomotives that can travel up to 125 mph and single-level passenger railcars.  

The committee was formed as a mandate in the Passenger Rail Investment and Improvement Act (PRIIA) of 2008. It authorized it “to design, develop specifications for and procure standardized next generation” equipment Amtrak and state intercity passenger rail programs may need. It further mandated development of standard specs that could be part of a procurement pool of next-generation trainsets.

Further, the Obama Administration has seen this law as a means not only to expand higher-speed rail services but also to revitalize the U.S. rail equipment industry. It is a reason why President Obama and his team have taken a much stronger interest in the subject as their predecessor, who actually signed the legislation.

In addition, to help raise the U.S. content bar, the U.S. Department of Transportation (DOT) partnered with the Department of Commerce’s National Institute of Standards and Technology through NIST’s Manufacturing Extension Partnership (MEP). The arrangement is designed to connect the more than 34,000 domestic suppliers registered in the MEP with rail-related business opportunities. Both agencies contend that the MEP will help U.S. railcar builders retool their production capabilities to meet the demands of this order and thus catalyze the supply chain toward much greater domestic content in railcar manufacturing.  [PAGEBREAK]Do these steps work?
None of these policy changes has had much effect on the market in practice, however. For example, the extent to which agencies buy buses from manufacturers outside North America is rare, despite a more relaxed enforcement of the policy in the market nearly a decade ago, and much tougher enforcement more recently. Las Vegas to date is the most noteworthy of these rare examples, but Oakland, Calif.; Washington, D.C.; and Salt Lake City are other cities whose public transportation agencies acquired foreign-made buses for some of their services. In some of these cases, however, Buy America waivers were not sought because they purchased their vehicles with local and state funds, which Buy America rules do not cover.

For the most part, price is not the main rationale for foreign-made procurements. In fact, there are typically cost differences of as much as 20% over prices for U.S. buses. The primary reason is these agencies are seeking attractive designs not offered in the U.S., particularly for the emerging bus rapid transit (BRT) market.

Whether during a more relaxed Buy America enforcement period or a more stringent situation, Buy America has not caused any of the non-U.S. manufacturers to alter their investment or commercial plans in the U.S. None of these companies has announced plans to build a U.S. facility, despite the fact that at least some of the waiver requests included such intentions. In fact, the most measurable factor given by some U.S. company officials for any changes in their share of supply has been macroeconomic forces, such as changes in shipping costs or shifts in foreign exchange rates.

According to calculations by the Apollo Alliance, a nonprofit coalition of businesses, labor and government agencies advocating for developing a larger “clean transportation manufacturing base,” since 2005, U.S. companies and governments have spent more than $10 billion in purchasing public transportation equipment sourced offshore, even though the five domestic heavy-duty bus manufacturers, a dozen railcar builders and a wide range of other transportation equipment makers served the market during the period. However, it should be noted that more than $25 billion was spent by transit agencies during the period just for rolling stock, let alone the many other billions for facilities and systems and related technologies, according to APTA data.

The conservative transportation interest blog Systemic Failure makes another argument. It examined the FRA’s recently announced pooled purchase with the more stringent Buy America requirement. Based on the FRA’s press announcement that it would cost $551 million for the 130 bi-level railcars in the joint procurement, each car would be $4.2 million dollars each — roughly double the global market price for a bi-level car in recent years.

Part of the explanation for this discrepancy is the small U.S. market as a share of the global industry; thus some of the above price differential would occur with a less onerous Buy America requirement. A 2010 General Accountability Office study estimated that transit railcars in the U.S. comprise about 5% of the worldwide fleet. While the share of the U.S. total has increased slightly due to demand growth here and a flattening of the worldwide market overall, the point largely remains true.

Chuck Wochele, VP, industry and government relations, for Alstom Transportation, estimates that Buy America-compliant car builders might be able to increase their U.S. content to “as high as 80%,” but 100% is much more difficult — maybe even impossible — given how all car builders have structured their supply chains. Most bus manufacturers expressed similar concerns and would be hard pressed to increase their share of supply much beyond their current amounts. This is because sourcing suppliers is much more complicated than simply finding them; they also must meet stringent quality assurance requirements that transit suppliers demand.

Stronger enforcement
Closing loopholes in the Buy America waiver process and creating more transparency are important improvements, but if restrictions go beyond that — to include even eliminating some of the waiver categories that may be viewed by some as loopholes as some policymakers have suggested — the result could ultimately be counterproductive, actually leading to fewer industry jobs, says Paul Smith, executive VP, New Flyer.
One example he and others in bus manufacturing cite: There currently is only one engine builder for heavy-duty bus engines in the U.S. market. Current Buy America rules flow down the supply chain to component suppliers that serve engine production, for things like electronic controls, fuel injection systems and related parts. If enforcement is too tight on this supply chain, many worry that Cummins will leave the market entirely out of frustration — not as far-fetched as it may sound, however dramatic, for every other engine supplier has done so.

This is primarily because the U.S. transit bus market is such a small part of the heavy-duty engine business, particularly when viewed globally. If Cummins were to do so, it would strand every single U.S. transit agency looking to buy buses. While bus engines are an extreme example, there are other parts of the supply chain similarly dependent on a declining list of suppliers.

Other barriers to entry for foreign suppliers exist; the 12-year useful life and Altoona testing are two of the most commonly mentioned. They probably help U.S. industry in the sense that they are regulatory barriers to imports, but the 12-year useful-life requirement disadvantages North American bus manufacturers in export opportunities, because this 20% more stringent design life requirement places additional price pressure on U.S. vehicles and commercial risk beyond that which are needed or desired in other world markets. In this sense, U.S. vehicles are viewed as overdesigned. Combined with the way that U.S. manufacturers are organized — i.e., not export-oriented despite interest periodically displayed from other markets — and their lack of experience in export business means that U.S. builders are usually not interested. That goes for most Canadian companies as well. Such attitudes also reinforce the political support for domestic content regulations.

Were this not complicated enough, the U.S. is also the only public transportation supply marketplace in which the supply chain preferences are directly driven by the customers; all other markets have the bus and railcar manufacturer that decides. This means that bus builders are more systems integrators than manufacturers per se. As another illustration of this point, the major bus builders that export, such as Volvo or Daimler Benz, do so by selling “knocked down kits” to agents within importing countries that are then locally assembled, combined with locally sourced components and materials. Field service and support is then largely carried out by the local agent with a manufacturer’s rep/export agent in support as a secondary tier. In the U.S., for the heavy-duty transit market it is a support network that is centrally run directly by the manufacturer.

As a result of these factors, combined with the fact that the U.S. market is a vastly smaller segment of the global bus market, make both entry in the U.S. as well as exports from the U.S. difficult. In fact, the history of the U.S. bus and rail markets is replete with a revolving door of offshore manufacturers that have entered it only to then have exited a few years later.

Regarding efforts to boost U.S. exports, the one program designed to foster technical exchange among U.S. companies as well as provide access to market information was the International Mass Transit Program. It started in 1995 under the TEA-21 legislation. However, the program ended this year as MAP-21’s language abolished the program.[PAGEBREAK]Growing the industry
There is one major policy that has shown a positive impact on exports and expanding the economic base over the past two decades. That policy is stable, increasing guaranteed federal funding, the kind that the industry enjoyed through TEA-21 and SAFETEA-LU. According to testimony in Congressional hearings by Jeffrey Parker, an industry analyst, these stable guarantees allowed manufacturers to plan business expansion and new research and development programs that made them more competitive. The rest, such as tightening Buy America or any other market-centric mandates and/or incentives, have always had less. In a context that is calling for the same or less investment in the near term, additional restrictions in the name of protection might even backfire.

In the current hyper-partisan Congress, however, funding guarantees in MAP-21 are nowhere near as strong as previous surface transportation bills, largely due to the projected shortfalls in the Mass Transit Account of the Highway Trust Fund. The fact that this bill covers only the next two years compounds business planning and investment challenges.

Such issues are timely as the White House convenes on economic growth and as the nation steps up the debate on the proper role of government in the economy. At least from the perspective of public transportation policy, the answer is fairly clear: grow the pie, rather than coming up with more ways to slice one that continues to be the same size or smaller.

Cliff Henke, a contributing editor to METRO, is senior analyst at PB. His views herein are solely his own.