Transit Rail: Potential Rail Car Cost-Saving Strategies Exist
Published: 2010-06-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Rail transit offers society a number of benefits, including reduced congestion and pollution and increased mobility. However, rail systems and cars are costly: Transit agencies can pay more than $3 million per car, often using federal funds. As requested, this report describes (1) characteristics of the U.S. market for transit rail cars, (2) the federal government's role in funding and setting standards for transit rail cars, and (3) challenges transit agencies face when procuring rail cars. GAO analyzed U.S. and worldwide rail car market data for commuter, heavy, and light rail systems and interviewed Department of Transportation (DOT) officials and domestic and international industry stakeholders, including the American Public Transportation Association (APTA).
section_title: What GAO Found
paragraphs: U.S. demand for transit rail cars is limited and erratic and orders tend to be for customized cars. Transit rail cars in the U.S. comprise about 5 percent of the worldwide fleet. Transit agencies' purchases vary considerably over time: A large transit agency may replace its entire fleet in 1 year, contributing to a spike in the market, whereas in other years, there may be only a fraction of that demand for the U.S. market. Transit agencies often request custom car designs to address not only legacy infrastructure requirements and interoperability issues with existing fleets, but also preferences. Rail car orders of small size and demand for customized cars can increase the price per car by, for example, concentrating design costs among fewer cars. The federal government provides some funding for transit rail cars and has varying levels of involvement in setting design standards for transit rail cars. More than half of the transit agencies GAO interviewed purchased rail cars with some type of federal funding, such as formula or discretionary capital funds. When transit agencies use federal funds to purchase rail cars, certain requirements apply, such as "Buy America"--which requires, among other things, that rail cars be assembled in the United States. The Federal Transit Administration (FTA) ensures that these requirements are met by overseeing new transit projects and through periodic reviews. The federal government's role in setting design standards for transit cars depends on the type of rail. For commuter rail, the Federal Railroad Administration has established safety standards that must be met, since these cars are intended to run on the same tracks as freight rail traffic. For other rail transit, FTA provided funds to help APTA--the standard-setting industry group--develop voluntary standards, including those for safety. However, the Secretary of Transportation proposed legislation in December 2009, which was introduced in Congress in February 2010, to give FTA more regulatory authority in relation to safety. Transit agency officials identified several challenges in procuring rail cars, including securing funding, given all of their competing needs. Manufacturers and transit agencies also face legal and regulatory requirements, such as "Buy America" requirements, but have generally adapted to challenges posed by them. However, market challenges still exist, including the small size of many orders that may affect price. Joint procurements, whereby transit agencies combine orders, can help them increase their order sizes; however, they can only combine orders if a design exists that meets both agencies' needs. While a few transit agencies have become aware of opportunities to jointly procure rail cars through informal mechanisms, such as industry meetings, there is currently no formal mechanism to identify mutually beneficial opportunities for joint procurement. As FTA helps fund many procurements, it may be in the best position to help transit agencies identify joint procurement opportunities. Furthermore, FTA and APTA have efforts under way to standardize light rail cars to make rail car procurement more efficient and cost-effective. Standards also might be beneficial for other types of systems, such as streetcars, particularly for those without existing infrastructure limitations.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Secretary of Transportation direct DOT to work with APTA to (1) develop a process to systematically identify and communicate opportunities for transit agencies with similar needs to participate in joint procurement and (2) identify additional opportunities for standardization, especially for new systems. DOT reviewed a draft of this report, generally concurred with its contents, and agreed to consider the recommendations.

section_title: Letter
paragraphs: Rail transit offers passengers and society a number of benefits, including  reduced congestion and pollution, and increased mobility. However, these  systems are costly and challenging to build and maintain. In particular, the  cost of individual rail cars—which transit agencies purchase to equip new  systems and replace existing fleets—can be high, typically $1.5 million to  $3.4 million per car for recent procurements, depending on the number  and type of cars purchased. In 2008, U.S. transit agencies spent over $2.3  billion on rail cars. Transit rail cars can vary substantially in design across  systems and, sometimes even within systems, requiring manufacturers to  build customized cars, which can drive up the cost of procurement. In fact,  procuring standardized vehicles could reduce costs per car up to 20  percent, according to a recent Department of Transportation (DOT) report  to Congress. This issue affects not only the 54 U.S. transit agencies  operating at least one rail transit line as of the end of 2008, but will affect  new rail systems, including new streetcar systems. Since most transit  agencies we contacted use Federal Transit Administration (FTA)- administered grant funds to purchase rail cars, reducing the cost of rail  cars would allow for more efficient use of federal funds. The Federal  Railroad Administration (FRA) typically does not fund transit rail cars, but  the agency does oversee commuter rail safety.
In response to your request, we addressed the following objectives:   (1) What are the key characteristics of the U.S. market for transit rail cars,  and how do they compare with international markets? (2) What is the  federal government’s role in funding and setting standards for transit rail  car procurement and design? (3) What challenges, if any, do transit  agencies face when procuring transit rail cars, and what actions have they  and other stakeholders taken to help address them?
To determine the characteristics of the U.S. market for transit rail cars, we  reviewed two databases—the FTA’s National Transit Database and the  American Public Transportation Association’s (APTA) transit database— to determine the number and types of passenger transit rail cars in the  United States. We also interviewed officials from 23 of the 54 U.S. rail  transit agencies as of 2008. We judgmentally selected these agencies on the  basis of their size; rail transit modes (commuter rail, heavy rail, and light  rail); and geographic distribution. These transit agencies were operating 33  systems among the major transit rail modes, compared with 68 systems  operated by all U.S. transit agencies. The results of our work are not  generalizeable to all transit agencies. Furthermore, we interviewed  officials from existing and potential transit rail car manufacturers, transit  agency consultants, FTA, and APTA. To determine how the U.S. market for  transit rail cars compares with international markets, we obtained  worldwide rail car data from SCI Verkehr in Cologne, Germany, and  interviewed rail car manufacturers; transit officials from Canada, Japan,  New Zealand, and Portugal; and European railway associations. To assess  the reliability of data from FTA’s National Transit Database, APTA’s 2009  Public Transportation Vehicle Database (APTA’s transit database), and  SCI Verkehr, we spoke with officials from each organization about data  quality control procedures and reviewed relevant documentation. For each  data set, we determined that the data were sufficiently reliable for the  purposes of this report. To determine the federal government’s role in  funding and setting standards, we reviewed applicable federal law,  regulations, and grant documents and interviewed FTA officials. Finally, to  identify any challenges transit agencies face when procuring transit rail  cars, we met with transit agency officials representing 33 transit systems  across the country, transit rail car manufacturers, transit agency  consultants, and FTA and APTA officials. Appendix I contains additional  information about our scope and methodology, including lists of the  organizations we contacted.
We conducted this performance audit from September 2009 through June  2010 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The U.S. rail transit system consists of the following three primary modes:  commuter rail, heavy rail transit, and light rail transit (see figs. 1 to 3). The  numbers in figures 1 through 3 are based on National Transit Database  information, current for 2008, adjusted by GAO for two systems and for a  reporting error.
Current FTA data include streetcars as part of light rail, but streetcars can  be distinguished from other light rail cars because they are usually smaller  and designed for shorter routes, more frequent stops, and lower travel  speeds.
Transit agencies in six large cities—New York; Chicago; Washington, D.C.;  Boston; Philadelphia; and San Francisco—own the majority of passenger  transit rail cars in the United States. (See fig. 4.) Agencies in these six  cities manage over 16,000 rail cars, or more than 80 percent of all the  active U.S. transit rail cars.
The number of transit systems is increasing beyond the large metropolitan  areas that currently dominate the market, although new systems tend to be  small. For example, the Utah Transit Authority began operating a 45-car  commuter rail system for Salt Lake City in April 2008. The Puerto Rico  Highway and Transportation Authority began operating a 74-car heavy rail  system in San Juan in December 2004. The Valley Metro in Phoenix began  operating a 50-car light rail system in December 2008. In addition, several  new streetcar systems have opened within the last decade in cities such as  Portland, Oregon; Tampa, Florida; and Little Rock, Arkansas.  Furthermore, additional cities—such as Oklahoma City, Oklahoma; Boise,  Idaho; and Cincinnati, Ohio—have plans for transit-oriented development  that include new streetcar lines.
Rail car procurements generally take years to complete and can involve  many technical experts, including consultants. A time frame of 3 to 4 years  is considered quick for a complete procurement, and many take much  longer. For example, according to officials at one transit agency, it can  take about 8 years from design to final acceptance for heavy rail cars. The  procurement process is lengthy because it involves four phases: the transit  agency’s initial design; advertising, communication, and contract award;  the manufacturer’s detailed car design, prototype development, and  testing; and production. (See table 1.)
Foreign-based companies supply most of the U.S. market for passenger  rail transit cars. Over the last decade, foreign-based companies, with U.S.  plants, have produced almost all of the more than 8,000 new rail cars  purchased by U.S. transit agencies. For example, Bombardier (Canada)  has been a major builder of commuter cars for U.S. transit agencies.  Alstom (France) and Kawasaki (Japan) have been major suppliers of  heavy rail cars, and Siemens (Germany) and Kinki Sharyo (Japan) have  been major suppliers of light rail cars. U.S.-based rail car manufacturers  serve niche markets for streetcars or unconventional commuter rail cars,  with typically sporadic and small orders—fewer than 20 cars.
section_title: Characteristics of the U.S. Transit Rail Car Market May Have Implications for Car Procurement
subsections: section_title: U.S. Transit Rail Car Demand Is Small and Erratic over Time
paragraphs: The U.S. rail car market is a small percentage of the world market for rail  cars. In particular, the U.S. transit rail car fleet constitutes about 5 percent  of the worldwide total. Other countries, such as Japan and Germany,  which have smaller populations than the United States, account for a  larger percentage of the world transit rail car fleet. Officials from rail car  manufacturers said that these countries have relatively more resources  invested in public transit infrastructure compared with the United States.  The small fleet size of the United States also correlates with a small share  of the annual world demand for newly manufactured cars by U.S. transit  agencies due to the limited extent of our transit rail systems, relative to  other countries. See figure 5 for percentages of the worldwide transit rail  car fleet in different locations.
In addition to the relatively small overall demand for rail cars in the United  States, individual rail car orders are often small. Almost half of the transit  agencies we interviewed procure rail cars in relatively small quantities.  For example, United Streetcar, a streetcar producer, told us that it expects  orders of just three to six cars at a time.
The level of U.S. rail car purchases is also uneven over time. See figure 6  for the number of rail cars produced per year for U.S. transit agencies  from 1970 through 2008.
The erratic nature of the U.S. market is primarily due to the following  reasons:    Large transit agencies, such as the Metropolitan Transportation Authority  (MTA) New York City Transit, procuring cars in large orders that cause  spikes in the market. For example, over half of the cars built in 2001 and  2002 were for a MTA New York City Transit procurement of over 1,600  cars.
Replacements of existing fleets, which are dependent upon the life cycle  of the fleets. Transit agencies generally do not procure rail cars on an  annual basis, and transit rail cars typically last 25 years or more with a  midlife overhaul, depending upon the materials used and the car design.  Some individual transit agencies may replace their fleets of rail cars at the  same time. For example, the Bay Area Rapid Transit is in the process of  purchasing 775 cars to replace and expand its entire fleet of 669 cars.
section_title: U.S. Rail Car Designs Have a Great Deal of Customization
paragraphs: U.S. rail car designs have a great deal of customization that differs among  transit agencies due to legacy infrastructure design, interoperability  concerns with existing fleets, and local preferences. In particular, many  heavy rail transit agencies have systems that require rail cars with  customized designs, rather than standard designs. Most of these systems  were built long ago, and their designs have unique characteristics, such as  tunnel size, curve radii, and the ability to support rail car weight. The  unique features of many systems can limit the ability of a car manufacturer  to produce cars for more than one agency from one car design. For  example, the Washington Metropolitan Area Transit Authority (WMATA)  could not purchase the Chicago Transit Authority’s (CTA) cars because  they were too tall for WMATA’s tunnels, and CTA could not purchase  WMATA’s cars because they were too long to make the sharp turns of the  Chicago system, according to officials from both agencies. Furthermore,  when procuring rail cars for existing transit systems, agency officials  generally must include specifications to ensure that the new cars will be  interoperable with their existing fleets. In addition to design features  based on infrastructure requirements, transit agencies may also request  other local preferences, such as rail car compatibility with platform  heights, door requirements, and certain safety features. This level of  specificity in transit rail car design is more common in the U.S. market  than it is in other countries’ markets. Transit agency, transit association,  and manufacturing officials said that rail car designs tend to be more  similar among transit agencies in Western Europe and within some Asian  countries, in part, because some countries have established standard  performance specifications or designs that manufacturers must follow  prior to building systems.
While rail car manufacturer and transit agency officials said that unique  infrastructure requirements are most prevalent in heavy rail systems, light  rail and streetcar systems can also have unique requirements. For  example, transit agency officials said that differences, such as the length  of the city blocks where the cars travel, may influence the car length and  overall design for light rail and streetcars. Furthermore, although officials  from almost half of the commuter rail agencies we interviewed said they  either had borrowed rail cars from another commuter rail agency or had  jointly purchased cars with another commuter agency, other officials  described unique infrastructure requirements, such as tunnel size, that  necessitate customized designs.
section_title: Characteristics of U.S. Transit Agencies’ Rail Car Orders Have Implications for the Price of Rail Cars
paragraphs: According to rail car manufacturer and transit agency officials, certain  characteristics of U.S. transit agencies’ rail car orders have implications  for the per-car prices that transit agencies pay for their cars.  Manufacturers said that certain fixed costs related to manufacturing start- up and rail car design are key factors in the per-car price of an order. Rail  car manufacturer officials said that the order size necessary to capitalize  on economies of scale varies from a few cars to over 100 cars, depending  upon the transit mode, the degree of customization of the car design, and  certain production costs. In general, as manufacturers and component  suppliers—such as door manufacturers—produce more cars using the  same design and production line, the cost per car is reduced due to the  manufacturers’ ability to spread the design and other fixed production  costs over a larger number of cars. Additionally, if more units are  purchased, component costs are usually lower on a per-unit basis because  suppliers are also able to capture greater economies of scale in component  production. As a result, transit agencies with large orders, such as the  MTA New York City Transit, have been able to get relatively low per-car  prices. However, certain characteristics of other U.S. transit agencies’  demand for rail cars may prevent manufacturers and suppliers from  capitalizing on these benefits.
These characteristics include the following:    Small orders and customized designs: U.S. rail car orders tend to be small  and customized, which results in higher per-car costs. First, officials from  all four of the major manufacturers we interviewed said that the cost to  design cars for a particular procurement is a significant up-front cost, and  that it is important to be able to spread design costs over a number of cars  to obtain economies of scale. Officials from several manufacturers said  that designing a rail car on the basis of unique specifications can add from  $20 million to $100 million to the cost of the order. However, the degree of  design specificity is also a factor. If the design is fairly standard, the design  costs will be lower, enabling the efficient production of a smaller order of  cars. However, if the design is highly customized, design costs are greater,  and it may be very expensive to produce a small order. Second, to build  customized cars, manufacturers may have to retool their production lines  for each procurement. This retooling results in start-up costs that are  embedded in the price per car. Manufacturers said that once there is a  break in production, expenses are incurred because manufacturers and  component suppliers may need to reconfigure or retool their production  line before they can begin producing rail cars and their component parts.  For example, officials from the Virginia Railway Express (VRE), a  commuter rail system, said that when they purchased one set of cars in  2006, they were able to obtain a price of approximately $1.6 million per  car, which was considered to be a favorable price, because the  manufacturer had recently finished production of similar cars for  Chicago’s Metra. However, in a later procurement in 2010, VRE paid  approximately $2.2 million per car, which was significantly higher, in part  because the manufacturer had to restart the production line for this car  design. The impact of design and start-up costs are exacerbated by the  small order sizes that are typical in the United States.
Erratic nature of transit agencies’ procurements: The uneven nature of  the U.S. transit agencies’ procurements also impacts the price of rail cars.  Officials from five of the six manufacturers we interviewed said that the  erratic nature of U.S. rail car demand reduced their ability to maintain  continuous production, which likely results in higher production costs per  rail car. Because transit agencies in the United States may procure many  cars in some years but few in others, manufacturers and component  suppliers may have to close production facilities or produce other goods  during the years that fewer cars are procured. Therefore, as we have  previously mentioned, they may have additional start-up costs when  demand recovers, and they increase their rail car production capacity to  meet this demand. In contrast, rail car manufacturers said that in other  markets (e.g., Europe), there may be a more stable demand, which allows  them to maintain more consistent operations and avoid the costs of  increasing and decreasing capacity. For example, according to a transit  association official who we interviewed, there is a large tramway system in  Düsseldorf, Germany, that orders about 15 to 20 cars per year. Although  this is not a large order, it is continuous and helps the manufacturer  maintain consistent operations.
Because of the lengthy rail car procurement and manufacturing process,  manufacturers also face financial risks from the volatile nature of the  prices of the commodities used to manufacture rail cars; and rail car  prices reflect these risks. Officials from one transit agency said that it can  take a transit agency up to 8 years from when the decision is made to  purchase new cars to when the cars are delivered. However, in the United  States, contracts for rail cars are usually negotiated as a fixed price— meaning that manufacturers bid on a price for a set of cars that remains  the same, even if certain costs of producing the cars change during the  lengthy production. Rail car manufacturers estimate future prices of key  commodities, such as copper and steel, when entering a proposal to build  rail cars, but they maintain risk that these commodity prices could change  in ways they did not expect. Officials from all six of the manufacturers and  almost half of the transit agencies we interviewed said that manufacturers  face significant risk related to variable prices for commodities such as  steel. For example, on the MTA New York City Transit’s current heavy rail  car procurement, the recent fluctuation in commodity prices for copper  and steel surprised one manufacturer. The manufacturer had locked in to  a price for the cars in the base contract, so the price fluctuations caused  the order to be less profitable. While manufacturers said that they may  engage in hedging strategies—such as buying futures contracts on  commodities—to mitigate these risks, they also said that adequately  hedging these risks can be difficult.
section_title: Federal Government Is Involved to Varying Degrees in Funding and Setting Design Standards for Transit Rail Car Procurement
subsections: section_title: Federal Government Funds Pay for a Portion of Most Transit Agencies’ Rail Car Purchases
paragraphs: Most of the transit agencies we contacted used some type of federal  funding, such as the New Starts program, to purchase rail cars for their  systems.
FTA’s New Starts program provides federal funding for the initial rail car  purchases needed to support service on a newly constructed line or  extension.
Transit agencies can use FTA’s Fixed Guideway Modernization Funds or  Section 5307 (Urbanized Area) formula funds to purchase additional or  replacement rail cars.
More recently, transit agencies and municipalities have used funding from  the American Recovery and Reinvestment Act of 2009 (Recovery Act)  specifically made available for transit projects or Recovery Act  Transportation Investment Generating Economic Recovery (also known as  TIGER) grants. For example, the city of Houston received a Recovery Act  grant for $87 million to expand its system and purchase additional  vehicles.
Some of the transit agencies we contacted used state or local funds for  subsequent rail car purchases, either to replace aging rail cars or to  provide additional capacity to their systems. State or local governments  fund rail car purchases with local revenues, state grants, or bonds—such  as those that are repaid from transit agency revenues or taxes levied on  real estate located in special tax districts. For example, according to  transit agency officials, over a 10-year period, the MTA Long Island Rail  Road and the Metro North Railroad purchased 1,172 rail cars without  federal funds.
section_title: When Federal Funds Are Used to Purchase Rail Cars, Transit Agencies Must Comply with Federal Procurement Requirements
paragraphs: When transit agencies use federal funds, federal procurement  requirements apply. Transit agency and FTA officials identified some of  the procurement requirements that apply to transit rail car procurements.  These requirements center on compliance with “Buy America” legislation  and on whether contracts are awarded in a manner that promotes free and  open competition. FTA relies primarily on self-certification, but also  conducts triennial and periodic procurement reviews to help ensure  compliance with these requirements.
The “Buy America” requirement specifies that the cost of rail car  components manufactured in the United States must be more than 60  percent of the cost of all component parts, and that the rail cars  themselves must be assembled in the United States. Under certain  circumstances, FTA has the authority to grant waivers to transit agencies,  allowing them to purchase rail cars that may not fully meet “Buy America”  requirements. Specifically, a waiver can be granted if (1) a product  manufactured in the United States was not available, (2) the cost of U.S.- made rail car component parts was prohibitive, or (3) FTA deems a  purchase from a foreign manufacturer to be in the best interest of the  public. For example, FTA granted a waiver for a transit agency to  purchase diesel-powered transit cars manufactured in another country  because that type of vehicle was not manufactured in the United States. In  another case, FTA approved a waiver for a transit agency’s purchase of a  prototype rail car made in another country because it would be used for  testing the vehicle’s performance. As part of this agreement, the remainder  of the cars in the order was assembled in the United States and complied  with the 60 percent domestic content requirement, which is computed on  the cost of components and subcomponents. According to DOT officials,  these waivers are considered on a case-by-case basis.
Transit agencies also must comply with other requirements—described in  FTA guidance—when they use federal funds to purchase rail cars. For  example, Congress has placed a 5-year limit on transit agencies exercising  options to purchase additional rail cars under an existing contract.  According to FTA officials, this limitation promotes free and open  competition because it presents other manufacturers with the opportunity  to bid on rail car purchases that would otherwise go to a single company  year after year.
In addition, to assist transit agencies FTA has issued a manual—the Best  Practices Procurement Manual—that describes various procurement  requirements and how they can be met. For example, FTA’s guidance  encourages transit agencies to jointly procure rail cars with other transit  agencies in order to save money, if possible. However, there are certain  limitations and procedures that must be followed. FTA’s manual provides  a roadmap on how to conduct joint procurements as well as how options  to purchase additional vehicles under one contract can be assigned to  another agency.
Finally, for FTA New Starts and major capital projects costing over $100  million, FTA monitors the project’s progress to determine whether a  project is on time, within budget, in conformance with design criteria,  constructed to approved plans and specifications, and efficiently and  effectively implemented. FTA’s review of these projects includes a review  of fleet management plans to ensure that transit agencies will be capable  of operating and maintaining their rail cars, and that the number of rail  cars to be purchased is justified by the anticipated ridership. FTA also  reviews the transit agencies’ design specifications for rail cars to help  ensure that the specifications are not so narrowly defined that competition  would be limited to a single bidder.
section_title: The Federal Government Has a Limited Role in Setting Design Standards for U.S. Transit Rail Cars That Varies Depending on the Type of Rail System
paragraphs: According to FTA officials, their input into transit rail car design is limited  to ensuring that Americans with Disabilities Act of 1990 (ADA)  requirements are met and does not include applying uniform design  standards for commuter, heavy, or light transit rail cars. The ADA requires  that transit agencies make transit systems accessible to persons with  disabilities, so transit rail cars must be designed so that a disabled person  can board the car without assistance. FRA sets regulations for commuter  rail safety and also enforces ADA requirements.
The federal government has had a more active role in setting safety  standards for some rail cars. Specifically:    FRA has established safety standards for commuter passenger rail cars  that travel on tracks that also carry freight rail traffic. FRA enlisted APTA’s  assistance to help develop safety standards for commuter rail cars and  then expanded the effort to establish industry standards and  recommended practices for commuter rail car safety. According to FRA  and APTA officials, this has led to greater uniformity in the design and  production of commuter rail cars. This greater uniformity could alleviate  some of the market difficulties that we previously discussed resulting from  customized designs. These standards and recommended practices do not  apply to heavy or light rail transit systems because these transit systems  do not share tracks with freight train traffic, which is generally a  prerequisite for FRA oversight.
While FRA sets safety standards for commuter rail cars, FTA has adopted  APTA “industry standards” and recommendations for transit rail car safety  into its safety requirements. Consequently, transit agencies are required to  follow the industry standards and recommended practices for safety, but,  unlike FRA, FTA does not have direct oversight of compliance or  enforcement authority. Instead, FTA requires states to set up safety  oversight organizations to ensure compliance. However, in December  2009, the Secretary of Transportation proposed legislation that would give  FTA the authority to establish and enforce minimum federal safety  standards for rail transit systems that received federal transit funding. This  authority would provide similar safety oversight for transit rail cars that  FRA has for commuter rail cars sharing tracks with freight trains. In  February 2010, legislation was introduced that would provide that  authority.
section_title: Although Procuring Rail Cars Can Be Challenging, Standardization and Joint Purchasing Have the Potential to Reduce Costs
subsections: section_title: Rail Car Purchases Compete for Existing Funding with Transit Agencies’ Other Needs
paragraphs: Many of the transit agency officials we interviewed said that securing  funding is one of the main challenges that they face when procuring transit  rail cars. As we have previously described, transit agencies may use  federal, state, and local funds to purchase or replace cars but must weigh  these purchases against other capital and operating needs. When a new  line is built, the New Starts program can provide specific funding for the  purchase of rail cars. For example, in 2005, FTA awarded the city of  Phoenix, Arizona, $57 million to purchase 36 light rail vehicles as part of  its full funding grant agreement for the Valley Metro light rail project.  However, once a line is built, there is no federal program that provides  specific funding solely for rehabilitating or replacing transit rail cars.  Transit agencies may use other sources of federal funding, such as Fixed  Guideway Modernization funds or Section 5307 (Urbanized Area) formula  funds, to rehabilitate rail cars but often have many other needs competing  for these same funds, including the purchase of new rail cars.
Transit agency officials we interviewed also cited several challenges  specifically related to using federal funds to purchase transit rail cars.
Transit agencies often replace entire fleets or generations of rail cars at  one time as the rail cars approach their replacement age—typically, 25  years or more. Transit agencies receive federal funding at a relatively  steady level over time, and, therefore, it can be difficult to obtain the  amount of funding needed at one time to replace a fleet or generation of  rail cars.
Transit rail car procurement can take several years. Some transit agency  officials told us that they cannot rely on federal funding for these  purchases because they do not know how much money they will receive  that far into the future.
In addition, some transit agency officials told us that a federal requirement  intended to encourage competition among manufacturers creates  challenges. Specifically, the requirement limits agencies’ ability to exercise  options to a 5-year period once a contract is signed if federal funds are  used. Although this requirement is in place to ensure that the rail car  market is fair and open, transit agency officials report this is burdensome,  because if they decide to procure new cars after the 5th year, they must  the initiate the procurement process—which is both lengthy and costly— all over again.
section_title: Legal, Regulatory, and Other Issues Also Create Challenges
paragraphs: Some of the transit agencies and manufacturers we interviewed identified  specific legal and regulatory factors that pose challenges in the  procurement process.
Transit agency officials identified some federal requirements that impact  their rail car procurements. For example, some officials told us that while  they support the need for ADA requirements, these requirements can be  costly to implement. Officials from one agency said that when replacing a  fleet, the agency needs to buy extra rail cars to compensate for the number  of seats reduced to meet ADA requirements. Nonetheless, the officials  indicated they have recognized the importance of the accessible service  they provide and have successfully incorporated ADA requirements into  their rail designs when they have purchased new cars or rehabilitated  existing fleets.
Likewise, rail car manufacturers have had to adjust operations to meet  federal requirements. For example, to meet “Buy America” requirements,  which require final assembly in the United States, some manufacturers  have decided to build permanent facilities in the United States; others  have built temporary facilities in the location where the order is filled. A  manufacturer’s decision to build a temporary facility can impact transit  agencies if, once the cars are built, manufacturers close the facilities and  transit agencies have to buy certain spare parts from overseas or order  them from specialty manufacturers. Because of the unique designs of rail  cars, the parts may have to be specially made for the individual car design  when replacement parts are needed.
Some transit agency officials and manufacturers told us that they can also  face difficulties when following state or local requirements. For example, a  transit agency and a manufacturer said that a state law that requires full  disclosure of all information, including potentially proprietary information,  in the negotiation process can make it difficult to conduct negotiations  and may limit the numbers of proposals received when purchasing new  rail cars. Officials from another transit agency said that a state law  requiring more than 9 percent sales tax on rail car purchases results in  significant costs that other transit agencies do not have to pay.
Another factor that affects some transit agencies—particularly new or  small agencies—is a lack of experience with the procurement process.  Given the 25-year expected lifespan of most rail cars, some transit agency  officials may participate in only one or two procurements in an entire  career and, therefore, have limited experience and must rely on design  consultants. For example, the Port Authority Trans Hudson’s consultant is  heavily involved in developing specifications for the current procurement  to replace its entire fleet. The last time the agency procured cars was in  1967, and the staff that worked on the procurement are no longer with the  agency. Transit agency officials with limited procurement experience may  not recognize opportunities for cost savings when specifying their design  requirements, and it may not be in the design consultant’s best interest to  identify and encourage the use of standard designs. In addition, since  many transit agencies procure rail cars in relatively small quantities, these  agencies may not be in a position to negotiate for rail car prices in line  with those of the larger agencies.
section_title: Industry Stakeholders Have Identified Opportunities for Economies of Scale through Standardization and Joint Purchases
paragraphs: Although rail car procurement can be challenging for both manufacturers  and transit agencies, industry stakeholders, manufacturers, and transit  agencies have identified opportunities to reduce costs through  standardization and joint purchases.
subsections: section_title: Standardization
paragraphs: To a certain extent, increasing the standardization of transit rail cars could  benefit transit agencies. First, it would enable manufacturers to produce  rail cars for numerous agencies without incurring start-up costs resulting  from breaks in the manufacturing process. Once there is a break in  production, the manufacturer must arrange for rail car components to be  delivered from suppliers, and some of these components have long lead  times before they can be delivered. Furthermore, time is lost and expenses  incurred because manufacturers need to reconfigure or retool their  production line before they can begin producing a rail car. Second,  standardization can benefit manufacturers and transit agencies by  decreasing design costs and may enable manufacturers to take advantage  of economies of scale in the manufacturing process by producing more  vehicles with similar parts.
However, there are arguments against standardization. Specifically, one  rail expert stated that adopting a standard design can discourage  innovation and inhibit research and development. Also, he reported that  a standard design may include features that are unnecessary for all  systems and could add to the price of each car. In addition,  standardization is not possible for all systems. As we have previously  described, many heavy rail systems have unique infrastructure designs.  Transit agencies would need to make major infrastructure changes in  order to use rail cars that are compatible with other agencies’ cars.  According to FTA officials, the cost savings associated with the use of a  standard design would not offset the cost of making these system changes.  There may be more opportunities to standardize light rail or streetcar  systems, particularly in new systems where the infrastructure has not yet  been constructed.
Although current U.S. transit rail car designs differ substantially among  systems, past efforts have attempted to standardize transit car designs.
One successful effort was the Presidents’ Conference Committee (PCC)  streetcar, which was first built in 1934. The committee, which consisted of  industry representatives, produced a standardized design that permitted  the use of assembly line techniques by multiple manufacturers and  allowed for wide variation to meet the needs of various transit agencies.  The design was widely accepted, but U.S. manufacturers stopped  producing PCC cars in the 1950s. However, a few PCC streetcars are still  operating in the United States. For example, the Massachusetts Bay  Transportation Authority (MBTA) and the Southeastern Pennsylvania  Transportation Authority both have active PCC cars on certain lines. A  later effort to create standardized transit rail car designs was less  successful. In the 1970s, the Standard Light Rail Vehicle was promoted by  the Urban Mass Transportation Administration, which created a  committee to develop the car design. A company called Boeing Vertol  started building cars of this design in 1973 for MBTA and the San  Francisco Municipal Railway, but the cars were prone to problems that led  to their early retirement.
Industry associations—including APTA and the Institute of Electrical and  Electronics Engineers—continue to promote standardization in transit rail  car procurement to make transit rail car procurement more cost-effic As part of its standards development program, APTA convened two  working groups in 2009 to develop (1) technical standards and (2) a set of  standard terms and conditions for transit agencies to use when procuring  light rail vehicles. These efforts are funded through membership dues and  grants from FTA, the Transit Cooperative Research Program, and the Joint  Program Office of the Department of Transportation. The goal of the  working group is to produce a set of technical standards that transit  agencies can use when procuring new light rail vehicles and that FTA  could apply to light rail cars, rather than establish federal requirements.These standards may result in reduced design costs for transit agencies  and allow manufacturers  to take advantage of economies of scale in the  manufacturing process.  ient.
The goal of the second working group is to develop a set of standard term and conditions that agencies can use when procuring light rail vehicles.  One of the biggest challenges for transit agencies—particularly for  s  agencies with limited procurement experience—is writing a contract that  makes it easy to identify its terms, including each party’s financial risks.  Currently, each agency addresses risk in its Request for Proposals (RFP)  and contracts in a different format, which makes it difficult for  manufacturers to identify each party’s risks and may slow down the  procurement process. The standard terms and conditions document  should (1) reduce ambiguities in procurement documents, (2) allow tra agencies and manufacturers to save time, and (3) reduce the need for  consultants. According to APTA officials, they expect to have a draft of  standards and a draft of the contract terms and conditions guidance to  industry stakeholders for their comment by late summer 2010.
In addition, there appears to be a push for standardizing high-speed  intercity passenger rail cars. Specifically, the Passenger Rail Investment  and Improvement Act of 2008 (PRIIA) required Amtrak to establish a  committee to design, set specifications for, and procure standardized nex generation train corridor equipment—such as high speed rail. Although  this effort does not affect transit rail cars, it could reduce rail car design  costs for intercity passenger rail.
Some manufacturers have also attempted to increase the standardiza of rail cars, while providing flexibility to their clients. For example,  officials from one manufacturer told us that their company has develo two standard designs that they believe can be customized to meet 80  percent of U.S. transit agencies’ needs for new light rail cars. One is a high- platform car and the other is a low-floor car. The design for a low-floor car  can also be used for a streetcar. These basic designs can be custom ized by  changing the components as required—for example, stronger air  conditioning systems for vehicles to be used in warm weather climates.  Another manufacturer has developed a basic, more affordable design commuter rail cars that can be customized to meet transit agencies’  needs—for example, a customer can change seating and interior materials,  but not the shape of the car. The manufacturer also offers custom des igns,  but at a higher cost. Manufacturers may have more opportunities for  for  standardization if transit agencies seek bids based on performance  specifications that detail agencies’ needs in terms of car performance, as  opposed to design specifications that detail how a car should be built.
section_title: Joint Procurement and “Piggybacking”
paragraphs: Transit agencies have attempted to decrease costs by jointly procuring  transit rail cars or “piggybacking” on another transit agency’s contract to  take advantage of economies of scale. A joint procurement means that rail  cars are purchased by two or more agencies under the same contract. Fo r  example, the Miami-Dade Transit jointly purchased heavy rail cars with  the Maryland Mass Transit Administration in the 1980s. “Piggybacking”  means that one transit agency exercises the options on another transit  agency’s contract for rail cars of the same design. For example, the Utah  Transit Authority piggybacked on San Diego Metropolitan Transit System contract for light rail vehicles. In joint procurements, all transit agencies  must be named in the original contract, and the car designs must no substantially different. In piggybacking, all transit agencies and all  potential option quantities must be named in the RFPs and again in the  contract. Transit agencies can benefit from both of these options through  reduced rail car costs resulting from economies of scale in the production  process as well as reduced design costs per car and procurement costs.
However, transit agency and FTA officials said that the opportunitie joint procurement and piggybacking are limited by several factors:    First, some transit agencies—particularly those with heavy rail system have infrastructure that requires specific rail car features that are not  common in other systems. For example, officials at the Bay Area Rapid  Transit in San Francisco explained that their transit rail cars must be built  from aluminum to meet weight restrictions of the infrastructure, where most other heavy rail cars in the United States are built from stainless  steel.
Second, transit agencies may have customized design requirements ba on local preferences that limit their opportunities for joint purchases.  Officials from one transit agency told us that their riders were accustomed to rail cars with passenger-loading in the center of the car, and, therefore,  they included this feature in their design specifications. The transit agency  vehicles with another agency, unless  would not be able to jointly purchase  they both had the same basic design.
Third, transit agency and FTA officials also told us that it is difficult for  transit agencies to at the same time. coordinate their purchases and have funding available    Finally, transit agencies are not generally aware of other transit agencies’  procurement plans, and there is no entity to formally help facilitate joint  purchases. According to FTA officials, they are aware of two informal  mechanisms for discussing the potential for joint procurement—FTA’s  semiannual New Starts Construction Roundtable conference and APTA  meetings. For example, the Agence Métropolitaine de Transport (AMT) in  Canada identified an opportunity to purchase commuter cars at a reduced  price at an APTA meeting. According to AMT officials, while this was not a  joint procurement, they saved money because they had a similar design to  the New Jersey Transit’s commuter cars that were currently under  production.
section_title: FTA Activities
paragraphs: FTA, recognizing the financial benefits of joint procurements,  piggybacking, and standardized rail cars, has recently looked for ways to  encourage these activities. FTA studied the feasibility of creating an  incentive system in conjunction with Section 5307 (Urbanized Area)  formula grants to encourage and reward transit agencies to take the lead  on joint or piggybacked procurements for buses and rail cars. As part of  this study, FTA implemented a pilot program for joint procurement of  buses. Three of the five pilot projects did not result in successful joint  procurements, but demonstrated some of the difficulties of joint  procurement. Specifically, the study found that (1) the incentives provided  must be significant, (2) it is not adequate to increase the federal matching  portion of existing formula funds, and (3) and it is important to maintain  continuous production without significant changes to achieve potential  savings. FTA did not implement a similar pilot of rail cars as part of this  study.
As a result of the study, FTA recommended to Congress, in a 2008 report,  three alternatives to provide financial incentives to and compensate  agencies that jointly procure transit rail cars:  1.  FTA would award incentive grants to transit agencies that lead joint  procurements to cover a portion of their program management cost.  2.  FTA would award additional federal funding on the basis of the  percentage of the rail car’s contract cost for transit agencies that  participate in a joint procurement.  3.  FTA would increase the federal match for rail cars purchased  according to federally designated standard terms and specifications.
According to FTA officials, Congress authorized a pilot program to provide  incentives for joint bus procurements in the agency’s annual authorization.
section_title: Conclusions
paragraphs: Rail transit offers society a number of benefits, including reduced  congestion and pollution and increased mobility. The benefits are realized  in many cities across the country. However, the relatively small and erratic  market for transit rail cars in the United States can hamper transit  agencies as they purchase rail cars for commuter, heavy, and light rail  transit systems, including streetcars, by increasing the cost and difficulty  of procuring transit rail cars.
Design specifications that focus on custom designs suited for single- system use have increased the amount of work and related costs needed to  design and test these cars. However, efforts are under way to promote  standardized design, including APTA’s efforts to develop procurement  standards for light rail cars and PRIIA’s requirement for Amtrak to set up a  committee to look into designs for high speed rail systems. DOT’s support  of these efforts could pay dividends into the future by making rail cars  more widely available at a lower cost. In particular, systems built in the  future may benefit from increased standardization if they are not limited  by existing infrastructure.
Joint procurements and piggybacking also have the potential to increase  the financial advantages of purchasing large numbers of cars. These  advantages typically have been limited to a handful of larger transit  agencies, since smaller transit agencies have not purchased a sufficient  amount of cars to benefit from economies of scale. While FTA’s  procurement guidance encourages joint procurement, it has not  established a mechanism to assist transit agencies to successfully pool  their orders, and transit agencies have reported difficulties in this area.  Often, transit agencies are not aware of the activities of other agencies in  the procurement arena. Without a process for coordinating performance  and design standards and a means of encouraging joint procurements,  current practices may not substantially change. A more systematic  approach to linking agencies with similar infrastructure and rail car needs  could identify even more of these opportunities. Since FTA helps fund  many procurements, it may be in the best position to help transit agencies  identify joint procurement opportunities.
section_title: Recommendations for Executive Action
paragraphs: To ensure that federal funds are used efficiently when procuring transit  rail cars, we recommend that the Secretary of Transportation direct the  Administrator of the Federal Transit Administration to, in conjunction  with the American Public Transportation Association, take the following  two actions:  1.  Develop a process to systematically identify and communicate  opportunities for transit agencies with similar needs to participate in  joint procurements of transit rail cars.  2.  Identify additional opportunities for standardization, especially for  new systems, such as light rail and streetcar systems.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Department of Transportation for  review and comment. The department provided comments via e-mail,  generally concurred with the report, and agreed to consider the  recommendations. The department also provided technical comments,  which we incorporated in the report as appropriate.
We are sending copies of this report to interested congressional  committees, the Secretary of Transportation, and other interested parties.  In addition, this report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-2834 or wised@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix II.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the key characteristics of the U.S. market for passenger  transit rail cars, we reviewed rail car databases, interviewed transit agency  officials, and spoke with officials representing  the Federal Transit Administration (FTA),  the American Public Transportation Association (APTA),    existing and potential transit rail car manufacturers, and  transit agency consultants.
We used two databases—FTA’s National Transit Database and APTA’s  2009 Public Transportation Vehicle Database (APTA’s transit database)— to determine the number and modes of passenger transit rail cars in the  United States. Both data sets describe the rail cars currently owned by  transit agencies as well as dates the cars were made and the companies  that built them. Both data sets also include information on commuter rail  locomotives, although we did not analyze locomotive data for this report  because locomotives carry no passengers and differ from other passenger  rail cars in terms of technology and the companies that produce them. To  assess the reliability of transit rail car inventory data from the National  Transit Database and APTA, we interviewed FTA and APTA officials about  data quality control procedures and reviewed relevant documentation. We  reviewed the data for missing information and any obvious errors. We  corrected National Transit Database data for one transit agency, based on  information obtained directly from that agency. We determined that the  data were sufficiently reliable for the purposes of this report.
We selected 23 transit agencies to interview about topics for our three  objectives. We conducted site visits at most of these transit agencies and  interviewed the rest by telephone. To select them, we used the National  Transit Database, which was current for U.S. transit agencies, as of 2008,  according to FTA officials. We adjusted this database to include additional  transit rail service reflected in APTA’s transit database. Thus, we added 1  agency, the Valley Metro Rail of Phoenix, Arizona, that started its first rail  service late in 2008 with a light rail line. We also added commuter rail  service, started in 2009, by the Tri-County Metropolitan Transportation  District of Oregon, an agency that had previously operated light rail  transit, for a total of 54 transit agencies.
From the list, we judgmentally selected transit agencies on the basis of  their size, rail transit modes (commuter rail, heavy rail, and light rail), and  geographic distribution. The 23 agencies we contacted collectively  managed about 17,600 rail cars (88 percent) of all 19,841 rail cars managed  by U.S. transit agencies. These transit agencies represent 42 percent of the  54 transit agencies we identified through the previously mentioned transit  databases. However, the results of our work are not generalizeable to all  transit agencies. As shown in table 2, our sample agencies managed cars  that approximate the distribution of rail cars in the U.S. fleet.
The 23 transit agencies we contacted, representing 33 types of transit  systems, were located in 13 states and the District of Columbia and were  distributed across the country, as shown in table 3.
In addition, we interviewed two consulting companies working with the  transit agencies that we interviewed. One contractor, Louis T. Klauder and  Associates, was serving as a car consultant for the Port Authority Trans  Hudson at the time of our visit. The other contractor, Virginkar &  Associates, Inc., was serving as rail car procurement contractor for the Los  Angeles County Metropolitan Transit Authority at the time of our visit.
To determine how the U.S. market for transit rail cars compares with  international markets for transit rail cars, we reviewed data obtained from  SCI Verkehr in Cologne, Germany. To assess the reliability of transit rail  car inventory data from SCI Verkehr, we interviewed a company official  about data quality control procedures. We determined that the data were  sufficiently reliable for purposes of this report. Furthermore, with the help  of the Department of State, we contacted:    domestic and multinational rail car manufacturers;    Agence Métropolitaine de Transport—the commuter rail service provider  for Montreal, Canada;  rail officials from Canada, Japan, New Zealand, and Portugal;    Korean Board of Audit and Inspection; and    European railway associations, including the Light Rail Transit  Association, headquartered in the United Kingdom; and UNIFE—the  Association of the European Rail Industry.
To determine the key characteristics of the U.S. market for passenger  transit rail cars and to determine how the U.S market for transit rail cars  compares with international markets for transit rail cars, we judgmentally  selected six companies that are existing and potential transit rail car  builders. Five companies were selected mainly due to their status as either  a major producer in the U.S. transit rail car market or a U.S.-based  producer. One company was selected due to the relevance of its October  2009 congressional testimony about the U.S. rail car market and rail car  design standardization initiatives. These companies were as follows:    Kawasaki Rail Car, Inc.
United Streetcar/ Oregon Iron Works  To determine the federal government’s role in funding and setting  standards, we reviewed applicable federal law, regulations, guidance, and  grants and interviewed FTA officials at headquarters and select regional  offices. We also interviewed APTA officials regarding the federal  government’s role in setting design standards.
To identify any challenges that transit agencies face when procuring  transit rail cars, we met with transit agencies representing 33 types of  transit systems across the country, transit rail car manufacturers, transit  agency consultants, and FTA and APTA officials.
We conducted this performance audit from September 2009 through June  2010 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. We provided a draft of our  report to the Department of Transportation and incorporated its  comments in the report as appropriate.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Catherine Colwell, Assistant  Director; Amy Abramowitz; Richard Calhoon; Sarah Jones; Stephanie  Purcell; Amy Rosewarne; Frank Taliaferro; and Crystal Wesco made  important contributions to this report.