Funding is of course a necessity. But I would like to use market power as much as possible, consistent with serving public needs, in order to distribute those funds. Currently we dump billions to build highways...not so much to keep them in good repair...and divert a comparative trickle to rail-based transportation.
I'm not against public funding of highways; the Constitution explicitly authorizes the federal government to build and operate post roads. However, railroads—all of them—have been Congressionally recognized as post roads for nearly two hundred years (1838, according to Wikipedia).
Hey, I agree, markets are really useful.
For over a century essentially all U. S. railroads were privately owned and operated, and for much of that time many of the managements did an exemplary job of running them.
...and this created its own problems. Why do the railroads have screwy criss-cross routes in Chicago and many separate passenger terminals? Private competing track ownership. Same problem in London and Paris. Countries with national systems didn't end up with this sort of stupid stuff. The "Joint Line" in Colorado would never have existed but for nationalization under USRA; would have continued the inefficient scheme of two separate single-track lines criss-crossing each other...
Furthermore, an awful lot of the private railroads went bust. *In the 19th century*.
Even with the private duopolies we have now, there's still craziness if you're trying to ship freight from a UP-served point to a BNSF-served point...
I'd like to restructure the incentives to encourage them to do so again.
Sure. But I think there's something fundamentally *government* about a railroad right-of-way. In the 19th century, to allow the private railroads to function, the government had to grant eminent domain -- a quintessentially government power -- to private companies. They still have it. This is not a situation which is popular these days -- use of eminent domain for private companies is really going to lose you a lot of votes.
This is why I think the most "privatized" system which would actually work involves government or charitable trust ownership of the land and tracks, with the private involvment being on the operational side, under contract. There are an awful lot of different ways this could be arranged. I will note that Wick Moorman actually proposed this when he was CEO of NS -- having the government own the lines and the private companies operate them.
Doing this with "franchises" is more or less what the UK did after a totally failed attempt to privatize the track (which led to deaths). The UK system isn't working so well either and people are calling for a return to full nationalized operations, though.
The problem with franchises is that they are a one-way bet. The franchisee claims to take revenue risk, but actually doesn't: if they do better than expected they keep the cash, if they do worse, they discontinue service and break the contract.
As a result, a much more common system in the US is "contracting out", where the government declares what services are desirable and takes the revenue risk, while the private company attempts primarily to operate it as well as possible.
The UK also has "open access", where private companies can simply bid for slots to run routes the government didn't think were necessary, taking the revenue risk, and this has worked out quite well, though it only amounts to a tiny fraction of services; it does, however, create dynamism and experimentation. It turns out it is much *easier* to have this sort of experimental, entrepeneurial activity with government-owned track (where they're inclined to accept any new operator) than with privately owned track (where there's a "get off my track!" attitude).