Finding an Appropriate Role for PPPs in the Infrastructure-Creation Process

» California seems certain to leverage private funds for its $40 billion-plus high-speed rail project. But just how much can it demand from for-profit sources? And who will benefit?

Too often, the opposition of American conservatives to increased investment in intercity rail appears to based on little more than denial. Today’s op-ed in the San Francisco Chronicle by Liam Julian is a case in point: The research fellow at the Hoover Institution puts in doubt the California High-Speed Rail Authority‘s plan to raise $12 billion from private investors to cover about a quarter of the $43 billion cost of the initial Anaheim-Los Angeles-San Francisco line.

Flip a few pages over, and you’ll find a dueling op-ed from Oliver Hauck, president of Siemens Mobility USA articulating his own company’s interest in accepting “some of the risk inherent in financing this major upgrade to the American transportation system” through a public-private partnership (PPP). Mr. Hauck’s no hack — similar excitement about contributing private sector funds to the project have come from French railroad operator SNCF and JR Central, one of Japan’s preeminent carriers.

The decision this week by the French track owner RFF to award a 50-year concession to contractor VINCI to build, manage, operate, and maintain the planned Sud Europe Atlantique high-speed line provides evidence that the private sector is quite willing to commit significant capital to the construction of new fast train projects. The 300 km French project will reduce travel times between Paris and Bordeaux (about 350 miles) to just over two hours from three hours today and will cost €7.2 billion (about $10 billion) to build. A quarter of costs will be covered by the national government using France’s relance (stimulus) funds and another quarter has been contributed by affected regions and cities.

The other half of construction costs will comes from VINCI, which has made the commitment in return for the right to collect track fees on high-speed TGVs using the line. The company clearly thinks the investment is a profitable proposition on a long-term timetable. The Sud Europe Atlantique project becomes one of the largest PPPs in Europe ever. It will likely attract three million additional annual riders between Paris and Bordeaux (from around 16 million today) once the corridor opens for service in 2016. The existing line will be opened to increased commuter and freight rail services.

RFF plans similar partnerships for the other three high-speed lines it will advance to the construction phase over the next few years: the 2nd phase of the Est-Européene line, completing the Paris-Strasbourg link; a bypass around Nîmes and Montpellier, eventually speeding trains to Barcelona; and the Bretagne-Pays de la Loire corridor, linking Brittany to the national network.

Still think California’s planned $12 billion private-sector contribution is so unreasonable, Mr. Julian?

California and other American states will be able to develop significant private-sector interest in aiding the construction of what have proven to be money-making projects worldwide.

But what’s not being adequately discussed is whether the involvement of the private sector in high-speed rail projects is a safe bet, and whether it will produce beneficial consequences for the population as a whole.

The assumptions made by those advocating private-sector involvement seem relatively solid at face value: the public sector lacks adequate funds because of decreasing tax revenue; businesses are theoretically more creative and will reduce delays; by moving line construction, operations, and maintenance to a third party, you eliminate some of the political aspects of any government-funded project; and risks inherent in any such major program can be transferred away from the taxpayer.

Problematically, however, many of those assumptions have been proven false in the real world.

In both Taiwan and the United Kingdom, private infrastructure firms managing the construction of new high-speed lines have gone broke because of their reliance on loans taken out at high rates, leaving the taxpayer to foot the bill on both line construction and loan back-payments. All the “creativity” in the world bulging from the minds of entrepreneurs didn’t save the people of either of those countries any money compared to what they would have gotten from a fully public operation. In each of those cases, the “risk” supposedly assumed by private corporations was dumped back onto the public sector because you don’t put billions of dollars in a high-speed rail program and then simply throw it away when private funds evaporate.

At least you shouldn’t.

It could be argued that governmental entities can manage infrastructure funding more effectively because they’re able to take out loans at much lower interest rates. This power could be expanded if the U.S. Congress establishes a national infrastructure bank, as has been recently suggested. A fully public operation would allow taxpayers to get some of their investment back through operational revenues; by contracting out a PPP, those profits will all go into the hands of corporations and their shareholders.

Just as important, by moving profit into the private sector, the government entity providing the majority of financing for a line’s construction loses some of its leverage over the project. This makes it difficult to articulate social equity goals in execution. The French example is quite useful from this perspective: by charging low fares from the start made possible because operations were run by a non-profit governmental entity, TGV services were able to build ridership quickly and ensure that high-speed rail is a travel option available to everyone.

Yet if profit is the primary motivator in high-speed operations, the possibility of low fares may thrown out the window. The California Authority has compared ridership and revenues in scenarios with fares set at both 50% and 83% of airline ticket prices; lower train fares would attract almost twenty million more annual passengers than would higher prices — but profit would be slightly lower. Some have suggested thus that the Authority choose bigger profits over higher ridership, with the presumption that private investors would be more attracted to the program if they could gain more from it.

But prioritizing profits has many negative side-effects apart from the loss of generalized mobility made possible with low fares: those twenty million potential riders unwilling to pay big money to ride the system will choose air and road alternatives instead of the train and produce increasing congestion and air pollution. Is that an acceptable trade-off?

Nevertheless, if managed correctly, a public-private partnership on the scale of what California is suggesting could be implemented without many negative consequences, especially if the role of the for-profit side of the equation is limited as much as possible. Facing enormous debt trouble, California has little maneuvering room to increase its bonding capacity beyond the $10 billion already committed to the project; meanwhile, the corridor is competing with projects across the country for very limited federal funds.

Getting the PPP process right, though, is vitally important.

A potential compromise would be to focus private involvement on the real estate side of the equation. The residents of California are wealthy, and the state could make billions by selling off development rights for land surrounding stations. Limited private investment in the line itself could mean a diversion of some, but not all, profit away from the public sector, leaving room to fulfill non-profit-oriented goals.

We can’t discard this unique opportunity in a business give-away.

Image above: California High-Speed Rail train, altered version from that produced by state high-speed rail authority

15 Comments | Leave a Reply »
  • Charanga

    I appreciate this timely response to Liam Julian’s op-ed piece. It frustrates me that he did not put is concerns in context. The Sud Europe Atlantique project example as the largest European PPP is compelling. Thank you for this information.

  • Cameron Slick

    Yonah, what property abutting stations in California or any planned HSR-designated corridor station is owned by a government entity. The post office next to Penn Station comes to mind, but their are plans for that, already. On the Chicago-Twin Cities line, I can’t imagine anything being government-owned except for some parking and easements next to Madison Airport, and the parking lot next to St. Paul Union Depot. Where is the land to sell?

  • First, a nitpick: JR Central runs the busiest Shinkansen line, but because its commuter network is so small, it’s smaller than JR East by any metric.

    More to the point: PPPs really have three separate problems. One is that the governments sometimes use them as an excuse to deny access to low-interest loans. This is what happened in the Channel Tunnel and THSR projects. In the case of the Channel Tunnel, it came from malice on the part of Thatcher, who hated public transportation. In the case of THSR, it didn’t.

    Two, unless there are clear delineations of who has to contribute what, government and business can blame each other for budget escalations, removing any incentive to control costs. This is not just a problem of PPPs; you can get the same issues by extensively using private consultants on a public project. Unsurprisingly, the two countries that do this the most, the US and UK, also have by far the highest transit construction costs in the world.

    And three, the bidding process is vulnerable to corruption. This happened in both projects, creating problems that shouldn’t have existed in the first place. In the Channel Tunnel, Goldman Sachs spread rumors about imminent bankruptcy to buy everyone else out for pennies on the dollar. And in THSR, the joint Franco-German bid to build the infrastructure engaged in so much bribery that one of Taiwan’s top officials was killed in the conspiracy; that’s why Taiwan pulled the plug on the bid late in the project, buying Japanese trains to run on the already-built French infrastructure.

  • Gabriel Ratener

    Isn’t SNCF a public operator?

  • Chris

    Will the public have to fund alternate infrastructure for those other 20 million commuters or is it just a case of induced demand? Potentially a serious conflict of interests.

    And do you have “commercial in confidence” in America yet, because governments love to hide their incompetence/ possible corruption behind PPP’s here in Australia.

  • Phineas Baxandall

    The recommendations here are similar to US PIRG’s report on high-speed rail.
    http://cdn.publicinterestnetwork.org/assets/d2cbda5b0c2d2d23101a0aef69daece6/The-Right-Track-vUS.pdf

    The government doesn’t need to own the land next to stations to generate land revenue. It can also sell zoning rights to build higher and bigger than would otherwise be allowed.

    USPIRG has also done a study of public-private toll roads like the SR 91 project in California and the Skyway in Chicago. It can be found here:
    http://www.uspirg.org/home/reports/report-archives/transportation/transportation2/private-roads-public-costs-the-facts-about-toll-road-privatization-and-how-to-protect-the-public

  • Adirondacker12800

    Private railroads regulated by the government brought us Penn Central and Conrail. Worked out real well in the UK and Japan too. Seems like a plan to me.

    PPPs are a way to privatize the profits and socialize the risk. If this is such a good idea, one that will make money either the private company should go out and do it or the government should take all the profits.

    • The mainland JRs not only are profitable, but also perform better than JNR did on metrics such as reliability and safety. Even before JNR’s privatization, Japan had plenty of good private railroads. Don’t try to compare it to the British Rail privatization disaster.

      • Max Wyss

        Although I wonder how much profit the Japanese private railroads make from the railroad operation, and how much they make as real estate enterprises.

      • They make profits out of both. Their core business is transportation; the real estate holdings are mainly retail near their major stations, to create more destinations they serve well.

      • trainsintokyo

        Although the real estate or leisure segments make up the largest percentage of revenue for some companies, I’m pretty sure every one of the 15 major non-JR private railways has more operating profit coming in from transport-related businesses than from any other segment. (This may include buses and other non-rail transport, however.) This is true in the Tokyo, Nagoya, Osaka, and Fukuoka metropolitan areas.

  • DauntlessRV

    If the Taiwan and UK PPP arrangements led to the private entities going bankrupt and forcing a public buyout of the infrastructure investments made by the private entities, I don’t see that as an entirely burdensome result; it all depends on the price the public had to pay to acquire the infrastructure. It could well have been a bargain purchase if the public managers in charge had thought all the way through to a bankruptcy of the private entities, and had provided for an outcome where there was not great pain on the public side. Is this a failure of public-private partnership? Or a lack of skill and acumen on the part of the public managers?

    Governmental entities can..”take out loans at much lower interest rates”? Some governmental entities can and some entities can NOT. And some of the entities that may be able do borrow at cheaper rates (e.g., state and local governments in the U.S.) can do so because the interest paid on loan principal is tax-exempt (for federal purposes) to the investor. So, there is a subsidy, and a hidden cost there; this is not exactly cheaper borrowing I think, this is comparing “apples and oranges”.

    Finally, I wonder about the statement that “a fully public operation would allow taxpayers to get some of their investment back through operational revenues, by contracting out a PPP, those profits go back into the hands of corporations and their shareholders..” If the PPP is brought into the equation to provide the capital in lieu of the public sector having to come up with the requisite capital, which is seemingly one of the top few reasons to consider a PPP arrangement, then of course revenues thrown off from the investment are needed to service the debt of the private entity and pay a return to the investors that have taken on the project risk. The revenues flow to whoever made the investment. The revenues can’t go to the public sector if the investment came from private capital. And if there was such an obvious low-risk return on the investment, then perhaps the public sector would never have contemplated bringing in private capital. So, I am not clear that this line of argument is entirely consistent. Thanks very much.

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