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