California High-Speed Rail High-Speed Rail Taiwan

Securing the Financial Health of New High-Speed Projects

» The recent failure of Taiwan High-Speed Rail raises questions about the role of private investment in new trains systems.

The California High-Speed Rail Authority projects that it will need about 33 billion in 2008 dollars to complete its initial San Francisco-Anaheim link, a reasonable estimate considering the cost of peer systems. In addition to the $9 billion in state funds devoted to the project by last November’s referendum, the Authority is banking on $2-3 billion in local money and $12-16 billion in federal contributions. Because this aid won’t be enough to cover the full costs of the line, the state will also demand $6.5-7.5 billion in help from public/private partnerships. In other words, the Authority is hoping it can raise 20% of construction costs with the help of corporate interests that would be able to benefit from some of the line’s operating profit.

The international experience, however, could put a damper on hopes for private involvement. This week, Taiwan High-Speed Rail fully revealed its fiscal impotency; the national government will have to take over the operating company, three years after the project opened to the public. The Taiwanese system, which cost more than $15 billion, was the first in the world built entirely with private funds — 80% of which were secured through bank loans at high interest rates. Though the line’s fare revenues, lower than projected, make up for operations, maintenance, and even most interest payments on the initial capital costs, elevated depreciation charges put the railroad into its misery. The recession, which decreased interest in travel, put the final stake in the company’s heart.

A government bailout plan will essentially force the public to assume the costs of paying back loans that provided for the system’s construction. No one would argue with the fact that pure government spending on the line’s construction, either direct through tax-based spending or with the support of loans at a low marginal rate, would have cost less money in the long-term, simply because of lower interest payments.

Taiwan’s experience is directly comparable to that of the United Kingdom’s High-Speed One, which was undertaken by London & Continental Railways under the initial presumption that the project would be entirely a product of private investment. Earlier this year, however, the European Union agreed to allow the British government to bailout the operation, which had gone bankrupt after construction was completed in 2007. Incompetence on the part of the corporations involved with the project had already forced the government to support £3.7 billion of bonds in 2006; aid this year amounts to £5.7 billion, compared to the initial capital cost of £5.8 billion.

In both cases, one wonders why private industry was involved at all if the respective governments were eventually going to to have to find the money to cover the price of the whole project anyway — plus pay interest on debt accumulated by failed companies.

Of course, California’s plans are different. While both the Taiwanese and British projects relied on bank loans that accounted for 80% of construction costs, the U.S. project will only be dependent on a 20% private investment. Revelations last week of SNCF’s expression of interest in involvement in the California system demonstrate that foreign companies see U.S. high-speed systems as potential money makers — and the French company’s report specifically argues that the U.S. project’s economics are sound. But just how much private money is an acceptable risk? Having the California High-Speed Rail project default on its obligations is unacceptable, because it would put a dent in plans for train systems throughout the country by dramatically illustrating “wasteful” spending in action — specifically the kind of example we cannot give anti-infrastructure conservatives.

The two experiences cited above indicate that a fully private project is very risky, and that makes sense; making up a huge initial capital cost like that of a rail line through loan back payments requires enormous revenues and limited operating needs. California’s estimates demonstrate annual fare revenues ($2.3-2.5 billion) that are about double operations costs ($1.1-1.3 billion); Taiwan’s system has similar financials, but paying back the bank has bankrupted the company.

Is a 20% private share acceptable? A $7 billion private investment would require roughly $560 million a year in payments at 5% interest over a short 20 year-period (totaling about $4.2 billion in interest). California’s system would provide a generous profit of $500 million for the operating company if revenues and operating costs are as expected; in bad years, or if ridership estimates are too high, the system could sustain revenues 20% lower than projected without going into the red. This seems reasonable.

California’s interest in a limited private involvement, then, avoids the risk inherent in a fully private project like that in Taiwan. Even so, one wonders whether there’s any point in taking the risk at all. The Authority projects a high benefits-cost ratio of 2.84 when considering passenger revenue, benefits to rail travelers, and reduction of road congestion, air pollution, car accidents, and airline delays. There is a clear government interest in building the high-speed line — so why do we need corporations to get involved?

California’s inclusion of private cash is a reflection of political reality: it is easier to claim that a project is financially viable when it has private money backing it up. In addition, the federal government is limited in the amount it can be expected to contribute, since it must also provide for projects in other parts of the country. It’s a good thing, though, that no one’s promoting a fully private system for the state, because that would likely result in more costs to a government forced to bailout a bankrupt company.