California High-Speed Rail High-Speed Rail

A Different Future with California High-Speed Rail

» California’s Senate takes a courageous step in supporting the first construction stage of the state’s high-speed rail project. There is much more work to be done.

Last week, America’s future in high-speed rail took a modest step forward. On Thursday, California’s State Assembly approved by a 51 to 27 margin the release of $2.5 billion in state bonds for the construction of a 130-mile segment of 220-mph tracks through the Central Valley and the implementation of $2 billion in commuter rail improvements in the Bay Area and Los Angeles regions. On Friday, by a vote of 21 to 16, the State Senate expressed its agreement.* If all goes as planned, the project could be under construction by the beginning of next year. Tracks between Madera and Bakersfield could be ready for use by 2017, the first step towards what could be an eventual 2h40 journey time for trains traveling from downtown San Francisco to Los Angeles.

The passage of the bill, which also frees up $3.2 billion in federal funds allocated for the project, is a major success not only for Governor Jerry Brown and California’s Democratic Party (no Republicans in either chamber voted in favor of the program), but also for President Obama and his Department of Transportation, which have championed high-speed rail as an essential element of America’s future transportation system. Moreover, it is a victory for those who argue that, despite the challenges and the compromises, in order to advance societal change on a grand scale, major investments in projects such as this are necessary.

The line section that will be built first has not been without controversy. Choosing to begin construction in the Central Valley, away from the population centers of the Bay Area and L.A. Basin, has induced the expected calls of a “railway to nowhere.” Yet the route selected in fact serves an area with a population of 3 million people and offers the crucial link between the two large metropolitan areas to the north and south. It is the only section of the system where sustained speeds of 220 mph can be offered by trains cruising down the straight-aways through farmlands. And it can be done at the moderate cost of about $44 million per mile, in a similar range as projects such as France’s LGV Sud-Europe Atlantique, now under construction (211 miles at a cost of €6.2 billion, or $7.6 billion, so about $36 million per mile).

If the only goal of the project were to connect L.A. and San Francisco as quickly as possible, the project could have been built to run around I-5, which charts a slightly straighter route through the Central Valley — not doing so, the L.A. Times told us today, could be a major flaw in the project.** But that alignment would skip over the Central Valley’s cities, depriving them of the direct access to California’s biggest regions. Because they currently do not have good airline service, they stand to be some of the places that benefit most from the project.

More importantly, though, California’s rail project is a statewide program about more than people from the coast. Without support from some residents and politicians in the Central Valley, the program could not have been passed either in 2008 or last week. Avoiding Fresno may have made building any high-speed rail impossible.

This raises a larger question. The high-speed rail project is quite expensive and it is not perfect. Its creation and development have been the result of compromise and negotiation between political leaders whose interests do not necessarily coincide with the ideal investment. But we live in a democracy where our elected officials, not engineers, make final decisions about projects such as this. Does an imperfect project deserve to be abandoned? I think not. It should be criticized and improved, but its weak points should not be achilles heels.

Map of the initial plans for service along the California High-Speed Rail route, showing the Madera-Bakersfield segment now approved for construction. Source: California High-Speed Rail Authority

What is so exciting about California’s project is the initiative the state and its municipalities have taken in the advancement of a program that could — if the public so desires — alter permanently the geography of America’s most populous state. By passing the $9.5 billion referendum in 2008, state voters indicated that they were willing to put a very substantial chunk of their own money, not just federal funds, on the line for an investment that will truly offer an alternative to automobile and aviation travel in this state. San Francisco, San Jose, Los Angeles, and San Diego are each in the process of significantly expanding their local rapid transit systems in a manner that will make them compatible with local high-speed rail stations. And the state has made a priority the development of a land use strategy that encourages denser construction around stops.

In other words, despite years of opposition from conservative groups concerned about spending of California’s “readiness” for high-speed rail, the state has advanced with an entrepreneurial spirit the project and accompanying changes. No other state has made nearly as serious an effort to consider its future infrastructure needs and integrate them into a unified planning policy.

Even if the initial construction segment is put under construction as planned — that may be difficult considering the regulatory approvals and barrage of lawsuits standing in its way — there are enormous obstacles to actually implementing the planned connection between San Francisco and Los Angeles, the most significant example of which is the lack of adequate fiscal resources. The California High-Speed Rail Authority’s 2012 business plan expects that it will cost $31 billion to connect Bakersfield to the San Fernando Valley, meaning that about $18 billion in funding is still necessary even for this first step, taking into account the roughly $8 billion released last week and the additional $5 billion for fast trains included in the 2008 referendum. For a one-seat ride between San Francisco and L.A., $51 billion will be necessary; for 2h40 service between the cities, $68 billion is required (this is in year-of-expenditure dollars; this is equivalent to $53 billion in today’s money).

While that figure might be acceptable from the perspective of overall public investment in infrastructure, where will that money be found? The U.S. transportation reauthorization bill passed last week provides no additional funding for high-speed rail. Republicans have demonstrated against intercity rail and rejected several projects despite federal support. In his campaign platform, Mitt Romney cites “privatizing Amtrak” as a top way to save the government money. The outcome of the 2012 elections will determine whether California will be able to move ahead as expected, or whether it will have to put off plans by two years or more.

The reality is that the prospects for the project’s completion in the next decade and a half, as currently planned, are limited. There is simply inadequate determination in the U.S. political sphere to make a project of this magnitude anywhere close to easy to execute. That does not mean that the project will not be built, but that making it happen will require years of negotiations, compromise, and expansion of popular support. We could be at the start of something very exciting, but there is a lot of work still left to be done.

A final note: To those who would suggest that the funds would be better used in the Northeast Corridor (an often-cited example of a “more reasonable” place for high-speed rail), there are two limitations that make such a project less than ideal. For one, the Northeast Corridor runs through eight states and the District of Columbia, leading to conflicting priorities and differences in opinion about the right investments to make. While Connecticut might want to spend its share of funding on improving train travel between New Haven and Hartford, Massachusetts might be interested in improving the main line along Connecticut’s shore to allow fast trains between New York and Boston. How can those problems be resolved with so many conflicting claims to power?

Moreover, whereas California’s citizenry has voted in favor of spending $10 billion of the state’s money on the high-speed rail projects, Northeast Corridor states have proposed nothing of the sort, and their residents have not had the chance to endorse anything similar. It would be unjust for the federal government to orient funding towards a section of the country with so little local commitment to a project, whatever the need.

Two, the high cost of California’s high-speed project has of course caused significant controversy, but the financial requirements of a true high-speed line for the Northeast would be far higher. The Boston-Washington corridor is simply much more developed than California’s Central Valley and thus there is less space to install track capable of 220 mph; the only way to do so is to invest in very expensive tunnels or land takings. Thus it is no surprise that Amtrak’s latest vision for high-speed rail service in the Northeast, released on Monday, would cost $151 billion to construct by 2040. If the West Coast project seems expensive, Amtrak’s seems extravagant.

* By a close, one-vote margin. The measure required a two-thirds majority to be approved.

** The article claims that French rail company SNCF recommended a route along I-5. Yet SNCF’s 2009 proposals for U.S. high-speed rail, which I broke, say “SNCF endorses the alignment proposed by the CHSRA project linking San Francisco Transbay Terminal to downtown Anaheim, passing through Los Angeles Union Station, Palmdale, Bakersfield, Fresno, Gilroy, and San Jose Diridon.” In other words, the company explicitly endorsed the alignment through the Central Valley cities, not along I-5.

California High-Speed Rail Finance High-Speed Rail

High Costs Threaten California’s High-Speed Rail Project, But the Wider Context Must be Understood

» Over the long run, California’s fast train project remains within an acceptable range of costs, despite recent increases.

The release of the California High-Speed Rail Authority’s revised business plan on Tuesday underlined concerns about the future viability of the nation’s biggest proposed transportation project: Not only would its completion have to be delayed significantly — to 2033 or later — but projected costs have risen dramatically, to $98 billion in year-of-expenditure dollars. In a political environment where making a large long-term commitment to anything other than the military is almost impossible, the increasing costs required to pay for the program put in doubt its future. This fast train project designed to connect Los Angeles and San Francisco in 2h40 is not dead, but its completion is less likely now than it was last week.

The steadily rising nature of the public expenditures that would be required to build the project as now designed have been roundly criticized in some quarters, and it is true that the project’s increasing reliance on very heavy and expensive infrastructures like viaducts and tunnels may be unnecessary by international standards. But the project’s per-mile costs — even with the cost increase — are not hugely different from those in other developed countries for rail systems offering speeds of up to 220 mph.

Yet the broader issue is how the project’s price compares to that of existing public sector transportation investments and the economy as a whole, and as the chart above demonstrates, its ostensibly enormous price is, well, relatively small.

Between now and 2033, the rail project would cost between $65 and $75 billion (in 2010 dollars). Over the same period, Caltrans, California’s Department of Transportation, can be expected to spend at least $286 billion (also in 2010 dollars), mostly on roads projects, assuming that its current annual budget of about $13 billion (including federal and state outlays) stays intact. In truth, considering that there is considerable support for increasing infrastructure spending in general, that figure is likely to go up considerably.

Compare those figures to the state’s GDP, which is estimated at about $1.9 trillion a year. Over the course of twenty-two years, the state will produce $42 trillion in output (again, in 2010 dollars) — assuming no growth in the economy, despite the fact that California’s population is expected to grow by seven to seventeen million people by 2040.

This very conservative* estimate, then, suggests that a high-cost rail project would not only represent only 0.18% of a heavily depressed state economy over 22 years, but also that it would only account for 21% of the broader state transportation budget, which would remain mostly focused on highway construction and maintenance, as in the status quo. On average, the U.S. invested between 2.5 and 3% of its GDP on publicly sponsored infrastructure between the 1950s and 1990s. The full cost of the California project thus comes to appear far less dramatic.

The project becomes even less problematic considering it is, like almost every high-speed rail project, expected to be operationally profitable, and that its benefits to the society will be larger than its costs. The analysis done by the authority, based on decreased travel times, lower use of fuel, reduction in pollution, increases in productivity and reliability, and a decline in traffic accidents, suggests a decent benefits-cost ratio of 1.5 to 1.8. This does not include other benefits, such as the ability to avoid building hundreds of lane-miles of new highways and expanded airports to accommodate the mobility needs of millions of new California residents.

Nor is such a significant investment in one project out of the international norm. The Grand Paris Express, designed to connect the suburbs of the French capital with a circumferential rail network, will cost about $40 billion to build (including ancillary improvements in the existing system). This alone will represent about 0.4% of the Paris region’s GDP between now and 2025. Both the Paris and California projects will contribute massively to the economic growth of the regions in which they are being built.

The question, then, is two-fold: First, what level of investment should the country make in its transportation system? Second, are other transportation projects more valuable than the California rail project?

The first issue is political: Is there sufficient support among electoral constituencies in California to allow for the continued sponsorship of what will be a drawn-out process with plenty of controversy? California Governor Jerry Brown appears to remain on board, as does, surprisingly, at least one member of the state GOP delegation. The rail authority’s attempt to stage the project — beginning with a segment between the Central Valley and either the Los Angeles Basin or Bay Area, and then moving for a full-length line — is one way to make the project more palatable in the short term.

More broadly, the state must make a decision about how it wants to invest in its transportation future. As already noted, the state department of transportation is likely to invest about $300 billion in mostly highway infrastructure over the next two decades. With so much spending directed towards the roads network, it cannot be easy to dismiss a large spending commitment to rail. But the difference between the two is obvious: Because the rail line is a single project (despite its statewide implications), it is viewed in terms of its huge costs and long-term lifecycle; the roads improvements likely to occur during the same period are four times as expensive — but broken into much smaller, shorter-term projects, so they are far less politically vulnerable.

And the system will surely need further support from the federal government, which the authority hopes to convince (over the next few decades) to chip in $20 billion or more in grants. Because of the insecure fiscal situation, private funding for the project will have to wait. Nevertheless, a future Congress that considers high-speed rail an acceptable mode of transport will likely fund projects nationwide; remember that earlier in 2011, President Obama proposed entirely seriously investing $53 billion in fast trains. Though that effort was not successful, the idea is clearly on the minds of policymakers.

None of this suggests that it would be a bad idea to reduce the costs of the project. The cost of the line cannot continue to increase infinitely (though the authority’s math in this business plan is based on the considerable preliminary engineering completed since the last plan in 2009, so that doesn’t seem likely). The whole line cannot be put into tunnels or onto viaducts in order to avoid community opposition, or it will become impossible to fund.

At a certain point, the question is therefore whether there are other programs that would provide better societal benefit than the high-speed rail system, and this is a valid conversation worth exploring. From my perspective, moving the money into roads infrastructure would be simpleminded considering the need to expand mobility options and decrease levels of pollution. It could also be possible to use the funds for local transit expansion, which has plenty of unmet capital needs, especially in California’s largest cities. But who in the state is proposing a comprehensive effort to upgrade rail and bus networks? And how would that spending address the needs of intercity travel?

* And admittedly back-of-the-envelope, but the point is to highlight proportions here, not specific values.

California High-Speed Rail Finance High-Speed Rail

With Little Hope for Near-Term Federal Support, California High-Speed Rail Struggles

» Despite an excellent proposal and significant state support, the project cannot hope to attract private investors without a larger commitment of aid from Washington. Meanwhile, Europe continues to invest.

The long hoped-for private financing necessary to construct the California High-Speed Rail project will not come as easily as originally planned.

That, at least, is the conclusion of the authority empowered to build the project, the nation’s single-largest infrastructure program. According to the Los Angeles Times, in a letter to legislators this week the agency warned that the private money that it had counted on to cover a third of the project’s more than $45 billion costs would likely not be available until after parts of the line were up and running. The problem is that investors are concerned about the fact that of the expected major contribution from the federal government, only $3 billion has been authorized so far — and opposition in Congress to President Obama’s high-speed rail program means more money will be difficult to get, at least until after the 2012 elections.

The letter was essentially a preview of the authority’s new business plan, which is due to be submitted November 1. The plan must be approved by the state legislators in order for state funding to be spent on the 220 mph line, which is designed to connect Los Angeles and San Francisco, with future links to San Diego and Sacramento.

The news is embarrassing for the authority, which has been arguing for years that it could attract billions in private funds before the project was ready to be built, but it is not altogether surprising given the situation in which it has been placed. As I argued in mid-2009, California may well “never receive a guarantee that the feds will fully fund their prescribed share of the entire corridor’s construction costs. This is a huge problem, because a public agency shouldn’t be expending massive amounts of money on sections of a train system it doesn’t know it can finish completely. The private partners California hopes to interest in its program will not be excited about helping out on a train line they aren’t sure will ever open.

And indeed, this has been a legitimate concern about the Obama Administration’s high-speed rail program since it was first formulated. Though it is designed to sponsor major projects like California’s, its small appropriation ability means that the commitments it should be making — California wanted upwards of $10 billion from Washington, equal to the full amount thus far appropriated by Congress to the national program — cannot be distributed. The fact that the House and Senate have yet to agree on a long-term transportation bill, and the fact that Republicans have shown no interest so far in funding more intercity rail programs using the public purse, suggests that the situation is unlikely to get better for now.

This is likely to put a dent in plans to open the new rail line by 2020.

The California authority has developed a series of potential solutions to the problem, which must be solved if the agency wants to use the federal grants it has received thus far, since they must be spent by 2017. One option is to use federal loan guarantees and tax credits to provide an incentive for private investors to put their funds into the project or to leverage the $9 billion in state funds (authorized by the public in a 2008 vote) through the bond market, which could allow a tripling of available money. This would all have to be paid off eventually through public sector tax funds or user fees. While the California network is to be operationally profitable like virtually every high-speed rail system, it is unclear whether receipts will be large enough to cover capital costs.

The other possibility is to shorten the planned route, replacing what was originally supposed to be a full new line from San Francisco to Los Angeles with a feeder line that would speed up existing Amtrak trains. Because the federal government has committed to a Central Valley segment between Merced and Bakersfield as the first section fo the route to be constructed, it seems likely that the authority would have to concentrate its resources on this project.

In some ways, this could be a reasonable approach. Trains between Oakland and Bakersfield currently take six hours to complete their journey, but the high-speed line would allow 52-minute trips between Merced and Bakersfield, compared to three hours today. Thus constructing just this segment would reduce Oakland-Bakersfield trips to less than four hours — a massive reduction in journey times — if the appropriate rolling stock were available.

Of course, this would do little to address the greater concern, which was supposed to be linking San Francisco and Los Angeles in 2h40. Currently, there are no direct trains into San Francisco, and the coastal route along which Amtrak trains run from Oakland to L.A. requires 11 to 12 hours of journey times. There is no train link between L.A. and Bakersfield. Because of the federal government’s previous decision to concentrate its resources in the Central Valley, resolving this issue will have to wait for another time if more funding is not found in the short term. But one wonders whether a link between Oakland and Bakersfield will be enough in itself to generate profitable ridership that convinces private investors to commit to the project, as the authority seems to be implying.

This news comes just as the European Union announced its most recent Ten-T program, which is investing €31.7 billion in ten E.U.-scale corridors, most of which are designated for high-speed rail. Member countries have committed to hundreds of billions of euros more to build the projects, and indeed, there are active plans for new lines in most European countries. This is a prime example of governments thinking seriously about how to invest their limited resources in transportation projects that will pay off in the long-term.

Some might argue that the United States and Europe are simply different, that private investors here recognize that Americans will not ride trains and thus will not commit to funding irrational projects. But the ability of European countries to attract private partners to cover up to half of the costs of their new rail lines has a lot more to do with the fact that there has been a solid commitment from governments there to invest in those programs, whereas American policy on the issue has been erratic at best.

The problem is that California has been shunted into an impossible position: forced to make due with very limited federal funds despite a large commitment from state voters, the authority cannot attract private dollars. This is not, I would argue strongly, the fault of the authority or the Department of Transportation, which has funded it so far; blame rests entirely on a Congress that has been incapable of having a serious discussion (and making a final decision) about the merits of major investments in the nation’s transportation infrastructure. Instead, it continues to hand out small amounts, enough to keep projects like California’s alive but not enough to actually implement them.

But California is still in a bind. It must either must cancel work — a dead-end proposition that will inevitably require unearthing the proposal in a decade — or build a much-shortened segment with far fewer benefits to the state. While it would be nice to get from Oakland to Bakersfield more quickly, the advantages of such a project pale in comparison to those of a full San Francisco-to-Los Angeles line.

None of this news should be cause for celebration for opponents of spending on government infrastructure. The millions of people who are expected to ride the high-speed rail system every year will have to get between their destinations by some mode, and California’s air and roads infrastructure is at capacity. No high-speed system means spending just as much — or more — public dollars on upgrades to the existing system. Meanwhile, even if the financial costs of upgrades to highways and airports were similar to those of building the new rail network, the society’s economic costs of doing so are completely different: The high-speed rail system would offer an ecologically friendly alternative that reinforces the city centers of the state instead of furthering sprawl.

Without a real sign of commitment from the federal government, however, projects like California’s simply will not be able to be constructed in the United States. This speaks volumes of the ability of the American public sector to invest in projects that are beneficial to the society as a whole from a long-term perspective.

Image above: California High-Speed Rail, from California High-Speed Rail Authority

California High-Speed Rail Finance France High-Speed Rail

Doing Right by the Public: PPPs in High-Speed Rail

» As the retrenchment continues in the American public sector, private-sector investors are likely to play an important role in paying for fast train systems.

California Governor Jerry Brown, a longtime supporter of the development of high-speed rail, has not given up on his state’s plans for an extensive network stretching initially from San Francisco to Los Angeles, and then on to Sacramento and San Diego. Despite cost estimate increases, opposition to the line among residents of some affected areas, and a total loss of new federal funding thanks to anti-investment Congressional Republicans, Mr. Brown has made evident in recent weeks his support for the line.

Construction on a segment in the Central Valley between Merced, Fresno, and Bakersfield is still planned to get under way next year. Funding for that initial link is mostly lined up, thanks to state commitments and federal grants resulting from the stimulus of early 2009.

But because of more detailed projections, the 178-mile first phase of the project is now expected to cost far more than initially envisioned — $10 to $13.9 billion instead of $7.1 billion — and it will need an injection of funds from another source to be constructed. With a promise to the state’s citizens that another demand for California-wide funds will be avoided, few local dollars to contribute, and an utter inability to rely on Washington for practically anything, that means the system will have to find private investors to join in. Whatever the relative merits of allowing private companies to invest in what is fundamentally public infrastructure, California has no other place to turn for the successful completion of its system.

California is not alone; with a depressed economy and few public sector funds available, there is increasing recognition of the importance of engaging private-sector funds in the creation of infrastructure. Illinois Governor Pat Quinn signed a bill this week authorizing public-private partnerships (PPPs) to be used for the creation of infrastructure in his state.

Critics of the California High-Speed Rail Authority have repeatedly argued that the agency would be unable to locate businesses that might be willing to contribute to the system, but international examples suggest that there is significant private sector interest in infrastructure construction. The Authority will release a request for qualifications soon and select a winning bidder in early 2012. But it has yet to clarify the manner in which it would structure its relationship with private companies in terms of financing, construction, and operations.

For precedents, the state should to look at France, which has recently signed two very large deals with private financing and construction conglomerates for the completion of two new extensions of its already large high-speed rail network. They provide two different models for engaging PPPs.

The first is the Bretagne-Pays de la Loire (BPL) high-speed link, which will connect Western France to the existing northern branch of the Atlantique line with 182 km of new tracks between Le Mans and Rennes for a cost of €3.4 billion. The connection will reduce running times from Rennes to Paris by 37 min, making it possible to travel on 320 km/h TGV trains between the cities in less than 1h30 by the time construction is complete in 2016.

The PPP contract here is being mostly funded with public sector sources; RFF, the public infrastructure owner, will contribute €1.4 billion, with state and local governments paying about a billion Euros more. 30% of the costs will be financed by the private sector group Eiffage. These loans will be paid back over twenty years with pre-determined fees from RFF and the government.

Like the Rhônexpress project in Lyon that connects the city center to the airport, this PPP arrangement essentially keeps the operations risks in the hands of the public sector; if ridership comes in under estimates, it will have to scrounge up funds from elsewhere to pay Eiffage its standard due. If ridership is higher than estimates, RFF will make a profit on its investment.

The other much larger project soon to begin construction in France is the Sud-Europe Atlantique line, which will extend the southern branch of the existing Atlantique line 302 km from Tours to Bordeaux. This €7.8 billion program will by 2017 bring Bordeaux within 2h05 of Paris, about an hour faster than today. Ridership to and from that city and Toulouse, planned to be about four hours away from Paris, is expected to rise substantially.

Because of the expected profitability of the line, RFF signed a concession contract earlier this year with a private consortium called LISEA made up of Vinci construction company (33.3%), the Caisse des Dépôts (25.4%), SOJAS investment company (22%), and AXA bank (19.2%). The 50-year contract, which includes construction, operations, and maintenance, is the largest-ever PPP for a high-speed rail construction project in Europe.

LISEA will contribute €3.8 billion to the project, with the remainder of costs being financed by the public sector, from local, region, national, and European sources. Much of the private funding will come from low-interest, long-term loans that will be repaid through charges on TGVs and other trains using the line, which will eventually be passed on to the ticket-paying passenger. The public sector funds are grants, so about half the line’s construction cost is expected to be paid back through ridership over the course of fifty years.

Unlike the BPL line, which limited risks of operational profitability and line ridership to the public sector, in this case the private investors will be responsible if initial estimates fall short.

If it wasn’t clear, the business case for Sud-Europe Atlantique line, like that for the California High-Speed Rail Authority, assumes operational profitability. Considering that the international record shows that high-speed rail systems have little difficulty achieving self-support, these are not unsound predictions. In both cases, the advantage of acquiring private-sector support for the project is delaying public investment and using future revenues to pay back construction costs. Each approach has its advantages, especially in terms of where risk is directed.

It would be a mistake to conclude from these examples that private-sector involvement will save any significant money over the long-term. Fundamentally, the creation of PPPs to fund projects such as California High-Speed Rail does not mean that the public at large will end up being responsible for a smaller percentage of overall costs. Indeed, the U.S. Department of Transportation’s Office of Inspector General released an under-recognized report last month that expounded on this fact significantly.

By considering a series of PPP highway projects in the U.S. and abroad, the study noted that they “have a higher cost of capital than traditional public financing… [and] involve equity investors who own stakes in the projects, share in the profits, and expect to earn higher rates of return for the risk they undertake,” in addition to having to pay taxes public projects do not have to pay. Even if PPPs have lower design and construction costs, may be able to more effectively increase tolls, decrease percentage of evading users, and take more advantage of concessions*, they are usually not able to offset the higher costs resulting from the formerly noted issues.

Some states like Illinois and Indiana have “made” billions by leasing off highways to private investors for billions for fifty years or more, but the report argues that “the funds paid upfront to the public sector under a PPP are paid in exchange for future revenues, often in the form of tolls.”

In other words, while the taxpayer may appear to be getting a discount now by having a business group pay for infrastructure, users of that same infrastructure will inevitably have to face the costs of future tolls. In the case of high-speed rail, replacing public sector investment during the construction phase with privately financiers using loans means higher ticket prices in the future to pay back a portion of the costs of construction. There is no free lunch.

The question is whether benefits of a transportation investment advantage the entire public or whether they are reserved to the specific people who take direct use of it. Transportation economists are convinced of the value of user fees, which assume that it is inefficient to carry out redistribution through indirect means, and for them, it makes perfect sense to charge users the full cost of not only the operation but also the construction of the infrastructure they are using. (Many economists would also argue that high-speed rail projects have significant positive externalities like pollution reduction and land use prioritization attached to them that demand direct grants from the government to cover some costs.) This user-fee approach is the method being used in the financing systems of the PPPs discussed here.

Others, however, would argue that the benefits of infrastructure like high-speed rail are economy-wide and that they should be paid for not only by users but by all members of the population through taxes. If we take this side of the argument, it becomes less clear that the best value for the society is to divert most costs to users. A grant-based system assumes that benefits of a transportation investment are felt by people throughout a country (such as through economic growth) and therefore just charging the riders for the costs of capital investments would be inappropriate.

Encouraging private investment in the California high-speed system now may make it more feasible to envision its construction in the short-to-medium-term. Delaying using future public sector revenues to pay for a project today is the basis of much long-term investment, so there is nothing particularly out of the norm about this idea. But the use of such investment will realistically mean a future of higher ticket prices resulting from the need to pay off the bonds taken out for the project’s completion.

Nor is the involvement of private-sector groups in a public-sector project risk-free. In fact, the devastating example of the United Kingdom’s High-Speed 1 line, connecting London to the Channel Tunnel, suggests that any decision to incorporate private investors in public infrastructure should be approached with skepticism — even trepidation.

A report from the Public Interest Research Group, also released this summer**, established a number of valuable principles for PPPs that are useful to consider in evaluating whether or not to include private groups in the funding process for a high-speed rail line. These suggestions include aligning “private sector incentives with public sector goals,” only pursuing PPPs “where ample competition exists,” ensuring “clear public accountability,” retaining public control over system decisions, limiting lengths of contracts, and guaranteeing transparency in the contracting process.

In addition to considering the French examples for PPP contract models, these are helpful suggestions that should be taken to heart by the California High-Speed Rail Authority as it develops its plan to bring fast train service to the state.

* Many of these fiscal advantages may (or may not) stem from the ability of private sector groups to avoid paying workers living wages, comply with minority workforce inclusion programs, fulfill expectations expressed by the public in the democratic system, and so on.

** For the sake of full disclosure, I served as a reviewer for the PIRG report.

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Washington, California, and the Curious Case of the Railway to Somewhere

» California’s fast train network should be built, but can its backers maneuver around the difficult federal grant system that is supposed to fund it?

Here’s a little-known fact about California’s geography: The Central Valley, believe it or not, is situated between Los Angeles and San Francisco.

All kidding aside, the California High-Speed Rail Authority’s choice of the Fresno-Bakersfield route for the system’s first construction phase has produced a flurry of criticism, most recently from the California Legislative Analyst’s Office (LAO, a sort of CBO for California). The LAO released a report this week that suggests that the project be reevaluated, perhaps by being absorbed into Caltrans (the state department of transportation) or possibly by being refocused on other initial corridors, such as Los Angeles to Anaheim or San Francisco to San Jose, which could act as improved commuter rail corridors if the whole system were never completed.

The report has its inaccuracies and parts of it deserve the skewering Robert Cruickshank provided it. Most significantly, the notion repeated by the report that faced with limited funds it is “more realistic” to focus on shorter corridors within metropolitan areas rather than between them completely misunderstands the value of high-speed rail.

The stretch through the Central Valley — along which trains will travel at 220 mph — is the crucial investment for a fast train system in the state. By allowing trains to accelerate to extremely fast speeds not possible within metropolitan areas, the system can produce true time savings over automobile and air alternatives.* Without the Central Valley link, the network would simply be a series of improved commuter lines.

Unfortunately, incremental improvements, rather than major new investments, are what the financing system that has been developed so far by the U.S. Congress and Department of Transportation is better at producing.

The problem California is now encountering has been a difficulty with the federal intercity rail process since its formulation with the 2009 Stimulus. Ironically the grant-making process — supposedly designed with high-speed rail in mind — has been more effective in funding smaller upgrades to existing Amtrak corridors than it has in financing large construction programs like California High-Speed Rail. This was a foreseeable dilemma.

In August 2009, before states had even submitted their grant requests, I wrote that the allocation system as initially designed would do few favors for the advancement of major projects:

“The problem is that the FRA [Federal Railroad Administration] has no standardized system by which to hand out those funds; as of now, it looks like the Department of Transportation will simply distribute money every few months to the projects it deems most valuable. As a result, California could get a billion here for the Transbay Terminal or a billion there for a line between Bakersfield and Merced, but never receive a guarantee that the feds will fully fund their prescribed share of the entire corridor’s construction costs. This is a huge problem, because a public agency shouldn’t be expending massive amounts of money on sections of a train system it doesn’t know it can finish completely. The private partners California hopes to interest in its program will not be excited about helping out on a train line they aren’t sure will ever open.”

And indeed, my predictions were right on point: The DOT has distributed relatively small grants every few months to its preferred projects (the two I anticipated were in fact funded) but it has never said it would fully commit to the completion of the entire California line. This has produced the second thoughts and hesitation on the project we are now seeing on the part of California politicians afraid that they will never get the federal dollars for which they have been hoping.

What is needed — and what has been needed for more than two years — is a Full-Funding Grant Agreement for intercity rail projects. Like the system used by the Federal Transit Administration for New Starts major capital projects, this agreement would commit all relevant entities to the financing and construction of a specified “Minimum Operating Segment” (MOS) designed specifically to offer mobility improvements without necessitating other segments to be completed to be viable. For public transportation projects, this contract ensures that Washington, the local transit agency, and other funding entities will keep to their word and finish the project by contributing a pre-determined share of total costs. This has been an efficient and effective system,** so bringing it into the intercity rail arena is a no-brainer.

What is currently funded in California — the Central Valley section — would likely not qualify as an MOS because it has not been designed and studied as an independent project; alone, it would probably not attract enough riders to justify its cost. A high-speed project like California’s, which requires entirely new tracks, would preferably be analyzed as a whole (as it has been) and funded as such. The same is true for other proposed true high-speed rail routes, like Amtrak’s $117 billion Northeast Corridor plan or a new route between Dallas and Houston, which this week received a $15 million planning grant from the DOT. In order to be built effectively and efficiently, each would need a signature from the federal government that ensures that a certain percentage of costs would be covered.

Lacking the significant budgetary authority to commit to such a process in any place proposing a high-speed rail line costing more than $5 billion, however, the DOT has had to hand out grants to smaller aspects of the $43 billion California project with the hope that one day the funding will come through for the entire system. This puts California officials in a bind: Are they supposed to be able to to attract private investment with such few assurances from Washington? Are they supposed to proceed with construction, even if they cannot be sure that the whole project will be completed? The federal government’s grants imply that Washington will put up its share of the project’s cost, but they certainly do not guarantee it.

The LAO report effectively suggests that the project be put on hold pending the answers to these questions. If California cannot be sure that it can fund the entire system, the logic goes, perhaps it should not be building the central stretch. But abandoning the work the state has done so far, or just delaying the program in hope of more definite policies in the years ahead, is a recipe for giving up on the project altogether. Today, California has momentum on its project — a supportive governor and billions of dollars in the bank amassed just over the past two years — so in the face of confusion in Washington, it at least has a chance to move forward. If the state relaxed its grip now, would it be able to keep going?

* Frequently overlooked is the fact that some of the world’s most successful high-speed routes, whether between Paris and Lyon or between Barcelona and Madrid, are more accurately high-speed lines in the countryside between the cities. At the ends of the routes, within the metropolitan areas themselves, trains generally run on slower-speed older lines.

** With the exception of a certain project in New Jersey.

Image above: High-Speed Rail in California’s Central Valley, from California High-Speed Rail Authority