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High-Speed Rail: Public, Private or Both?:Assessing the Prospects, Promise and Pitfalls of Public-Private Partnerships
by Tony Dutzik and Jordan Schneider, Frontier Group; Phineas Baxandall, U.S. PIRG Education Fund
Private sector companies are likely to play a major role in the construction of high-speed rail lines in the United States. Even as California nears construction of the nation’s first high-speed rail line, however, it remains unclear just how the private sector will participate in building out the nation’s high-speed rail network.
Public-private partnerships – or “PPPs” – have come to play an important role in the construction of high-speed rail lines around the world. In a PPP, the public and private sectors are supposed to share the risks, responsibilities and rewards of infrastructure development.
The experience with high-speed rail PPPs around the world, however, has been mixed. While PPP arrangements have brought private capital and expertise to the task of building high-speed rail, PPPs have also resulted in cost overruns, government bailouts, and other serious problems for the public.
America must learn from these experiences and pursue PPPs only in situations in which they make sense – and do so in keeping with a series of key principles designed to protect the public interest.
Public-private partnerships will likely be part of the development of high-speed rail in the United States.
- High-speed rail systems require billions of dollars in financial capital, which cash-strapped state and federal governments are likely to seek through partnerships with the private sector.
- California is moving forward with the creation of the nation’s first true high-speed rail system, and it is required by ballot initiative to obtain private investment in the project.
- Amtrak is seeking to involve private investors in its plan to bring true high-speed rail service to the busy Northeast Corridor.
- The U.S. Department of Transportation has signaled that private investment will play a key role in achieving President Obama’s goal of linking 80 percent of the U.S. population via high-speed rail by 2035.
All high-speed rail public-private partnerships require substantial public investment.
- No modern high-speed rail line has ever been built with only private capital. In several recent and current European high-speed rail PPPs, the public sector has been responsible for more than half the capital cost of the high-speed rail line.
No two public-private partnerships are alike.
- There are countless varieties of high-speed rail PPPs, meaning that each such partnership is unique and must be evaluated on its own terms.
Public-private rail partnerships have the potential to unlock access to private capital, expertise, technology and economies of scale, and can also help mitigate the risk of high-speed rail projects to taxpayers. However, PPPs also come with a number of risks and costs, including:
- Higher costs for capital, as well as costs related to the profits paid to private shareholders.
- Heightened risk for the public once a project has begun, due to the ability of private-sector actors to hold projects hostage and demand increased subsidies or other concessions from government.
- The costs of hiring and retaining the lawyers, financial experts and engineers needed to protect the public interest in the negotiation of PPP agreements and to enforce those agreements over time.
- Loss of control over the operation of the high-speed rail line, which can result in important transportation assets being operated primarily to boost private profit rather than best advance public needs.
- Delays in the early stages of a project, as government and private partners engage in the difficult and complex task of negotiating PPP agreements.
High-speed rail PPPs and efforts toward rail privatization abroad have a mixed track record.
- In Taiwan, the government’s efforts to pursue a fully private-sector built and financed high-speed rail line fell apart – despite rising ridership – as the private company responsible for building the line faced a financial crisis caused by its reliance on high-cost debt. The Taiwan government ultimately stepped forward to bail out the company and refinance its debt.
- In the Netherlands, a series of problems led to massive cost overruns in the construction of a high-speed rail line, most of which became the responsibility of the government. The PPP process was characterized by illegal collusion among bidders for the construction contracts, poor coordination among the various contracts, and unexpected delays that required the government to provide emergency bailouts.
- In Great Britain, an effort to privatize the operation of the nation’s rail infrastructure led to a decline in the system’s safety. Excessive use of contracting, coupled with poorly designed incentives, caused delays in the response to known safety problems and a massive backlog of critical maintenance projects – problems that contributed to a deadly train accident in 2000. In the wake of that accident, the formerly private infrastructure provider was reorganized as a government-regulated non-profit.
- Portugal engaged in thoughtful development of a PPP strategy for construction of its high-speed rail system. However, Portugal’s high-speed rail program still required a large investment of public resources and the nation may be responsible for paying financial compensation to its private sector partners if it pulls back on its high-speed rail construction plans in the midst of a devastating financial crisis.
Public officials should use a set of common-sense principles to evaluate public-private partnerships – and should refuse to pursue PPPs that do not serve the public interest.
The principles that should guide government’s approach to high-speed rail PPPs are:
- Governments must only pursue PPPs for the “right” reasons, such as the ability to deliver a public project for lower price or with higher quality – rather than use PPPs to avoid budgetary discipline or compliance with labor standards or other regulations governing public projects.
- PPPs must deliver added value for the taxpayer, as measured by a comprehensive test that includes all the relevant costs of a high-speed rail project.
- PPPs must align private sector incentives with public sector goals, ensuring that private sector partners experience penalties and rewards that forward the public’s interest in timely and cost-effective completion of the project and effective and safe operation.
- PPPs must only be pursued where ample competition exists for the service being put out for bid.
- PPPs must only be pursued by competent, well-prepared governments with the ability to defend the public interest in contract negotiations and to properly monitor and enforce contracts as they are carried out.
- There must be clear public accountability in PPP projects, with one government agency responsible for overseeing the project and holding contractors accountable for their performance.
- The public must retain control over key transportation-system decisions, ensuring that high-speed rail lines are built and operated in ways that are consistent with the public interest rather than the maximization of private profit.
- PPP projects must not impose unreasonable limitations on future government action, such as the “non-compete” clauses in some toll road leases that forbid government from improving other nearby transportation facilities.
- PPP contracts should be of reasonable length, with contracts for the operation and maintenance of long-lasting infrastructure being longer than contracts for trains, communications equipment and other items with faster turnover.
- There must be complete transparency in the PPP contracting process and in the execution of PPP contracts. When there is a conflict between public right to be informed and private investors’ confidentiality rights, the former should prevail.
Government agencies considering PPPs should understand that even well-crafted PPPs are not a panacea – and that a strong government commitment to the project is likely necessary to draw productive private investment. Specifically:
- Governments should be prepared to undertake extensive early planning and environmental review of a project before submitting it to bid, in order to reduce project uncertainties and increase the comfort of private actors in submitting competitive bids.
- Governments should be prepared to reduce the risk of cancellation of a project mid-stream by providing full-funding grant agreements that provide a multi-year commitment of government funds.
- Governments should acknowledge that public investment is necessary for the completion of a high-speed rail project and understand that even “private” rail proposals are likely to impose public costs, particularly in the event of a threatened private-sector default.