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Private High-Speed Rail: A Dangerous Fantasy

By Phineas Baxandall
Senior Analyst for Tax & Budget Policy

The politics of high-speed rail can be bizarre. Few people actually oppose connecting our cities with fast intercity trains. Most of the industrialized world has already shown that the idea is popular and works well. The politicians that do the most to prevent high-speed rail generally claim to be fans of bullet trains who just want the task to be left to the private sector.

In Congress, chair of the House Transportation and Infrastructure Committee John Mica (R-FL) last week released a six-year blueprint for America's transportation system that failed to allocate a dime for high-speed rail. Yet Mica calls himself "the best cheerleader" for high-speed rail. He insists additional public money shouldn't be spent on it or that each public dollar must leverage many times more private dollars.

A new report released today shows why leaving high-speed rail chiefly to the private sector is a dangerous pipe dream. The study, High-Speed Rail: Public Private or Both? Assessing the Prospects, Promise and Pitfalls of Public-Private Partnerships by U.S. PIRG shows that private financing and operations can be a supplement to public commitments, but not a substitute. Moreover, without tough public rules and steady government oversight, private partnerships will yield costly problems.

The issue isn't whether public-private partnerships (PPPs) can play a major role in developing high-speed rail. They can. Foreign and domestic firms have capital and expertise that can be cultivated. Infrastructure projects entail major risks that can be shared with private investors.

But high-speed rail simply won't get built without the public taking the lead. No modern high-speed rail line has ever been built with only private capital. Advocates for private-only investment ignore this fact. 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. And often the "private" partners have actually been state-owned companies or highly-regulated entities with government representatives on the board, much like Amtrak.

Moreover, the experience with high-speed rail PPPs has been mixed. While PPP arrangements have brought private capital and expertise to the task of building high-speed rail, PPPs have also sometimes resulted in cost overruns, government bailouts, and other serious problems for the public. Private investment entails a number of additional risks and costs. For instance, private companies must offset their higher costs for capital, as well as costs related to the profits they pay to private shareholders. Private-sector actors can hold projects hostage and demand increased subsidies or other concessions from the government. In negotiating and enforcing PPP agreements, government must count on additional costs of hiring and retaining the lawyers, financial experts and engineers.

In Taiwan, for example, in 1998 the government signed a 35-year private concession to build and operate service linking the Island from North to South, based on the promise that no public funding would be required. When the Asian financial crisis struck, the private operator was forced to take on large debt at much higher rates than a governmental body would. The private shareholders eventually balked at finishing the project, leaving it in financial limbo. The government had little choice but to accede to a costly bailout.

America must learn from these experiences. We should accept that the public sector will provide the anchor and pursue PPPs only in keeping with key principles designed to protect the public interest. Based on a variety of international cases in Europe and Asia, the report recommends ten common-sense principles to evaluate and guide public-private partnerships. These are:

1) Governments must not pursue PPPs for the "wrong" reasons, such as to avoid budgetary discipline or compliance with governmental standards. Instead, PPPs must be chosen for their ability to deliver a public project for lower price or with higher quality.
2) 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.
3) 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. Private partners shouldn't prosper for creating public misfortune.
4) PPPs must only be pursued where ample competition exists for the service being put out for bid.
5) PPPs must only be pursued by competent, well-prepared governments with the ability to defend the public interest in contract negotiations, monitoring and contract enforcement.
6) There must be clear public accountability in PPP projects, with one government agency responsible for oversight and holding contractors accountable for performance.
7) The public must retain control over key transportation-system decisions.
8) PPP projects must not impose unreasonable limitations on future government action.
9) PPP contracts should be of reasonable length.
10) There must be complete transparency in the PPP contracting process and in the execution of PPP contracts.

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. Pretending otherwise is a political fantasy that will likely become a public nightmare.

Click here to see a copy of U.S.PIRG's report.

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