High-Speed Rail: Public, Private Or Both? Assessing the Prospects, Promise and Pitfalls of Public-Private Partnerships

High-Speed Rail: Public, Private or Both? Assessing the Prospects, Promise and Pitfalls of Public-Private Partnerships

Education Fund High-Speed Rail:

Public, Private or Both? Assessing the Prospects, Promise and Pitfalls of Public-Private Partnerships

Illinois PIRG Education Fund

Tony Dutzik and Jordan Schneider, Frontier Group Phineas Baxandall, U.S. PIRG Education Fund

Summer 2011 Acknowledgments

The authors thank Michael Likosky, senior fellow at the Institute for Public Knowledge at New York University, Elliot Sclar, professor of urban planning at Columbia University, and Yonah Freemark of the Transport Politic for their review of this report. Thanks also to Carolyn Kramer for her editorial assistance.

Illinois PIRG Education Fund thanks the Rockefeller Foundation and the Ford Foundation for making this report possible.

The authors bear responsibility for any factual errors. The recommendations are those of Illinois PIRG Education Fund. The views expressed in this report are those of the authors and do not necessarily reflect the views of our funders or those who provided review.

With public debate around important issues often dominated by special interests pursuing their own narrow agendas, Illinois PIRG Education Fund offers an independent voice that works on behalf of the public interest. Illinois PIRG Education Fund, a 501(c)(3) organization, works to protect consumers and promote good government. We investigate problems, craft solutions, educate the public, and offer Illinoisans meaningful opportunities for civic participation. For more information about Illinois PIRG Education Fund or for additional copies of this report, please visit www.illinoispirg.org/edfund.

Frontier Group conducts independent research and policy analysis to support a cleaner, healthier and more democratic society. Our mission is to inject accurate information and compelling ideas into public policy debates at the local, state and federal levels. For more information about Frontier Group, please visit www.frontiergroup.org.

Design: Harriet Eckstein Graphic Design Cover photo illustration: Renfe Operadora, Dirección de Comunicación, Marca y Publicidad Table of Contents

Executive Summary 1 Introduction 5 Public-Private Partnerships: What They Are and Why They Matter 6 Public-Private Partnerships and their Role in High-Speed Rail 6 Models of Public-Private Partnerships 9 The Pros and Cons of Public-Private Partnerships 15 Potential Benefits of PPPs 15 Potential Problems of PPPs 17 Evaluating the Experience Abroad 21 Protecting the Public Interest: Principles for High-Speed Rail PPPs 30 1: Governments Must Only Pursue PPPs for the “Right” Reasons 30 2: PPPs Must Deliver Identifiable Added Value 31 3. PPP Contracts Must Align Private Sector Incentives with Public Sector Goals 31 4. PPPs Must Only Be Pursued in an Atmosphere of Competition 32 5. PPPs Must Only Be Pursued by Capable and Prepared Governments 32 6. There Must Be Clear Accountability in PPP Projects 33 7. The Public Must Retain Control over Key Transportation-System Decisions 33 8. PPP Contracts Must not Impose Unreasonable Limitations on Future Government Action 34 9. PPP Contracts Should Be of Reasonable Length 34 10. PPPs Must Be Subject to Extraordinary Transparency 35 When Do PPPs Make Sense? 35 Are PPPs Really Worth It? 35 Notes 37

Executive Summary

rivate sector companies are likely to Public-private partnerships will play a major role in the construction likely be part of the development of Pof high-speed rail lines in the United high-speed rail in the United States. States. Even as California nears construction of the nation’s first high-speed rail • High-speed rail systems require bil- line, however, it remains unclear just lions of dollars in financial capital, how the private sector will participate in which cash-strapped state and fed- building out the nation’s high-speed rail eral governments are likely to seek network. through partnerships with the private Public-private partnerships—or sector. “PPPs”—have come to play an important role in the construction of high-speed rail • California is moving forward with the lines around the world. In a PPP, the public creation of the nation’s first true high- and private sectors are supposed to share speed rail system, and it is required the risks, responsibilities and rewards of by ballot initiative to obtain private infrastructure development. investment in the project. The experience with high-speed rail PPPs around the world, however, has been • Amtrak is seeking to involve private mixed. While PPP arrangements have investors in its plan to bring true brought private capital and expertise to the high-speed rail service to the busy task of building high-speed rail, PPPs have Northeast Corridor. also resulted in cost overruns, government bailouts, and other serious problems for • The U.S. Department of Transporta- the public. tion has signaled that private invest- America must learn from these experiment will play a key role in achieving ences and pursue PPPs only in situations in President Obama’s goal of linking which they make sense—and do so in keep- 80 percent of the U.S. population via ing with a series of key principles designed high-speed rail by 2035. to protect the public interest.

Executive Summary 1 All high-speed rail public-private result in important transportation as- partnerships require substantial public sets being operated primarily to boost investment. private profit rather than best advance public needs. • No modern high-speed rail line has ever been built with only private • Delays in the early stages of a project, capital. In several recent and current as government and private partners European high-speed rail PPPs, the engage in the difficult and complex public sector has been responsible for task of negotiating PPP agreements. more than half the capital cost of the high-speed rail line. High-speed rail PPPs and efforts toward rail privatization abroad have a No two public-private partnerships mixed track record. are alike. • In Taiwan, the government’s efforts • There are countless varieties of high- to pursue a fully private-sector built speed rail PPPs, meaning that each and financed high-speed rail line fell such partnership is unique and must apart—despite rising ridership—as be evaluated on its own terms. the private company responsible for building the line faced a financial Public-private rail partnerships have crisis caused by its reliance on high- the potential to unlock access to private cost debt. The Taiwan government capital, expertise, technology and econo- ultimately stepped forward to bail out mies of scale, and can also help mitigate the company and refinance its debt. the risk of high-speed rail projects to taxpayers. However, PPPs also come with • In the Netherlands, a series of prob- a number of risks and costs, including: lems led to massive cost overruns in the construction of a high-speed • Higher costs for capital, as well as rail line, most of which became the costs related to the profits paid to responsibility of the government. The private shareholders. PPP process was characterized by il- legal collusion among bidders for the • Heightened risk for the public once a construction contracts, poor coordi- project has begun, due to the ability nation among the various contracts, of private-sector actors to hold proj- and unexpected delays that required ects hostage and demand increased the government to provide emergency subsidies or other concessions from bailouts. government. • In Great Britain, an effort to priva- • The costs of hiring and retaining the tize the operation of the nation’s lawyers, financial experts and engi- rail infrastructure led to a decline neers needed to protect the public in the system’s safety. Excessive use interest in the negotiation of PPP of contracting, coupled with poorly agreements and to enforce those designed incentives, caused delays in agreements over time. the response to known safety problems and a massive backlog of critical • Loss of control over the operation of maintenance projects—problems that the high-speed rail line, which can contributed to a deadly train accident

High-Speed Rail: Public, Private or Both? in 2000. In the wake of that accident, project and effective and safe the formerly private infrastructure operation. provider was reorganized as a government-regulated non-profit. 4) PPPs must only be pursued where ample competition exists for the • Portugal engaged in thoughtful service being put out for bid. development of a PPP strategy for construction of its high-speed rail sys- 5) PPPs must only be pursued by tem. However, Portugal’s high-speed competent, well-prepared govern- rail program still required a large ments with the ability to defend the investment of public resources and the public interest in contract negotiations nation may be responsible for paying and to properly monitor and enforce financial compensation to its private contracts as they are carried out. sector partners if it pulls back on its high-speed rail construction plans in 6) There must be clear public ac- the midst of a devastating financial countability in PPP projects, with crisis. one government agency responsible for overseeing the project and hold- Public officials should use a set of ing contractors accountable for their common-sense principles to evalu- performance. ate public-private partnerships—and should refuse to pursue PPPs that do 7) The public must retain control over not serve the public interest. key transportation-system deci- The principles that should guide gov- sions, ensuring that high-speed rail ernment’s approach to high-speed rail lines are built and operated in ways PPPs are: that are consistent with the public interest rather than the maximization 1) Governments must only pursue of private profit. PPPs for the “right” reasons, such as the ability to deliver a public project 8) PPP projects must not impose for lower price or with higher qual- unreasonable limitations on fu- ity—rather than use PPPs to avoid ture government action, such as the budgetary discipline or compliance “non-compete” clauses in some toll with labor standards or other regula- road leases that forbid government tions governing public projects. from improving other nearby transportation facilities. 2) PPPs must deliver added value for the taxpayer, as measured by a 9) PPP contracts should be of reason- comprehensive test that includes all able length, with contracts for the the relevant costs of a high-speed rail operation and maintenance of long- project. lasting infrastructure being longer than contracts for trains, communica- 3) PPPs must align private sector tions equipment and other items with incentives with public sector goals, faster turnover. ensuring that private sector partners experience penalties and rewards that 10) There must be complete transpar- forward the public’s interest in timely ency in the PPP contracting pro- and cost-effective completion of the cess and in the execution of PPP

Executive Summary 3 contracts. When there is a conflict increase the comfort of private actors between public right to be informed in submitting competitive bids. and private investors’ confidentiality rights, the former should prevail. • Governments should be prepared to reduce the risk of cancellation of a Government agencies considering project mid-stream by providing full- PPPs should understand that even well- funding grant agreements that provide crafted PPPs are not a panacea—and a multi-year commitment of govern- that a strong government commitment ment funds. to the project is likely necessary to draw productive private investment. • Governments should acknowledge Specifically: that public investment is necessary for the completion of a high-speed • Governments should be prepared to rail project and understand that even undertake extensive early planning “private” rail proposals are likely to and environmental review of a project impose public costs, particularly in before submitting it to bid, in order the event of a threatened private-sec- to reduce project uncertainties and tor default.

High-Speed Rail: Public, Private or Both? Introduction

merica’s emerging push to build that must be resolved—both in Califor- high-speed rail has taken its share of nia and in other high-speed rail projects Alumps in the past year. Newly elected around the country—is the question of governors in Ohio, Wisconsin and Florida how best to divide roles between the public shelved rail projects for which billions of and private sectors. The multi-billion dol- dollars in federal funding had already been lar cost of high-speed rail lines provides a allocated, while congressional negotiators powerful incentive for government agen- have imposed significant cuts to the federal cies to find private-sector partners willing high-speed rail program. to share in project financing and in the These setbacks—difficult though they assumption of risk. These public-private may be—are likely only temporary. Rising partnerships—or PPPs—have become oil prices, increasingly crowded highways common around the world as a means and airports, and the demands of a 21st of building large infrastructure projects, century knowledge economy all demand including high-speed rail lines. But the that the nation pursue improved passenger experience with PPPs in the development rail service, including the construction of of high-speed rail has been decidedly new high-speed rail lines. mixed—characterized by both apparent California is now poised to build the successes and grand failures. nation’s first true high-speed rail line, with It is not too soon for the United States— construction on the first segment of the and especially California—to learn from line due to begin in 2012. As California’s the experiences of high-speed rail PPPs high-speed rail system moves ahead, the abroad, to develop principles that will en- discussion has begun to turn from the able public officials to determine whether question of whether to build high-speed a PPP is the right way to approach a par- rail to the question of how to build it. ticular project, and to structure PPP agree- Among the most important of the issues ments that protect the public interest.

Introduction 5 Public-Private Partnerships: What They Are and Why They Matter

he United States is in need of new line attracted interest from seven teams transportation solutions. Our high- including dozens of firms from around the Tways and airports are increasingly globe.3 In California, a request for expres- congested, making travel, even between sions of interest from private firms drew cities just a few hours apart, inconvenient more than 1,000 responses, while 22 funds and frustrating. Meanwhile, our reliance have expressed interest in financing part of on oil continues to threaten our economy, the system’s construction.4 our national security, and our environ- The construction of high-speed rail in ment. the United States will inevitably involve High-speed rail is a potential solution both the public and the private sector. Ef- to many of these challenges. Americans fective “partnerships” between the public are excited about the prospect of a clean, and private sectors are critical if the nation efficient new means of travel; nearly two- is to get the high-speed rail network it thirds of Americans support federal or state deserves at a price it can afford. funding for high-speed rail.1 But the American people aren’t the only ones enthusiastic about high-speed rail. Businesses from around the globe are eager to compete for the billions of dollars in infrastructure spending that Public-Private Partnerships will accompany the nation’s investment in and their Role in high-speed rail. In 2009, 30 companies from around the High-Speed Rail world committed to establish a presence The term “public-private partnership” or expand their existing presence in the (PPP) is vague. In the broadest sense, it can United States if they are chosen to supply be construed to include almost any part of components for high-speed rail.2 Prior to the economy. In the most commonly used its cancellation, the Florida high-speed rail sense, however, PPPs are arrangements in

High-Speed Rail: Public, Private or Both? which government and private sector firms existing lines will likely require regula- share in a project’s risks, responsibilities tions paired with government provision and rewards. of either subsidies or capital investments PPPs are distinguished from tradi- to entice freight railroads to accommodate tional government contracting in that the high-speed passenger services on their private sector partner is more integrally tracks. involved in a project’s development and These partnerships—while critical to execution than as a “contractor for hire.” the development of an effective passenger Private-sector firms might be involved in rail network for America—are not the fo- helping to design a piece of infrastructure, cus of this report. Instead, we focus here on finance it, or operate it once construction the use of public-private partnerships for is complete. the construction of high-speed rail lines In the American context, there are two on new rights of way. types of public-private partnerships that These projects—which include the are likely to come into play in development California high-speed rail network, the of the nation’s high-speed rail network. proposed construction of a true high- The first type involves partnerships be- speed rail system in the Northeast, and the tween the government and the owners of previously proposed Florida network—are existing freight railroads that are proposed likely to be the most expensive projects in for upgrades in the federal high-speed the development of the nation’s high-speed rail program. Many of the initial high- rail system, but also the projects with the speed rail projects approved for funding greatest impact. under the 2009 American Recovery and It is critical—both for the protection of Reinvestment Act (ARRA) fit into this the public purse and for the future of the category, representing incremental im- nation’s high-speed rail program—that provements in service on existing rights these projects be managed and executed of way owned by incumbent freight rail- effectively. As a result, it is important that roads. Any attempt by the government to the nation approach the use of PPPs in the encourage high-speed rail service on these realization of these projects with care.

Figure 1. Potential Players, Tasks and Relationships in High-Speed Rail PPPs

Public-Private Partnerships 7 Who Pays for Public-Private Partnerships?: The Myth of “Privately Funded” High-Speed Rail

overnment officials and the media sometimes believe that privatization enables Gthe public sector to get something for nothing—brand-new infrastructure paid for entirely through private-sector investment. In the case of high-speed rail, there has been no such thing as a fully privately funded modern high-speed rail line any- where in the world. Recent high-speed rail lines built or begun in Europe have typically required government entities to pay more than half the costs of the project. For instance:

• The Netherlands’ HSL-Zuid line —which links Amsterdam and Rotterdam in the Netherlands to Belgium—relied on the public sector for 86 percent of its budget. 5

• The Perpignan-Figueres high-speed rail connection between France and Spain benefited from a public investment of 57 percent of project costs.6

• The initial segment of Portugal’s high-speed rail network is projected to be built with 55 percent of its budget coming from public sources.7

• The new Tours-Bordeaux high-speed rail line in France will be built with 50 percent public investment from France and the European Union.8

Even projects that were originally intended to be fully privately financed—such as Great Britain’s High Speed 1 line and Taiwan’s high-speed rail system—eventually benefited from heavy government investments in the form of loan guarantees and the purchase of partial or full ownership of the companies that built the lines. As American policy-makers consider how to finance future high-speed rail investments, they must remember that PPPs do not provide a “free lunch.” The capital-intensive nature of high-speed rail development—coupled with the difficulty of projecting future ridership—means that private investors are unlikely to take on the full financial responsibility of building a high-speed rail line. Public investment in high-speed rail has been necessary everywhere it has been built. Often, however, that public investment can be justified by the myriad long-term public benefits—economic, environmental, energy security-related and more—that accrue from high-speed rail construction.

High-Speed Rail: Public, Private or Both? Models of Public-Private below). China is perhaps the prime example of government participa- Partnerships tion in high-speed rail construction. As noted above, the term “public-private In China, all rail projects (including partnership” is vague, and can be used high-speed rail) are carried out by a to describe many different types of rela- government ministry.9 The construc- tionships among public, quasi-public and tion and maintenance of the lines are private sector firms. Indeed, the number usually paid for with public funds or of possible combinations of participants, government bonds. relationships and divisions of responsibility in PPPs is sufficiently vast as to make every • Government-owned corporations: such arrangement unique. Government-owned corporations— sometimes called state-owned The Players enterprises—are by far the most At first blush, the definitions of “public” common drivers of high-speed and “private” in a public-private partner- rail construction internationally. ship seem clear: a “public” entity is the These are organizations that are government; a “private” one a corporation. accountable to the government but In reality, however, there are a variety operate as businesses. Amtrak in of potential players in PPPs—some of the United States is an example of a which fall into the hazy middle ground of government-owned corporation10, as “quasi-public” organizations, which blend are the state-owned railways in many the attributes of public and private sector nations that have taken leadership entities. in the development of high-speed Among the potential players in a PPP rail, such as those in France, Spain are the following: and Germany. While government- owned corporations are often heavily • Government agencies: Govern- influenced by government in their ment agencies can play two roles in core business activities, they often PPPs: as investors and participants. have latitude to branch out to other All high-speed rail projects in other lines of business or to the provision of countries involve public investment of rail service in other countries. some kind. Indeed, it is not uncom- mon for several different governmen- • Non-profit corporations: A less- tal entities to invest in a high-speed common participant in rail opera- rail project—in Europe, for example, tion is the state-chartered non-profit the European Union and individual corporation. The main example of nations often invest resources together this type of “player” is Great Britain’s in high-speed rail (sometimes with Network Rail, which manages the additional contributions from local nation’s conventional rail infrastruc- governments), and the same can be ture. Network Rail acts as a non-profit expected for state and federal govern- agency, funneling all revenues from ments in the United States. Far fewer its management of the country’s rail projects, however, involve govern- infrastructure back into stations ment agencies as the direct builders or and tracks. Non-profit corporations operators of high-speed rail systems, can also act as investors in for-profit with those roles often being left to high-speed rail operations—Britain’s government-owned corporations (see High Speed 1 rail line, for example,

Public-Private Partnerships 9 is currently operated by a consortium is owned by Air France-KLM.12 An that includes the Ontario Teachers’ arrangement between the Dutch gov- Pension Plan.11 ernment and a firm 90 percent owned by the Dutch government, therefore, • Private corporations: Private cor- holds the appearance of a public-pri- porations—accountable primarily to vate partnership, but is actually closer their shareholders—are also potential to a public-public partnership. participants in high-speed rail operations. In Japan, the Shinkansen high- The Tasks speed rail network (much of which The construction and operation of a high- was built by Japan National Railways speed rail line is a massive logistical, engi- during its days as a government- neering and construction feat, involving owned firm) has been privatized, with the organization of vast amounts of capital six large, regional, privately-owned and thousands of laborers in a complex ar- companies responsible for operating ray of tasks over the course of many years. high-speed rail service. The tasks involved in building a high-speed rail line can all be the responsibility of a • Joint ventures: Finally, any of the single entity, or they can be distributed above categories of actors may join among many participants. forces in a joint venture, which itself The necessary steps in the construction can be a party to a PPP. In the Neth- of a high-speed rail line include: erlands, for example, the concession for operation of trains on the HSL- • Finance: High-speed rail lines are Zuid high-speed rail line was granted typically multi-billion dollar projects to a joint venture called High Speed that require the assembly of capital Alliance, 90 percent of which is owned from a variety of sources, including by the state-owned Dutch national various government entities, publicly- railway, NS, and 10 percent of which owned firms, and private investors.

High-speed rail lines are complex systems, involving the construction of civil engineering works, the laying of tracks, the operation of trains and stations, and the development of effective signaling, communications and safety systems. Credit: flickr user mostlybytrain, photo used with permission.

10 High-Speed Rail: Public, Private or Both? The responsibility for financing a and stations. Public entities typi- high-speed rail line may be carried cally engage in at least some level of out by the government or assigned to design—at minimum, choosing the a private entity as part of a larger PPP. route—even in projects in which private-sector entities are responsible • Design: Design of a high-speed rail for detailed design. In addition, gov- line includes decisions on routing and ernment agencies are typically re- station location, as well as techni- sponsible for reviewing the design for cal specifications of civil engineering consistency with environmental and works (grading, tunnel boring and other regulations, often with a large bridge construction), tracks, signaling degree of public input.

The Ingredients of a High-Speed Rail System

nother dimension of complexity in high-speed rail PPPs is the division of labor for Aconstruction of the system. A high-speed rail line may be seen either as a single, integrated entity, or as a collection of “ingredients” for which the responsibility can be split among a number of contractors. Among the ingredients of high-speed rail projects are:

• Civil engineering works: These are the basic public works over which a high- speed rail line travels, including the graded rail bed, tunnels and bridges.

• Tracks: These are the physical structures of the rail line, including rails and power systems.

• Communications and signaling: These are the systems that enable rail service to operate safely over a given set of tracks, including communications, signaling and train protection systems.

• Stations: Including related amenities such as parking lots, restaurants and shops.

• Rolling stock: Including the high-speed trains themselves and other maintenance equipment.

• Maintenance facilities and equipment

A final “ingredient” of high-speed rail service might be called systems“ .” Each of the above categories represents a set of tangible assets that must be built, maintained and operated individually for a high-speed rail system to run smoothly. However, these categories do not include the information and other components that enable these assets to mesh together as a coherent system—for example, scheduling, ticketing, coordination of maintenance schedules, and management.

Public-Private Partnerships 11 • Construction: Construction of a DesertXpress high-speed rail line between high-speed rail line includes basic Victorville, California, and Las Vegas has civil engineering work, laying of track been proposed as an entirely privately and installation of power systems, owned and operated system, though it may design and implementation of control benefit from government subsidies, includ- systems, supply of rolling stock, and ing access to federal loans.13 construction of stations. Concessions: traffic-based: A concession is a grant of permission for a private • Maintenance and operation: Each firm to build and operate an asset—and of the physical components of the collect revenues from that asset—for a rail must be both maintained in good fixed period of time and/or until other working order and operated on a day- conditions in the contract have been met. to-day basis. These tasks can all be In these agreements, concessionaires use managed by a single entity, or may be the revenue stream from their operation undertaken by separate entities. For of the facility or service to pay off debts example, in Europe, the task of main- incurred in the construction of the line taining and operating the entire train and to pay for ongoing maintenance and system has historically been central- operation of the system.14 ized in state-owned railways. More There are many varieties of concession recently, however, European nations agreements, but for the purpose of evaluat- have separated the task of maintaining ing high-speed rail PPPs, they fall into two and operating the physical infrastruc- categories: those in which the concession- ture of their rail systems from the aire’s revenues are based on the usage of task of operating train service, and are the line—which we’ll call “traffic-based” in the process of opening the latter concessions—and those in which they are task up to competition. (See ”Beyond not. “Traffic-based” concessions often take PPPs: Open Competition in European the form of build-operate-transfer (BOT) Rail Service,” page 13.) projects, in which a firm is granted a concession to build and operate a high-speed rail line, financing its investment with The Relationships payments from riders, and then returning PPPs can be arrayed on a spectrum from the project to the government when the those that are “more private”—that is, concession expires. closer to the experience of full private own- In Taiwan, for example, the same firm ership—to those that are “more public.” that built the high-speed railway also oper- Private construction and ownership: ated revenue service on the line. But there At the most “private” end of the public- are also traffic-based concessions in which private spectrum are projects in which the the rail builder does not operate train ser- role of the government is limited to provid- vice, but rather charges tolls—or “access ing regulatory oversight (or in some cases, fees”—to other companies that run train financial subsidies) to private-sector build- service on the line. An example of this ar- ers of high-speed rail. Historically, this rangement is the Perpignan-Figueres rail is how much of the U.S. railway network line that links the rail systems of France was built in the 19th century, with private- and Spain. The line was commissioned by sector companies—sometimes benefitting the national railways of France and Spain, from government subsidies or other forms operating as a joint venture, and was built of assistance—laying the tracks and pro- by a consortium of private firms represent- viding service. In the United States, the ing both nations. The concessionaire took

12 High-Speed Rail: Public, Private or Both? Beyond PPPs: Open Competition in European Rail Service

ublic-private partnerships represent one way to tap the skills of private-sector Pfirms in the provision of high-speed rail service. European nations, however, are taking the additional step of opening some aspects of rail service to market competition between existing state-owned railroads and/or private train operators. These developments have little relevance for the United States, which is just now building its high-speed rail network. However, they are often mentioned in discussions about rail “privatization” in the United States, and are therefore worth discussing. Historically, Europe’s railways have largely been built by state-owned firms, which also operated train service on those lines. Beginning in the early 1990s, however, the European Union issued a series of directives intended to change the way rail service was provided on the continent by mandating “open access” to rail lines. As opposed to the traditional arrangement in which state-owned firms could claim exclusive rights to run trains on their own tracks, the new system would operate more like the provision of intercity bus service over the highway network, in which any firm could provide train service, so long as it paid the appropriate access fees to the owner of the tracks and met other government standards. The first result of this shift has been the separation of many former state-owned railways into distinct organizations devoted to providing rail infrastructure and operating rail service. In some cases, as in France, this separation has resulted in the creation of separate companies. France created a new, state-owned infrastructure management company, French Rail Network (RFF), which is “responsible for capacity allocation, contracting, traffic management, and maintenance, although it subcontracts the traffic management and maintenance to the passenger rail operator, [SNCF].” 17 RFF owns all intercity rail infrastructure in France except stations, which are retained by SNCF.18 RFF collects track access fees, which are approved by the Ministry for Transport, from SNCF and other rail operators who wish to use the network.19 In Germany, the infrastructure and rail operations functions are carried out by separate subsidiaries of the same firm, Deutsche Bahn (DB), a state-owned company. The company is divided into five large subsidiaries that handle track infrastructure, ticketing and sales, regional services, long-distance services, and freight.20 To date, open access has not resulted in a great deal of competition for high-speed rail service. For example, although DB’s tracks have theoretically been open to competition since 1994, the company’s inherent advantages have led to only a small amount of private competition, limited mainly to regional service.21 In France, international high-speed rail service is currently provided by Eurostar and Thalys, which are consortia of which the state railway, SNCF is a major shareholder.23 There have been substantial political and technological barriers to broader international competition, but the European Union has been chipping away at those barriers for years, leading to the prospect of private firms competing with traditional state-owned firms—and state-owned firms competing with one another—to provide high-speed rail service to Europeans.

Public-Private Partnerships 13 on financial risk in the venture in exchange for the construction and operation of the for permission to operate the line’s infra- rail system itself and the operation of the structure for 53 years and charge tolls train service on the line. The conces- on every passenger and freight train that sion for construction, maintenance and crosses the tracks at rates established in the infrastructure operation was issued for a concession agreement.15 25-year term, with the vendor scheduled Concessions: availability payments: to receive availability payments from the The second major form of concession Dutch state, while a separate consortium agreement relies on fees called “availability won a concession to operate revenue service payments” to pay back the private invest- on the line.16 ment in a high-speed rail line. Under an Public tender contracts: Public tender availability payment concession, the firm contracts are contracts for specific services that builds the line is also responsible for its for which vendors are paid specific sums. maintenance and operations over the length This is the traditional way in which pri- of the concession period. Rather than the vate-sector entities have engaged in the private entity recouping its investment in construction of public infrastructure in the the line through fares or other revenues, United States and is how most high-speed however, it receives regular “availability rail lines in the world have historically been payments” from the government, contin- built. In these arrangements, governments gent on meeting specified benchmarks for or state-owned railways retain overall re- the availability of the line. sponsibility for planning and operation of Some high-speed rail projects combine the system, but hire contractors for specific both kinds of concession agreements. The jobs—for example, the construction of a HSL-Zuid high-speed line in the Nether- bridge or design and implementation of a lands, for example, used separate consortia signaling system.

14 High-Speed Rail: Public, Private or Both? The Pros and Cons of Public-Private Partnerships

ublic-private partnerships are often dollar endeavors subject to a variety touted as providing unique benefits of risks—from unexpected difficulties Pabove and beyond those that can be building tunnels through mountains or achieved through government action alone. densely packed urban areas to delays in the At their best, PPPs merge the specific completion of adjoining transportation capabilities of public and private sector infrastructure. Sharing risks between organizations. Additional benefits from government and private entities can—if using PPPs, however, are not always real- done correctly—make it more palatable ized in practice—and poorly designed PPP for both entities to “take the leap” in arrangements can expose the public to an building a project with great benefits for array of financial and public policy risks. society. Public officials considering PPPs must PPP agreements can share risk in a therefore evaluate specific proposals and variety of ways: vendors carefully to ensure that promised additional benefits are realized. • In a public tender contract, private contractors are held liable for building a piece of infrastructure—often at a particular price and on a particular schedule.

Potential Benefits of PPPs • In an availability payment (design- build-maintain) concession, private Risk Sharing contractors are held accountable for One of the most important potential quality workmanship by also being benefits of public-private partnerships is given responsibility for maintaining the ability to share the risk inherent in a the line over a period of time. major capital investment among a variety of public and private actors. High-speed • In a traffic-based concession agree- rail lines are typically multi-billion ment, private entities take on the risk

The Pros and Cons of Public-Private Partnerships 15 that ridership, and therefore revenue, there are several international firms that on the high-speed rail line will be less have amassed decades of experience in the than anticipated. construction and operation of high-speed rail lines, and may be effective competi- The potential for risk sharing is one of tors to build similar systems in the United the primary selling points used by PPP States. proponents to encourage public-private However, PPP savings can also be il- partnerships—and is a particularly pow- lusory if savings are merely generated by erful selling point at a time of tight fis- avoiding labor and wage requirements or cal constraints. However, the ability of a regulatory standards that would otherwise PPP to shelter the government from risk govern projects built directly by govern- depends on the details of the agreement. ment agencies. These changes might Evidence from abroad shows that even spe- produce a nominal cost “savings” in the cific contract provisions designed to protect short run, but they are achieved by exter- the government from risk may fail to do nalizing costs onto or transferring benefits so because the fate of the project becomes from other residents and employees in the inexorably tied to the fate of a particular state rather than by adding unique value private company—a problem known as that can only be delivered by the private “lock-in.” (See page 17.) sector. To assess whether a PPP approach Advantages in Speed, Cost or delivers added value to taxpayers, govern- Quality ments must carry out a “value for money” PPPs are often touted as being able to de- test, such as the public sector comparator. liver infrastructure projects faster, cheaper These tests are intended to determine or with better quality than a public-sec- whether a PPP or traditional public-sector entity. This is not to say that private tor contracting will deliver the greatest entities are inherently better suppliers value, taking into account quality, price of infrastructure than public agencies. and risk. Private entities bring many inherent dis- advantages, including higher capital costs Access to Capital and the need to cover financial returns to Access to capital is not typically a strong shareholders. The process of undertaking suit of private entities. Government a PPP also incurs transaction costs—such agencies are capable of borrowing large as the potential need to pay stipends to amounts of money to finance public infra- would-be bidders to help defray the cost structure at relatively low cost. However, of preparing proposals.24 States and locali- in the current atmosphere of constrained ties that have pursued toll road PPPs in public budgets, access to private capital the United States, for example, typically may make the difference between build- pay millions to auditing, consulting and ing necessary high-speed rail projects and legal firms. leaving them on the drawing board for A key question for government agencies years to come. considering PPPs is the degree to which the Because of the multi-billion dollar price savings purportedly delivered by private tag of most high-speed rail projects, gov- companies are real or illusory. Real savings ernments in both Europe and the United can result from a private company’s access States have stated that private investment to expertise and experience, its ownership will be necessary to build out their high- of proprietary technologies, or economies speed rail networks. of scale. In the case of high-speed rail,

16 High-Speed Rail: Public, Private or Both? Potential Problems of PPPs Lopsided Allocation of Risk Governments that engage in PPPs often High and Volatile Capital Costs do so in the hope of sharing the risks of a Private companies have higher long-term project with a private partner. However, borrowing costs than public entities. Ac- the very nature of PPPs often leads to a cording to analysis by Dennis Enright lopsided allocation of risks that leaves the at NW Financial Group, an investment public sector on the hook when unexpected bank, public sector costs in 2007 for rais- problems arise in a project. ing capital through debt were a full 35 Public and private entities come to PPPs percent less than the lowest cost a private with inherently different motivations: the entity could hope to obtain.25 Other aca- government to deliver a given infrastruc- demic studies confirm these consistently ture project on time and with the lowest higher private capital costs.26 And since possible public outlay, and the private the recession it has become relatively more partner to maximize profit. The initial expensive for the private sector to borrow negotiation of the contract is the time at capital compared with the public, with which the public sector has maximum le- U.S. government debt remaining at near verage, with the ability to choose the best rock-bottom interest rates. of a competing set of bids from private Because government officials can is- entities. Once a PPP bidder is chosen and sue tax-free bonds and bond traders are a contract is signed, however, the balance willing to accept lower interest rates of power shifts. The government entity on public bonds, deals based on private remains accountable to the public for de- capital are inherently more expensive livering the project on time, and becomes than public financing. When investors dependent on the private partner to meet purchase stocks or other forms of equity that objective, giving the private partner in private infrastructure companies, they leverage in subsequent renegotiations of take on greater risk than if they purchase the contract. private infrastructure bonds; therefore, Once a project is initiated, the ultimate they expect even higher rates of return. source of leverage for a private sector firm is Thus, regardless of whether private the threat that the entity will go bankrupt companies raise capital through debt or or walk away from a project—leaving the equity, their costs will be higher than governmental partner with an unfinished public financing. infrastructure project it may be ill-equipped Another key credit-related risk of PPPs to complete. Once a project is seen as is the possibility that the cost of credit moving forward, decision-makers will will increase—or that credit will dry up make budgetary and infrastructure plans entirely—midway through a project. A under the assumption that the PPP will be private entity’s inability to obtain capital, completed, increasing the disruption and or to obtain capital at the cost anticipated costs for the government side to exit the when the PPP was originally devised, can process. Poorly written PPP contracts may jeopardize the entity’s ability to carry out give private-sector partners other points of the project—leaving the government re- leverage: including the ability to slow down sponsible either for bailing out the private work or change the terms of delivery of entity or taking over the project mid- the high-speed rail service. Even in cases stream. Such a situation occurred with where the language of a PPP contract may the construction of Taiwan’s high-speed appear to be clear-cut, the mere threat of rail line. (See page 21.) protracted litigation, arbitration or delays

The Pros and Cons of Public-Private Partnerships 17 may be enough to force concessions from requires the participation of an army of the government. financial analysts, lawyers, and experts in This situation—known as “lock-in” 27—is infrastructure development. Even after not dissimilar to the situation faced by the a contract is signed and work begins on U.S. government during the financial crisis a project, expert consultants are needed of 2008, in which the government faced throughout the contract term to interpret the difficult choice of bailing out banks the contract and potentially litigate to en- or allowing them to fail, risking the onset sure that the private operator is upholding of a second Great Depression. When PPP the terms of the deal. These ongoing costs projects become “too big to fail”—or when to government are rarely considered as part it is too difficult to replace an incumbent of the cost of a PPP project. firm mid-project—then risks that the public sector thought it was avoiding may Coordination Issues instead be magnified. Successful high-speed rail services are Lock-in is a particular problem with more than just trains running on tracks. high-speed rail PPPs because renegotiation They are the confluence of many sys- of contracts is so common. High-speed rail tems—from power supply and train control projects are incredibly complex, meaning to ticketing and station operations—all that it is nearly impossible for contract working together seamlessly. In traditional writers to anticipate every possible con- state-owned railways, these systems were dition that will arise over the course of designed and operated under a single the project. When circumstances change corporate roof. PPP-based project deliv- and contracts must be renegotiated, new ery plans, however, can include dozens opportunities emerge for private firms of individual contracts for various pieces to exert leverage over their public sector of the high-speed rail system. Failures of partners.28 coordination among the various contract There are ways to reduce the threat of holders can result in unplanned costs or lock-in. One is to eschew PPPs for projects quality concerns. Ensuring that contrac- that are too big or too important to fail.29 tors coordinate their efforts can also add Another is to structure PPPs in such a another monitoring and enforcement bur- way as to ensure that no individual vendor den for the government agency initiating becomes indispensible to the project. In the PPP project. addition, PPP contracts can be written to In addition, because high-speed rail is require private-sector actors to post bonds generally built one line at a time, rather guaranteeing completion of the project,30 than as a completed network, new lines to purchase insurance or establish escrow must be integrated seamlessly into the accounts against certain risks, to create broader network. Dividing the ownership clear expectations for which parties are or operations of multiple lines within a responsible for certain types of unantici- network among different firms has the pated changes (e.g. changes in applicable potential to impose new challenges in en- safety standards), and to establish clear suring that the system works as a cohesive processes for dispute resolution and con- whole. tract renegotiation. Loss of Control Monitoring and Complexity A PPP arrangement involves a swapping PPP deals also create significant legal and of risk for control. In a traffic-based con- monitoring costs for governments. Devel- cession agreement (in which the private oping and implementing a PPP agreement partner uses the revenue from high-speed

18 High-Speed Rail: Public, Private or Both? rail service to pay for the cost of building A similar example occurred in the the line), the government theoretically development of Great Britain’s first high- sheds a great deal of risk, but also provides speed rail line, High Speed 1, which was the private company with a greater deal of built by London & Continental Railways control over how a high-speed rail line is (LCR) under a concession agreement operated. This is because private entities with the British government.31 In an ef- are less willing to depend on revenues fort to maximize revenue and pay back its from ticket sales and other user fees to debts, LCR assessed track access charges recoup their investment unless they feel to companies providing rail service on the protected against government actions that line that were higher than commercial might curtail those revenues. Availability rates and were thought to be high enough payment concessions (design-build-main- to make it unprofitable for would-be com- tain) on the other hand continue to expose petitors to offer service on the line.32 Had government to ridership risk, but also give the situation continued, the public interest the government greater control over how imperatives of maximizing the use of the the high-speed rail line will operate. infrastructure would have run headlong The public faces dangers that a PPP into LCR’s financial imperative to maxi- may create a publicly subsidized piece of mize revenue. As it turned out, the British infrastructure that is primarily used to government—which had already agreed to serve the profit-maximizing purposes of a guarantee LCR’s debt—took formal con- private entity in ways that conflict with the trol of the company in 2009 and entered public interest. The most obvious example into a new PPP for operation of the line.33 of this tension arises in the setting of ticket By taking full ownership over LCR, the prices. A private concession operator will British government made it possible to tend to want higher-priced tickets as a way offer lower track access charges and gain to maximize their revenue for shareholders, greater use of the high-speed rail line, even if higher ticket prices depress total though at the cost of absorbing much of ridership and therefore diminish the posi- the risk it thought it had offloaded to LCR tive public impact of the route. in the first place.

Delays at Front End of Project PPPs often promise to complete construction faster than publicly built projects—in part because penalties for late delivery included in PPP contracts drive improved performance by contractors. The difference in speed, however, often depends on when one starts the clock. PPP projects are often more difficult to get off the ground than publicly built projects, especially if they are conducted with due diligence and proper input from stakeholders. The concessionaire for construction of England’s The first hurdle in building a project High Speed 1 line was forced to charge above- using PPPs is to design one that is at- market access fees to recoup its investment. tractive to private investors while also The British government later took over the satisfying public interest objectives. This company, a move intended to expand the use of can be difficult. The Perpignan-Figueres the line. Credit: Darnell Ibraham high-speed rail line connecting France

The Pros and Cons of Public-Private Partnerships 19 and Spain—often considered a successful of negotiations forced the contract to be PPP—is one example. Preparation of the opened for bid once again. The final con- concession agreement began in 2000, with tract was issued in early 2004 and financial publication of the request for bids in July close on the deal was not accomplished 2001. One year later, in July 2002, the bi- until February 2005.35 The ability of the national agency responsible for building bi-national agency to hold firm during the line chose a preferred bidder, only to the first set of negotiations helped protect walk away from negotiations in early 2003, the public against an inadequate deal, but citing “unacceptable” conditions demanded it also resulted in a significant delay in the by the private sector bidders.34 The collapse start of the project.

20 High-Speed Rail: Public, Private or Both? Evaluating the Experience Abroad

ublic-private partnerships have in- Taiwan: creasingly played an important role Taxpayers Find Themselves on Pin the construction and operation of Hook for “Privately Built” high-speed rail systems around the globe. What lessons can be learned from the High-Speed Rail Line experiences of other nations? By many measures, Taiwan’s high-speed In this section, we review four case stud- rail line, which links the island nation from ies of PPP or privatization efforts abroad. north to south, has been a success. Between Two of the case studies—in Taiwan and 2006, the year prior to the launch of high- the Netherlands—are cautionary tales speed rail, and 2009, the number of passen- illustrating that the purported benefits ger-miles traveled by train in Taiwan had of PPP arrangements, particularly the increased by 56 percent, while the number sharing of risk, are not always realized of passengers on domestic air service had in practice. The case study from Britain dropped by 53 percent.36 By 2009, high looks beyond the realm of high-speed ridership on its densely populated routes PPPs to examine the risks of infrastructure allowed the company that built the line to privatization more generally, specifically start turning an operating profit.37 the conflict between profit-making and Taiwanese taxpayers, however, are pay- protection of the public interest inherent in ing a higher price for that success than privatization. Our fourth case study, from had been anticipated. Once promised that Portugal, describes how reliance on PPPs private capital would pay the entire cost can reduce a government’s ability to react of constructing the line, Taiwan taxpay- to fiscal challenges, even if the PPP agree- ers have instead been asked to pick up a ments themselves are designed to avoid the significant part of the tab. mistakes of the past. In 1998, the Taiwan High Speed Rail Corporation (THSRC) was awarded a 35-year concession to build and operate Taiwan High Speed Rail (THSR), partially based on THSRC’s promise to build the

Evaluating the Experience Abroad 21 system without government capital. But Because of the ongoing financial losses, the company began to run into difficulty “THSRC shareholders signaled reluctance after the Asian financial crisis in the late to invest further in the project, which has 1990s, when it was forced to take out loans led to difficulty for THSRC in securing with high interest rates in order to pay for financing from banks as well,” according to the project.38 a report by the Utah Foundation.42 A lack Like a homeowner saddled with an ad- of financing led to problems with finishing justable rate mortgage, the high-interest the project, and when the network opened debt soon became financially unsustain- to the public in 2007, several key stations able, with more than three-fifths of the were incomplete. company’s net income used to pay off these In order to keep the system operating, loans.39 As late as 2009, the company was the government refinanced THSRC’s still paying a high 8 percent interest rate loans and contributed hundreds of millions on some of its loans.40 In addition, the of dollars to the network, even though company was forced, as a result of its status the original build-operate-transfer plan as a concessionaire, to depreciate the value stipulated that the THSRC build the of its assets much faster than it would have system without any government capital. under traditional forms of ownership, add- The government has opted not to take ing to the financial woes that caused the over the company, expressing no interest company to post annual losses that totaled in growing its current 40 percent share $2.18 billion by 2009.41 or investing money beyond the bailout.43

The private-sector builder of Taiwan’s high-speed rail line initially pledged to build the system with no public investment. An accumulation of high-cost debt, however, ultimately led to a government bailout. Credit: Yueh-Hua

22 High-Speed Rail: Public, Private or Both? However, to help “persuade creditors to Belgium—demonstrates the problems that issue loans to the THRSC at interest rates can arise when the carefully choreographed that will allow it to remain solvent,” the set of actions needed to bring a high-speed THSRC has elected a new chairwoman, rail PPP to successful completion goes backed by the government, allowing “the awry. government more of a supervisory role in At the time HSL-Zuid was commis- the company.”44 sioned, it was the largest PPP rail project The Taiwan example illustrates several in Europe. The innovative deal was praised important challenges of PPPs. First, it in PPP circles, earning notice as the “Eu- demonstrates the dangers of overreliance ropean PPP Deal of the Year” in 2001 from on private capital. Like many homeowners Project Finance magazine, which extolled its saddled with high-interest debt during the “particularly appetizing risk profile.”45 De- subprime mortgage crisis, the THSRC spite its high profile as a PPP, however, the was ultimately unable to restore itself to HSL-Zuid project relied mostly on public financial health, even when high-speed rail funding, drawing on private investment for service began to turn an operating profit, only 14 percent of the project cost.46 due to its earlier legacy of high-interest From the beginning, however, design- bank borrowing. Financing the project ers of the HSL-Zuid project made several publicly from the very start may have important mistakes that led to cost over- proven to be cheaper and more stable, re- runs, delays and government bailouts. The ducing the crushing debt load the THSRC first major mistake was in the structure of faced—and possibly reducing the burden of the deal itself. Construction of the high- the bailout on the government of Taiwan, speed line was broken into three separate which ultimately refinanced the company’s projects: debts anyway. Second, the Taiwan example dem- • The job of building the “substruc- onstrates the dangers of “lock-in.” The ture” of the system—the tunnels, Taiwanese government could have allowed bridges, and concrete slabs on which the THSRC to go bankrupt and operation the track rests—was divided into of the high-speed rail line to cease when seven packages and given to civil the company ran into financial trouble. contractors. The Dutch government Doing so, however, would have resulted in judged that it would be unable to the abandonment of a critical public asset, transfer risks to the private sector leaving the government with little choice for substructure construction, and so but to prop up the failed business plan of a awarded the substructure contracts private operator with public funds. according to traditional contracting principles.47

Netherlands: • The “superstructure” concession was Poor Planning Meets Failure given to the Infraspeed Consortium, to Manage Risks which was responsible for designing, The construction of a high-speed rail line building, financing and maintain- involves the mobilization of billions of dol- ing the system’s tracks, stations and lars in capital and thousands of workers in signaling for a 25-year period. a series of highly complex and interrelated tasks. The construction of the HSL-Zuid • The operations concession was won high-speed rail line—which links Amster- by the High-Speed Alliance, a consor- dam and Rotterdam in the Netherlands to tium 90 percent owned by the Dutch

Evaluating the Experience Abroad 23 state railway, NS, and 10 percent among the various contracts. The interface owned by Air France-KLM. between the substructure and superstructure contracts proved to be a particular By dividing up the project in this way— problem.54 Infraspeed, the concessionaire and negotiating all three sets of contracts for the superstructure, based its project early in the process—the Dutch govern- bid on civil engineering designs that had ment wagered heavily on the ability of the changed during the bid assessment, result- winners of the contracts to communicate ing in incompatibilities in the design of well with one another, and to complete each various components.55 segment of the project on time. Fundamental problems also existed Problems began to surface immediately. within the government bodies responsible The bids for the substructure contracts for supervising the contracts. It was al- were higher than expected, due largely leged that the contracts for the system to a lack of competition in the Dutch were so complex as to be unintelligible to construction market. Dutch investigators the government officials responsible for later found that the consortia bidding on enforcing their terms.56 In addition, two the substructure projects engaged in il- separate state agencies were responsible for legal coordination, though it is unknown overseeing the project, leading to problems how much this affected the final bids.48 In determining who was in charge. any event, the total estimated cost of the Finally, the new high-speed line was project ballooned to 43 percent higher than intended to operate on the emerging Eu- budgeted.49 Because the Dutch government ropean automatic train control system, the was primarily concerned with completing specifications for which were not complete the project within its pre-determined bud- until late in the process. This resulted in get, the higher-than-expected bids forced a delay in the opening of the line, with the government to make cutbacks in the interim service on the line finally launched design of the system and to pursue other in September 2009—roughly two years strategies to induce lower bids, including late—with maximum speeds of 99 mph. the elimination of penalties for late deliv- Full service at the maximum speed has yet ery of the substructure. This left the state to be launched, due to delays in the provi- liable for making payments to the super- sion of the necessary trains. structure and operations contractors in the These delays resulted in yet another event that the project was delayed.50 problem: Due to the delays in obtaining The shift in financial responsibility for trains, the franchise selected to run train delays was part of an overall pattern in operations, High Speed Alliance (HSA), which the state was left liable for project was forced to start paying access charg- risks—defeating much of the purpose of es—per its concession agreement—without the PPP arrangement.51 Indeed, Dutch being able to run train service, leaving it auditors found that the state took on almost with no revenue from the line.57 The Dutch all the responsibility for cost overruns in government was forced to make two large the original contract.52 The cost control payments to the company to keep it afloat, benefits of the PPP were also largely un- extended its concession, and waived access realized, as the project far exceeded its fees for a few years, to be paid back later original budget, costing 55 percent more with interest. Access charges were also re- than originally projected.53 duced due to lower-than-anticipated train The cost overruns were due to a variety speeds and reduced frequencies.58 of factors, including changes in the scope of In short, the HSL-Zuid project, con- work and poor planning and coordination sidered an exemplary PPP project at the

24 High-Speed Rail: Public, Private or Both? time the project was launched, wound maintenance companies created after the up illustrating, in many ways, how not to break-up of the old BR system, the govern- structure a PPP for high-speed rail. The ment “decided to make Railtrack into a Dutch government’s decision to undertake contract management operation in which separate contracts for superstructure and essentially all infrastructure work (main- substructure appears to have been a mis- tenance and rehabilitation) was carried out take. The lack of effective competition under contract,” according to a report by among bidders prevented anticipated cost the World Bank.59 Railtrack had no abil- savings from being realized, while the lack ity to shape these contracts, however; the of proper risk management provisions in government established them in advance the contract exposed the state to effects of and packaged them with the maintenance cost overruns. Failing to establish a clear companies to improve their marketability. line of authority for government manage- Additionally, under this system, contrac- ment of the project, and creating what tors—not Railtrack—held responsibility was in effect a public-public partnership for deciding whether maintenance work for operation of the line compounded the on the track was needed.60 problems. As a result, Railtrack was left without the in-house expertise needed to manage and supervise its contractors and to Great Britain: independently assure the system’s safety.61 Infrastructure Privatization The contracting system also resulted in Creates the Wrong Incentives Railtrack and its contractors bickering In Great Britain, the 1980s saw Prime about who was responsible for fixing safety Minister Margaret Thatcher lead a period problems rather than taking prompt action of privatization of formerly nationalized to address them. According to one analysis industries. By 1993, under her successor, of the British experience with rail privatiza- John Major, privatization had come to tion, “Each had incentives to pass the cost the nation’s rail sector. The breakup of of dealing with the problem to each other, the former national rail company—Brit- with the result that meetings were followed ish Rail (BR)– resulted in the creation of by letters and letters were followed by dozens of local and regional rail operating memos in a sort of caricature of the worst companies and separate companies re- kind of bureaucratic buckpassing.”62 sponsible for specific tasks within the rail Moreover, Railtrack was a victim of system. The for-profit company Railtrack poorly designed incentives. In an attempt was created to operate and maintain the to strike a balance between what Railtrack infrastructure of the system: the tracks, would have to charge the train operat- signals and stations. ing companies (TOCs) to cover its rail The experiment with for-profit manage- infrastructure costs and what the TOCs ment of the nation’s rail infrastructure lasted could afford to pay to maintain successful less than a decade, with Railtrack ultimately franchises, the government established an being folded into Network Rail, a non-profit access charge regime with “mostly fixed an- corporation operating under direct supervi- nual charges for each franchise along with sion of the British government. a relatively small variable charge for actual Poorly drawn contracts and misaligned use,” according to the World Bank.63 This incentives led to Railtrack’s lack of proper regime meant that Railtrack’s revenues management and maintenance of the were disconnected from the amount of system infrastructure. First, in order to traffic the system carried. Increases in traf- increase the “saleability” of the numerous fic were likely to lose money for Railtrack,

Evaluating the Experience Abroad 25 as the company would face increased main- matters greatly because private entities must tenance expenses.64 On the other hand, be induced to make business decisions that because access charges were low, TOCs benefit the public interest. The financial had lots of incentive to run as many trains incentives experienced by Railtrack—a as they could, which dramatically increased publicly traded company—clearly did not both congestion and maintenance costs.65 align with the public interest. Even the Railtrack’s problems came to a head in former head of Railtrack, Gerald Corbett, 2000 when a train derailment in the town acknowledged in an interview with the of Hatfield killed four people and injured BBC that “there is a tension between dozens. The Hatfield accident occurred shareholder interests and public service when a rail fractured underneath a passen- obligations. The only way we can make ger train traveling at 114 mph.66 Problems profits is by not doing the things we should with the segment of rail that failed had do to make the railways better.”69 been known to the contractor responsible for maintaining it for more than a year Portugal: prior to the accident. Subsequent investigation also turned up a large backlog of Will PPPs Leave the Public needed maintenance on the rail system, as Holding the Bag Amid a well as the failure of Railtrack to properly Fiscal Crisis? implement previous government recom- Portugal is situated next to one of the mendations to improve its management.67 world’s high-speed rail leaders, Spain. Yet, In the wake of the Hatfield disaster, nearly two decades after the completion of Railtrack ordered a series of speed re- Spain’s first high-speed rail line in 1992, strictions and emergency repairs and Portugal remains without high-speed rail inspections that wreaked havoc with train service. service and reliability. More than 165,000 Over the past decade, Portugal has scheduled trips were canceled during 2001, developed a plan to build a high-speed three times the number of the year before.68 rail line, which would link its major cities On-time performance collapsed, and the with the Spanish network. In develop- company never recovered from the loss of ing its approach to the project, Portugal confidence by passengers and the British consciously sought to avoid many of the government. pitfalls of earlier rail PPPs. However, with The privatization of Railtrack was the nation in financial crisis, Portugal may not the type of arrangement typically wind up saddled with liabilities to private conceived for rail PPPs, nor did it deal with partners, but with little else to show for its high-speed rail, but it does illustrate several high-speed rail efforts. important principles about the structure of Portugal assigned responsibility for PPPs. First, it demonstrates that it is critical planning and construction of the high- in any contracting arrangement—such as speed rail network to a company specifi- that between Railtrack and its maintenance cally created for the purpose, called RAVE, subcontractors—that the supervising which was co-owned by the government entity have the technical ability to ensure and the Portuguese state railway.70 RAVE that contractors are performing their jobs (which was recently dismantled in the adequately, especially when public safety wake of the country’s financial crisis) is at stake. The same principle applies to was established in 2000 and spent years state agencies responsible for supervising devising the physical plan for the system, the work of contractors in a PPP. Second, concluding preliminary studies and en- it shows that the structure of incentives vironmental reviews, and developing the

26 High-Speed Rail: Public, Private or Both? Portugal is seeking to build a high-speed rail line that will link with the extensive high-speed rail system built by neighboring Spain (above, a Spanish train passes by a castle in Córdoba). However, Portugal’s high-speed rail ambitions may be derailed by the country’s financial crisis, potentially leaving the nation liable for paying compensation to its private partners. Credit: Renfe Operadora, Dirección de Comunicación, Marca y Publicidad business plan for high-speed rail prior six separate PPP projects, five of which to the system being put out to bid.71 The are projects to build complete sections of years of study and advance preparation the high-speed rail line, with one national were believed to be critical to reducing contract for signaling and communications the number of uncertainties in advance of over the entire network.72 According to an the bidding—creating more confidence in analysis by the accounting firm KPMG, private investors to enter bids and compete RAVE conducted an analysis to ensure with one another on price. that “six PPP projects would represent In determining how to divide up PPP an optimum balance between generating projects, nations face competing impera- private-sector interest while minimizing tives—dividing the project into too few the number of interfaces between projects (and too large) pieces reduces the number and contractors.”73 of companies capable of competing for the The business plan paid a great deal of business, stifling competition and adding attention to the structuring of incentives to to the risk of “lock-in.” Dividing the project ensure that they align with public interest into too many pieces, on the other hand, imperatives. For example: increases the number of interfaces among different sections of the rail line, leading to • The builders of each section of rail potential problems with coordination. were to be paid back over the 40-year RAVE ultimately opted to break its period of the concession through high-speed rail construction program into availability fees, which places the

Evaluating the Experience Abroad 27 incentive on the companies to do step believed to be necessary to finance the high-quality construction and to project during the global financial crisis, maintain the availability of the tracks but one that assumes a risk usually borne over a long period of time. In addi- by private-sector actors.78 In addition, the tion, about 2 percent of the compensa- line will be built with heavy public invest- tion was to be tied to the amount of ment, with 55 percent of the project cost traffic carried on the line, providing borne by the Portuguese state and the Eu- the infrastructure company with an ropean Union.79 The public sector outside incentive to work closely with the of Portugal is also expected to take on some company operating rail service to financial risk in the form of substantial maximize traffic.74 loans from the European Investment Bank to the private-sector companies building • In the agreement for the first section the lines.80 of high-speed rail—the Poceirão-Caia One risk that apparently was not fully segment—major project-related risks considered, however, was the risk that and hurdles were clearly identified and Portugal would have to pull back on its consciously split between RAVE and commitment to the project as a result of the the private partners. For example, the nation’s growing financial crisis. Yet, under risk of changing technical specifica- conditions imposed by a recent Interna- tions was addressed by adopting broad tional Monetary Fund-European Union guidelines in the concession agree- bailout, new PPP projects—including for ment with a determination of final high-speed rail—are to be suspended. In specifications at a later date.75 The addition, the nation’s existing PPPs— state, meanwhile, took on responsibil- which Portugal had relied heavily on to ity for purchasing the rolling stock, build public infrastructure projects—are which will be transferred to the oper- to be investigated to find out whether they ating company once it is chosen.76 are concealing additional public debt.81 The country has also been instructed to look Portuguese officials claim that their for opportunities to renegotiate existing advance preparation, clear division of risks, PPPs.82 and decisions on how to divide the project As of this writing, Portugal’s high-speed will result in major cost savings. Using the rail program is in limbo, its fate to be de- public sector comparator test (see page 31), termined by its new government, elected RAVE claims that the PPP will cost 40 in June. But Portugal’s decision to move percent less than it would have if built by forward with a PPP approach could cost the the public sector, and notes that the cost nation dearly if it decides to halt its high- of the project decreased over the course of speed rail plans. Private-sector vendors are planning and bidding, rather than going already beginning to clamor for compen- up. If completed as planned, the system sation from the Portuguese government would be one of the least expensive in the that could total in the tens or hundreds world.77 of millions of Euros.83 In addition, a pull- However, the PPP approach still left back from the project would threaten re- the Portuguese government on the hook lations with Spain, which is extending its for a major share of the project’s costs and high-speed rail network to the Portuguese risks. The state was forced to compromise border as part of a bilateral project to link on several contract conditions in order to the two nations’ capital cities. satisfy bank lenders and took on itself the The Portuguese experience illustrates risk posed by interest rate fluctuation—a several potential pitfalls of PPPs. First,

28 High-Speed Rail: Public, Private or Both? PPPs used for infrastructure investments in crisis, as the nation risks having to pay other areas of the economy may have given compensation to private-sector partners the Portuguese government a mechanism in the event of the cancellation or slow- to run up public debt without account- down of its high-speed rail plans. Third, ability (see page 30), helping to contribute Portugal’s experience illustrates that even to the nation’s crushing debt load. Second, the most thoughtful and well-structured Portugal’s use of PPPs is currently reducing PPPs still expose governments to a hefty its flexibility in responding to the financial share of project costs and risks.

Evaluating the Experience Abroad 29 Protecting the Public Interest: Principles for High-Speed Rail PPPs

ublic-private partnerships can be a clear idea of the benefits they hope to useful tools for governments to un- achieve. Pdertake large infrastructure projects There are good reasons and bad reasons in ways that reduce cost and increase reli- to enter into a PPP. As noted earlier, PPP ability. However, PPPs can also be struc- proponents suggest that partnerships pro- tured in ways that impose large risks on vide the opportunity to cut costs, reduce government and taxpayers, waste money, public-sector risks, and improve quality and create incentives that run counter to and timeliness in the delivery of major the public interest. infrastructure projects. Regardless of In previous papers,84 the authors have whether these claims are credible in a par- laid out general principles for the use of ticular case, PPP arrangements may also be privatization and PPPs in toll roads and undertaken for other reasons, including: other public assets. The principles that should guide the use of PPPs in high-speed • The ability to evade labor or other rail are quite similar in some ways, but dif- regulations that pertain to govern- fer in important respects. ment-sponsored construction projects by instead placing the project under the responsibility of a private actor.

• The ability to shift the costs of an 1: Governments Must Only infrastructure investment “off balance Pursue PPPs for the “Right” sheet,” thereby masking the degree of public investment in a project and po- Reasons tentially encouraging the public sector The first rule for entering into any produc- to take on projects that would other- tive partnership is that you need to know wise fail to pass political muster or to what you want to get out of it. Govern- accumulate large amounts of hidden ments should enter into PPPs only with debt.85

30 High-Speed Rail: Public, Private or Both? • The ability to pass off politically un- Accounting Office went so far as to label popular decisions to an unaccountable the test as applied in that country “pseudo- private entity, as has happened with scientific mumbo jumbo.”86 The potential toll increases and parking rate increas- for manipulation of the test is particularly es in the wake of previous privatiza- great when the government has already tion episodes in the United States. committed itself to a PPP approach, or when the test comes to be seen as a hurdle to be surmounted, rather than as a real When governments consider PPPs, tool for evaluating whether a PPP for a the public not only deserves the right to particular project makes sense. scrutinize those arrangements, but also to In other words, while completing a understand the government’s rationale in value-for-money test should be a prereq- pursuing them. Understanding the reasons uisite for moving forward with a PPP for pursuing a PPP will also help ensure project, it is also necessary that the test be that the eventual agreement serves those fair and comprehensive, that it be carried purposes. out by an agency or organization with no vested interest in the outcome, and that the analysis include examining how ad- justments in sensitive assumptions would affect results. 2: PPPs Must Deliver Identifiable Added Value Pursuing a project through the use of PPPs creates a set of risks for the public sector 3. PPP Contracts Must Align and results in the sacrifice of some degree Private Sector Incentives of control over the project. As a result, PPPs should only be pursued when they with Public Sector Goals deliver added value for taxpayers. The previous experiences of high-speed rail To determine whether a PPP project will PPPs in the Netherlands and Taiwan—and deliver added value, governments should with rail privatization in Britain—dem- undertake comprehensive and evenhanded onstrate that PPP agreements must be financial analyses that compare the costs of structured in ways that reward private the project under a PPP versus traditional sector partners for actions that benefit the public procurement. In addition, they public interest rather than merely assum- must be willing to walk away from PPPs ing a confluence of interests. Contracts as a procurement mechanism if the test should instead seek to anticipate ways that shows that the hoped-for savings will not interests will diverge and take particular materialize. care to leverage pro-public action, and to Many countries subject PPP projects to spell out obligations and dispute resolution a test called the public sector comparator procedures for those instances. (PSC). The PSC test has been the subject Recently, the availability payment—or of criticism given the potential for small design-build-maintain—model has gained changes in the cost assumptions, the factors favor both because it removes ridership considered, and assumptions about the risk from the private sector, making the value of money over time to dramatically projects less risky to finance, and because affect the results. In 2002, the assistant it exposes the private sector actor to the auditor general at Britain’s National consequences of the decisions it makes

Protecting the Public Interest 31 during construction. A poorly or cheaply out on a national—rather than regional— built rail line, it is believed, will cost basis in part based on the assumption that more to maintain over time and be out of there were a limited number of global firms commission more often. By basing com- willing and able to bid for the contract. In pensation on availability payments and the Netherlands, the process of bidding requiring private sector operators to take out the substructure contracts appeared on the costs of maintaining the system to be competitive, with various consortia they have built for a particular period of ultimately winning the contracts. Un- time, well-aligned incentives for quality fortunately, those consortia were largely construction are put in place from the made up of different configurations of the very beginning. The success of this ap- same few companies, which pursued anti- proach, however, depends on the ability of competitive practices during the bidding government agencies to monitor contract process.87 performance, to enforce contract provi- Breaking high-speed rail projects into sions, to prove that any shortcomings are smaller pieces to enable a variety of firms the fault of the operator, and, if necessary, to compete is not without drawbacks, since to replace vendors that consistently fail to doing so creates additional interfaces re- meet performance standards. quiring coordination among various actors. In general, all PPPs should have detailed, However, it does reduce the chances that clear, complete and rigorous standards that the state will be “locked in” with a single govern contractor performance, with clear contractor on a project that is “too big to criteria for measuring success and failure, fail,” and increases the chances that com- regular evaluation of performance, finan- petition among firms will result in lower cial consequences for failing to meet the prices and better quality. designated standards, and clear processes for dispute resolution.

5. PPPs Must Only Be 4. PPPs Must Only Be Pursued by Capable and Prepared Governments Pursued in an Atmosphere The experience with PPPs abroad suggests of Competition that governments that enter PPPs ill-pre- Private sector participation in government pared and without the in-house expertise to infrastructure projects is only likely to understand contracts and monitor contrac- be beneficial in cutting costs, improving tor performance are likely to make major quality, and mitigating risk if private sec- mistakes—mistakes that have important tor firms are forced to compete against one ramifications for the public interest. another for the projects. It is also likely to Governments need to evaluate honestly be beneficial only to the extent that the their capacity to assess and monitor conces- projects do not become “too big to fail” and sion agreements to determine whether they the state does not become locked into part- can adequately protect their constituents. nerships with particular private entities. In addition, governments should take the PPP projects must be structured in such time to develop clear and specific plans for a way as to attract multiple competitive their high-speed rail networks, conduct bids. In Portugal, for example, the signal- preliminary studies (including, where ing and communications contract was bid possible, environmental reviews), develop

32 High-Speed Rail: Public, Private or Both? well thought-through business plans, and contractors and government agencies, come to a clear vision of their goals for the but also to provide a clear face for public project before making a final decision as to accountability in the management of the the type of contracting model they will use project. to build the system, much less solicit bids. Establishing true accountability for This process takes time, but it is neces- long-term infrastructure projects is always sary in order to solicit high-quality bids a challenge, since it is rare that the same and build private-sector confidence in the public officials responsible for authorizing capability of the government to understand and designing a project are still around to and manage the project. officiate at the ribbon-cutting. But while The substantial expertise needed to individual accountability is hard to main- protect the public interest in a high-speed tain, institutional accountability is not. rail PPP means that government agencies Ideally, the job of representing the public considering the PPP approach will be interest in the construction of high-speed called upon to make major investments in rail should be clearly assigned to one entity human resources. While there is a role for responsible for carrying the project from hiring consultants to aid in this process, start to finish. governments should be prepared to build the in-house expertise in law, finance, engineering and other disciplines needed to manage a PPP project. The issue of human resources in the management of high-speed rail is already 7. The Public Must Retain emerging in the United States. A recent re- Control over Key port by the California Legislative Analyst’s Transportation-System Office suggested that the California High- Speed Rail Authority may be insufficiently Decisions staffed to monitor and enforce the many When governments invest hundreds of contracts that are, or soon will be, under millions to billions of dollars in high- its authority.88 speed rail projects—as they generally do The private sector companies that regardless of whether a project is built by engage in PPPs have experts to represent the government or under a PPP—they their interests in these areas; the public should be able to deliver infrastructure should be well represented as well. that serves the public interest. Yet, in cases such as that in Taiwan, or along Britain’s High Speed 1 line (see page 19), the profit motive of private sector infrastructure operators has threatened to limit the usefulness of a high-speed rail line to 6. There Must Be Clear the public. Accountability in PPP Projects Government has a right—and indeed The experience of the Netherlands, in a responsibility—to safeguard the public which no government agency had clear interest in the operation of high-speed responsibility for the execution of the high- rail lines, regardless of the structure speed rail project, shows that there must be of ownership. This principle has two clear lines of accountability in the execu- important implications. First, it implies tion of PPP projects. This is important not that concession agreements that give only to minimize “buck-passing” among private sector actors untrammeled ability

Protecting the Public Interest 33 to establish access charges or prices are improved commuter rail along some seg- almost always best avoided. PPP agreements reduces its revenues. That may be ments should be structured in ways that true, but these are indirect risks that the encourage more—not less—ridership on public sector should take on. It is reason- a high-speed rail line. able to stipulate against direct future claims Second, it suggests that the public sec- on PPP revenue, such as from future ticket tor must retain a strong hand in setting fees or rail operator taxes; but otherwise policies for the operation of high-speed the public sector should be left free to make rail service. In well-developed rail mar- the proper public policy decisions without kets, open competition between carriers worrying about lawsuits and paying ad- on the same tracks may eventually prove ditional costs from indirect “harms” to a to be a workable model for providing rail private partner. service. Until then, however, the government should ensure that the high-speed rail asset is managed—through concession agreements, regulation, or both—in such a way as to provide the greatest possible 9. PPP Contracts Should Be benefit to the public interest, not just the greatest possible profit to the rail service of Reasonable Length or infrastructure operator. Another issue that has arisen in asset privatization schemes in the United States is the establishment of contract lengths for asset leases of as long as 99 years, essentially transferring ownership of the facility to the private sector. Excessively long 8. PPP Contracts Must Not contracts create two problems: they can Impose Unreasonable lock the public into a bad deal essentially forever, and they rely on contract-writers Limitations on Future to anticipate all of the challenges that Government Action could occur up to a century in advance— Previous agreements in the United States an impossible feat. With the exception to privatize toll roads and other public of the 90-year concession for Britain’s assets have often come with non-compete High-Speed 1 line (which subsequently clauses or compensation event contin- became moot after the British government gencies that prevent public entities from took over the concessionaire and reissued pursuing the best policies for the public the concession with a 30-year lease), most interest. For example, the private lessee of high-speed rail concessions around the a toll road might insist that the government world have been of lengths ranging from not build a competing highway that would 15 to 50 years. Generally speaking, avail- reduce their revenue. ability payment (design-build-maintain) Non-compete clauses are likely to be contracts should be of sufficient length to less of an issue with high-speed rail PPPs, motivate the builder to ensure high-qual- except in the case of concession agree- ity construction—recent PPPs have been ments in which the private actor’s profit in the neighborhood of 40 to 50 years. depends primarily on ridership levels. Contracts for items that have a shorter For instance, a PPP partner might claim life span or are more likely to be replaced that a government-sponsored rideshare soon—such as rolling stock and commu- program along the same corridor or nications systems—should be shorter.

34 High-Speed Rail: Public, Private or Both? 10. PPPs Must Be Subject to sector is not sufficient to turn a bad project into a good one. Extraordinary Transparency Moreover, effective high-speed rail Transparency is a critical component to PPPs can only result from the active and the completion of PPP deals that benefit intelligent involvement—including the the public interest. Open publication of bid financial commitment—of government packages and other documents can enable entities. the public and experts to identify problems Government entities considering in proposed PPP agreements before gov- high-speed rail PPPs must take several ernment officials sign on the dotted line. important steps in order to ensure the Transparency also reduces the potential productive involvement of private-sector for favoritism and backroom deals in the companies: selection of contractors, ensuring that the contractors chosen are those who provide • Governments should be prepared to the best value for the money. In addition, undertake extensive early planning transparency enables the public to play a and environmental review of a project watchdogging role in the oversight of proj- before submitting it to bid, in order ect cost and to create an outside source of to reduce project uncertainties and pressure on public officials and contractors increase the comfort of private actors to fulfill their responsibilities. in submitting competitive bids. In addition to ensuring the transparency of dealings between the public sector and • Governments should be prepared to the lead contractor in a PPP deal, the gov- reduce the risk of cancellation of a ernment should also insist on monitoring project mid-stream by providing full- the flow of public dollars to subcontrac- funding grant agreements that provide tors, as well as ensure that subcontractors a multi-year commitment of govern- deliver the promised level of service to the ment funds. public. Inevitably, as in any business setting, • Governments should acknowledge some details of PPP negotiations will need that public investment is necessary to remain confidential on a temporary for the completion of a high-speed basis. However, the strong presumption rail project and understand that even should be that all documents produced in “private” rail proposals are likely to the course of a PPP process will be made impose public costs, particularly in available to the public as quickly as pos- the event of a threatened private-sec- sible, and government agencies managing tor default. PPP processes must be accountable under public records laws.

Are PPPs Really Worth It? The debate over public-private partner- When Do PPPs Make Sense? ships often gets swept up in broader Governments often look at the private ideological debates about the proper role sector as a knight riding to the rescue of of government. To some conservatives, infrastructure projects that are imperiled the private sector is often considered more by political or budgetary constraints. efficient and more capableby definition. To However, the involvement of the private some liberals, private sector involvement in

Protecting the Public Interest 35 public works is inherently suspect. Critically, they also tell us that the most With high-speed rail, the experience powerful tool available to the public sec- of public-private partnerships abroad tor in ensuring that PPPs serve the public suggests that PPPs are neither beneficial interest is the ability to walk away. Gov- nor detrimental by their very nature. If a ernments should never commit to a PPP government agency seeking to launch an approach unless they are convinced that a infrastructure project is sure in its goals, PPP is the best way to achieve the goals of well prepared and strategic—and if it is for- a particular project—and that a PPP can tunate enough to enter a market brimming be achieved that comports with the above with competent, competitive firms eager principles. to win their business—a public-private As the nation prepares to make a mas- partnership can be an effective way to get sive investment in our future in the form the job done. But the many problems and of high-speed rail, it is important that pitfalls with PPPs around the globe teach government officials recognize that public- us that there are certain public interest private partnerships are not panaceas, but protections that should never be negotiated are merely useful tools that should only away, and that the public sector must be an be pursued under the right conditions and aggressive and capable defender of the in- with the proper protections for the public terests of citizens in any PPP negotiation. interest.

36 High-Speed Rail: Public, Private or Both? Notes

1 Harris Interactive, More than a Third of 8 Reseau Ferre de France, South Europe Atlantic Americans Aware of High Speed Rail Projects in High-Speed Rail Line: Tours-Bordeaux Press Kit Their State, 24 February 2011. (Powerpoint presentation), 30 March 2010.

2 U.S. Department of Transportation, U.S. 9 Pedro Cantos and Javier Campos, “Recent Transportation Secretary LaHood Leads Confer- Changes in the Global Rail Industry: Facing ence on Domestic High-Speed Rail Manufacturing the Challenge of Increased Flexibility,” (press release), 4 December 2009. European Transport, 29:1-21, 2005.

3 Janet Zink, “Even with Florida’s High-Speed 10 Government-owned corporations can Rail Stalled, Interest from Potential Builders be defined as those in which the government Grows,” Lakeland (Fla.) Ledger, 15 December 2010. retains majority ownership and control over the corporation, even if the government does 4 “1,000 responses”: California High-Speed not own 100 percent of the stock. For example, Rail Authority, Requests for Expressions of Inter- there are private shareholders in Amtrak, but est, downloaded from www.cahighspeedrail. they have essentially no say in the operation of ca.gov/rfei.aspx, 20 May 2011; “22 funds”: Ashley the company. See U.S. Congressional Budget Swearengin et al., “Five Big-City Mayors Back Office, The Past and Future of U.S. Passenger Rail High-Speed Rail,” Fresno Bee, 7 June 2011. Service, September 2003.

5 Omega Center, Bartlett School of Planning 11 High Speed 1, U.K. Government Sells Right to (U.K.), Project Profile: Netherlands: HSL-Zuid, Operate Its First High Speed Railway for £2.1 BN downloaded from www.omegacentre.bartlett.ucl. (press release), 5 November 2010. ac.uk/studies/cases/pdf/PROFILE_HSLZUID_ 040311.pdf, 3 May 2011. 12 Fyra, NS Hispeed Factsheets, downloaded from www.fyra.com/index.php?page=ns-his- 6 Thomas Vieillescazes, DIF, PPPs and EU peed-factsheets&hl=de_DE, 22 May 2011. Funds, Cross-Border Projects: The Case of the Rail Sector PPPs, Powerpoint presentation to 13 Richard N. Vellotta, “DesertXpress Rail the Ministry of Finance and World Bank PPP Project Going After Tax Dollars After All,” Las Seminar, Warsaw, 17-18 June 2008. Vegas Sun, 21 February 2011.

7 RAVE (Portugal), The Portuguese High-Speed 14 Tania von der Heidt et al., Contractual Railway Project, downloaded from www.rave.pt, Arrangements and Their Implications for 3 May 2011. the Provision of an Australian HSR System,

Notes 37 paper presented to the Next Generation Passenger Transport, Hamilton Island, Austra- Infrastructures Conference, Chennai, India, lia, 12-17 August 2007. 9-11 December 2009. 28 Ibid. 15 See note 6. 29 S. Ping Ho and Chun-Wei Tsui, When Are 16 See note 5. Public-Private Partnerships not an Appropriate Governance Structure? Case Study Evidence, 17 Government Accountability Office, High paper presented to 2010 Construction Research Speed Passenger Rail: Future Development Will Conference, Banff, Alberta, Canada, 8-10 May Depend on Addressing Financial and Other 2010. Challenges and Establishing a Clear Federal Role, March 2009. 30 See note 27.

18 Thomas Remond, Infrastructure Charging on 31 European Commission, State Aid the French Railway Network: RFF’s Experience, 29 N523/2002, United Kingdom—The Channel October 2004. Tunnel Rail Link (CTRL IV) (memorandum of decision), 18 September 2002. 19 Ibid. 32 “Government Takes Control of London 20 Anzir Boodoo, An International Comparison and Continental Railways,” The Railway Gazette of Railway Organizational and Planning International, 9 June 2009. Frameworks, 2002. 33 Ibid. 21 Thorsten Beckers et al. Long Distance Passenger Rail Services in Europe: Market Access 34 Claude Barjonet, “Le TGV Perpignan- Models and Implications for Germany, December Figueras attribué à Eiffage et ACS-Dragados,” 2009. Les Echoes, 29 December 2003. (Translated from French using Google Translate.) 23 See note 17. 35 See note 6. 24 Infrastructure Management Group, Report of Responses to the Request for Expressions 36 Directorate-General of Budget, Accounting of Interest for Private Participation in the and Statistics, Executive Yuan, R.O.C. Development of a High-Speed Train System in (Taiwan), Statistical Yearbook of the Republic of California, prepared for the California High- China 2009, 2010. Speed Rail Authority, October 2008. 37 “THSRC Generates First Net Operating 25 Dennis J. Enright, The Public Versus Private Profit in 2009,”Focus Taiwan News Channel, 23 Toll Road Choice in the United States, NW June 2010. Financial Group, LLC, June 2007, 8. 38 Peter Yu Kien-Hong and Jokull 26 See, for example: Paul A. Grout, “Public and Johannesson, “Near-Bankruptcy of the Taiwan Private Sector Discount Rates in Public-Private High-Speed Rail Corporation: What Went Partnerships,” The Economic Journal, Vol. 113, Wrong?” International Journal of Business and Mar. 2003, pp. C62–C68; E.R. Yescombe, Management, 5(12): 14-22, December 2010. Public-Private Partnerships: Principles of Policy and Finance, 2007 as cited in Ingo A. 39 Robert Cruikshank, “Taiwan HSR Hansen, Review of Public-Private Partnerships Generates Operating Profit” California High in Heavy Railway Infrastructure Projects, 20 Speed Rail Blog, 27 June 2010. December 2010. 40 Yi-Shan Chen, “How to Save the High- 27 Gunnar Alexandersson and Staffan Hultén, Speed Railway?” CommonWealth Magazine “Prospects and Pitfalls of Public-Private Part- (Taiwan), 24 September 2009. nerships in the Transportation Sector—Theo- retical Issues and Empirical Experience,” paper 41 “Official Hints at Extending THSRC th presented at the 10 International Conference Handover Period,” Taipei Times, 15 October on Competition and Ownership in Land 2009.

38 High-Speed Rail: Public, Private or Both? 42 High Speed Rail Systems Around the World: A 55 See note 14. Survey and Comparison or Existing Systems, The Utah Foundation, August 2010. 56 See note 49.

43 Ibid. 57 “Eurlings Moves to Rescue HSA,” Railway Gazette International, 11 March 2009. 44 Ibid. 58 Ibid. 45 Project Finance, “European PPP Deal of the Year 2001—HSL Zuid,” 1 February 2002. 59 Louis S. Thompson, Privatizing British Railways: Are There Lessons for the World Bank 46 See note 5. and Its Borrowers? The World Bank Group, September 2004. 47 Ernst & Young, High Speed 2: International Case Studies on Delivery and Financing—A Report 60 Ibid. for HS2, 18 December 2009. 61 Ibid. 48 For differing perspectives on the impact of collusion among bidders on the cost of the HSL-Zuid 62 Brendan Martin, British Rail Privatization: project, see: Joop Koppenjan and Martijn Leijten, What Went Wrong?, May 2002. “Privatising Railroads: The Problematic Involve- ment of the Private Sector in Two Dutch Railway 63 See note 59. Projects,” Asia Pacific Journal of Public Administra- tion, 27(2):181-199, December 2005; Hugo Priemus, 64 See note 62. “Contracting Public Transport Infrastructure: Recent Experience with the Dutch High Speed 65 See note 59. Line and the Amsterdam North-South Metro Line,” Presentation at the 11th International Th- 66 Ibid. redbo Conference on Competition and Ownership in Land Passenger Transport, Delft University of 67 Office of Rail Regulation (U.K.), Train Technology, 21 September 2009. Derailment at Hatfield: A Final Report by the Independent Investigation Board, July 2006. 49 Joop Koppenjan and Martijn Leijten, 68 See note 6. “Privatising Railroads: The Problematic Involvement of the Private Sector in Two Dutch 69 Interview with Gerald Corbett on BBC Railway Projects,” Asia Pacific Journal of Public Radio’s “Today”, 17 December 1999 as cited Administration, 27(2):181-199, December 2005. in Brendan Martin, British Rail Privatization: What Went Wrong?, May 2002. 50 Ibid. 70 Carlos Alberto João Fernandes, RAVE 51 General Accounting Office (Netherlands), (Portugal), “Portuguese High Speed Network Tweede Kamer Dossier: HSL Zuid, June 2010 Is Fast Approaching,” European Railway Review, (translated from Dutch via Google Translate); 26 September 2007. House of Representatives (Netherlands), Risk HSL (report), 20 June 2007 (translated from 71 Ibid. Dutch via Google Translate). 72 KPMG International, Rail at High Speed— 52 Peter Badcock, “HSL Zuid Opening Doing Large Deals in a Challenging Environment: Postponed Again,” Railway Journal Lessons Learned from Portugal’s First High-Speed International, 11 September 2007. Rail, 2010.

53 General Accounting Office (Netherlands), 73 Ibid. Tweede Kamer Dossier: HSL Zuid, June 2010 (translated from Dutch via Google Translate). 74 Duarte Silva, et al., RAVE (Portugal), Performance Payment Regime for HSL in a PPP 54 Jaap Verkade, Rounding Evaluation Large Context: The Portuguese Model, January 2011. Construction Projects HSL-Zuid, May 2009 (translated from Dutch via Google Translate). 75 Isabel Falcão de Campos, et al., RAVE

Notes 39 (Portugal), Portuguese High Speed Rail Business U.S. PIRG Education Fund; Private Roads, Model: A New Way Forward on PPP, September Public Costs: The Facts About Toll Road Privatiza- 2010. tion and How to Protect the Public, Spring 2009; and Tony Dutzik, Brian Imus and Phineas 76 João de Abreu e Silva, Duarte Silva and Baxandall, Privatization and the Public Interest: Joseph Sussman, The Portuguese High Speed The Need for Transparency and Accountability in Rail Network: Relating Financing to Strategic and Chicago’s Public Asset Lease Deals, Fall 2009. Operating Issues, 20 December 2010. 85 Chris Chan, et al., Australian Government, 77 See note 75. Productivity Commission, Public Infrastructure Financing: An International Perspective, March 78 Ibid. 2009. Note that use of independent “quasi- public” agencies can serve legitimate purposes, 79 See note 7. but should be subject to extraordinary levels of public transparency rather than the relatively 80 RAVE (Portugal), Project & Infrastructure lower levels of transparency that tend to charac- Financing in Portugal: The High-Speed Rail terize these agencies. See Deirdre Cummings, Project, Powerpoint presentation to Project Phineas Baxandall and Kari Wohlschlegel, Out & Infrastructure Financing in Portugal of the Shadows: Massachusetts Quasi-Public Agen- Conference, Lisbon, 25 February 2010. cies and the Need for Budget Transparency, Spring 2010. 81 Giles Tremlett, “Portuguese Learn Price of €78bn Debt Bailout,” The Guardian, 4 May 86 Association of Chartered Certified Accoun- 2011. tants, ACCA Members Survey: Do PFI Schemes Provide Value for Money?, September 2002. 82 Bruno Alves, “EU/IMF Tell Portugal to Renegotiate PPP Contracts,” Infrastructure 87 Hugo Priemus, “Contracting Public Trans- Investor, 5 May 2011. port Infrastructure: Recent Experience with the Dutch High Speed Line and the Amster- 83 “TGV Cancellation Could Cost Portugal dam North-South Metro Line,” Presentation at Dearly,” Algarve Resident, 12 November the 11th International Thredbo Conference on 2010; “Portuguese Rail Project in Doubt,” Competition and Ownership in Land Passenger International Railway Journal, 15 April 2011. Transport, Delft University of Technology, 21 September 2009. 84 See Phineas Baxandall, Road Privatization: Explaining the Trend, Assessing the Facts, and 88 California Legislative Analyst’s Office, Protecting the Public, September 2007; Phineas High-Speed Rail Is at a Critical Juncture, 10 May Baxandall, Kari Wohlschlegel and Tony Dutzik, 2011.

40 High-Speed Rail: Public, Private or Both?