High-speed ambitions

The US spent $1.8trn to develop its vast system of highways and airports. Now it is setting its sights on a high-speed rail network to span the country. Can it be created, and what role can the private sector play in its delivery? Cezary Podkul investigates.

Henry Posner, the bowtie-sporting chairman of Pittsburgh-based Railroad Development Corporation, has spent the better part of the last 25 years investing in the rail sector. From Mozambique and Malawi to Estonia, Peru and Guatemala, he has built, refurbished, bought and sold more than his fair share of freight railroads.

This year, Posner decided to try something new: high-speed passenger rail.

In a year when Congress set aside $8 billion to seed a nationwide network of high-speed lines – including one in his back-yard in Pittsburgh – Posner’s new bet may seem obvious. Slightly more surprising: the Pittsburgh native started up a 110 mile per hour inter-city rail company – the Hamburg-Köln Express in Germany.

Closer to home, Posner is just one of many infrastructure investors keeping a keen eye on the US’  nascent high-speed rail industry. Flip through a list of prospective participants in hearings on the subject on Capitol Hill, and you will see familiar names including Goldman Sachs, The Carlyle Group, Citi and Macquarie – an indication that there is plenty of private capital out there waiting to see what the opportunity will be. However, there is still a great deal of uncertainty over when that opportunity will arrive, and what shape it will take.

It is with this in mind that InfrastructureInvestor surveyed government officials, trade associations, investors, advisors and developers to hear their thoughts on the sector and whether they see a genuine opportunity for private capital to play a role in its development. The answer was a consistent “yes – but not yet”: high-speed rail requires a whole host of planning, permitting and preliminary design work that the private sector is happy to leave to government institutions such as California’s High-speed Rail Authority. Once the work is done, industry insiders see a much bigger role opening up for equipment vendors, concessionaires and private equity investors.

In the meanwhile, the industry will have to work hard to resolve a thorny question: what will define high-speed rail in the US? Will it be diesel-powered locomotives capable of traveling between 90 to 110 miles per hour on existing freight and passenger lines? Or will it be the ambitious, 200 mph separate-track trains California is envisioning for its high-speed rail network? Both approaches have strong supporters and strong detractors in the US today.

Playing ‘catch-up’

In other parts of the world, this debate has already been had, and settled. The Paris-based International Union of Railways, an industry group, estimates that there are already 10,739 kilometres of passenger train lines in operation around the world on which trains can travel at speeds of more than 250 kilometres per hour, which is the union’s standard for high-speed rail.

The first of these fast lines opened in Japan in 1964. 45 years on, 2,452 kilometres of high-speed rail lines, known as Shinkansen, link Japan’s major cities. Europe followed soon after, with France and Italy installing their own high-speed rail lines in the early 1980s. Today, high-speed trains whiz passengers across most other large European countries, including Germany, Spain and the UK. And most of them have big plans for new lines – $348 billion in Spain alone – as do Poland, Portugal and Russia, to say nothing of China’s $300 billion ongoing high-speed rail build-out.

How high-speed rail came to be so widely accepted in Japan and Europe is as much a story of want as it is of necessity. In the aftermath of World War II, as many of these countries rebuilt their infrastructure, they invested heavily in rail –  in no small part because dense population centers and high petrol prices made it a much more attractive mode of surface transport than cars. The US, on the other hand, bet big on automobiles and airplanes: according to the Federal Railroad Administration, the US spent $1.8 trillion in the last 60 years to build out its highway and aviation transportation systems, which are among the largest and most advanced in the world.

Now, already mired in congestion on its roadways and airways and facing only more of the same, the US is looking to bring its passenger rail system up-to-speed with the rest of the world. In April, President Obama unveiled a plan to invest $8 billion from the stimulus bill and an additional $1 billion per year for the next five years to jump-start high-speed rail projects in the US. The plan identified two types of projects that will be seeded by the money: building out of brand-new high-speed rail corridors akin to Japan’s Shinkansen, as well as  speeding up existing passenger rail lines that operate at slower speeds, often on train tracks shared with freight rail.  

California dreams

By far the most advanced attempt at creating a high-speed rail in the US is California’s proposed 800-mile high-speed rail network. The populous West Coast state – in 2008 California’s population stood at 37 million – has been working on the project since 1996, when its legislature formed the California High-speed Rail Authority to plan, design and construct a high-speed rail system in the state.

After 14 years and several cost-and-benefit analyses, revenue forecasts and environmental certifications, the project is now poised to begin construction, thanks in no small part to a $10 billion bond issue approved by voters last year for funding. The vast majority of that will go toward building the high-speed system’s backbone – the Anaheim to San Francisco line linking the southern and northern parts of the state – estimated to cost $33.6 billion, according to the authority’s 2008 business plan.

Of that, the authority anticipates $12 billion to $16 billion will come from the federal government as matching funds for the $9 billion in state bonding capacity. Another $2 billion to $3 billion will come from local matching funds, and a remaining $6.5 billion to $7.5 billion from public-private partnerships.

Sasha Page, vice president at Infrastructure Management Group and the head of the financial advisory team for the authority, says the local, state and federal funds will be deployed first to overcome major project risks that the private sector isn’t willing to take on, such as right-of-way acquisition and environmental mitigation. “We expect the equity and the private investment to come later,” he says.

Infrastructure Management Group has laid out two possible scenarios for how much later that will be. One scenario, referred to as the “mid-term private participation”, would get the private sector to finance parts of the project starting in 2016. The winning bidders would likely be given a revenue guarantee, or a promise from the authority to cover any shortfalls in expected revenues, since the demand for the system would be uncertain at that point, Page says. One of the mechanisms being considered for the guarantee is an availability payment structure, in which a government counterparty makes periodic payments to a private sector contractor in exchange for meeting agreed-upon levels of service provision for an infrastructure asset. This approach has been commonly used in Europe but has to date only been successfully executed on two infrastructure projects in the US.

A second scenario, “later private participation”, would not rely on any revenue guarantees. Instead, the public sector would initially finance the entire system. Once it is complete in 2020, the authority would operate the system for five years so that ridership patterns are established and traffic and revenue projections can be put to the test. Then, in 2025, once patronage is proven, the authority would award long-term operating concessions for the system in exchange for upfront payments from the private sector, thereby recouping its costs.

If substantial ridership does develop, these could prove to be pretty large deals for the private sector. “Provided you charge market prices, in the way airlines would do, these railways can be very profitable – hugely profitable,” says Jim Collins, director at Steer Davies Gleave, a UK-based rail consultancy. For now, the authority is being conservative in its estimates: in 2030, it foresees 7 percent of all trips in the state being made via high-speed rail, with 89 percent still coming from car travel. When fully functional, though, the system is estimated to be capable of carrying 90 million passengers annually and clearing $3.6 billion in gross revenues.

Page cautions that the business plan is currently being updated and figures and timetables are subject to change. But “the idea is to use a combination of availability and ridership-based financing”, he says, so the ultimate structure for private sector participation may well end up being a blend of both scenarios.

Whichever way the private participation plays out, Page doesn’t doubt the project’s ultimate outcome. “We’ve developed a realistic plan,” he says. He is convinced it is only a matter of time until a two-and-a-half hour train ride separates Los Angeles from San Francisco, giving Californians a reason to opt out of the hour-and-a-half long flight.

The pitfalls

Posner, the rail investor from Pittsburgh, takes a more cautious approach. “California has got much more of a ‘think big’ vision than the rest of the country,” he admits. “But that being said, it is not clear how realistic that vision is.”

One of the key areas giving him pause is the intermodal connectivity between the high-speed rail stops and commuter’s other modes of travel. It can make or break a business: In September, Posner discontinued a bus service he had started between Pittsburgh and Harrisburg, the Pennsylvania capital, because the so-called Steel City Flyer could not get access to the Amtrak terminal in Harrisburg, which would provide most of the passengers. This would have been less of a problem in Europe, where rail is “well integrated with local train and metro service”, says Posner. “To the extent that we don’t have nearly the amount of transit integration that Europe has, its going to make access to the high-speed rail [difficult].”

Dale Bonner, California’s Secretary of Business, Transportation and Housing,  points out that his agency’s transportation arm, CalTrans, plans on taking $950 million of the bonding issuance approved by voters “to ensure that the high-speed rail system is properly integrated with the intercity and commuter rail services that feed into it”.

But Posner also worries about the extent to which public apprehension about public-private partnerships will scuttle any potential private sector role in high-speed rail. He points to his state’s failed attempt to lease the Pennsylvania Turnpike last year as a warning that PPPs remain difficult politically to pull off. “The mixed success in getting toll roads done suggests there is a lot of work to be done in getting the process to be understood and accepted,”  he says. “Rail is more complex than highways, so I think it’s a relative stretch to think there is a role for the private sector anytime soon.”

Bonner is more optimistic. His agency recently created the Public Infrastructure Advisory Commission, which is empowered by the legislature to identify and review potential PPP transactions. “Those are contracts that come up under a statutory scheme that is different than the High-speed Rail Authority,”  he says. But his agency will still be working together with the authority to build up the PPP market in California. “So we’ll no doubt learn some things as we evaluate PPP opportunities for highway projects that will be of great benefit when we have discussions about high-speed rail and vice-versa,” he says.

Even if the PPPs for high-speed rail do materialise, rail experts forsee another problem that could derail the whole process: uncertainty over government subsidies. Mark Rosner, former head of PPPs for Burlington Northern Santa Fe, US’ largest freight carrier, points out that intercity passenger rail service in the US is hardly ever profitable. With the exception of Amtrak’s Northeast Corridor, a rail line from Washington DC to Boston along which the passenger rail carrier runs an electric rail service that runs just under 90 miles per hour on average, there is hardly any intercity passenger line that can cover its operating expenses. As a result, Amtrak relies on heavy government subsidies to provide services outside the Northeast Corridor. “The real issue to me with high-speed rail is ultimately not the technology proposed or the location of where it is going to be used but what’s the subsidy that’s going to be used?” he says. “Ultimately there needs be a transportation policy that says [the federal government] will support high-speed rail and there’s going to be an appropriate subsidy where it is needed,” he adds.

In California, the authority’s financial advisors acknowledge that this is an issue. At a 3 September financial workshop for the High-speed Rail Authority’s board members, they pointed out that the authority “must secure long-term federal” funding for the project, according to the board presentation prepared by Infrastructure Management Group and Goldman Sachs. But Infrastructure Management Group’s Page remains optimistic that the federal support will ultimately materialise: “We fully expect and we hope that there will be an ongoing federal high-speed rail programme, the way there is for highways.”

Highways in the US are funded through a trust fund backed by gas tax revenues. There is currently no similar trust fund for high-speed rail. Jim Berard, a spokesperson for the House of Representatives Transportation and Infrastructure Committee, writes in an email to InfrastructureInvestor that there is “all sorts of ‘talk’ surrounding high-speed rail”, but the only “concrete proposal on the table” is a provision in committee Chairman Jim Oberstar’s surface transportation bill that would provide $50 billion to develop high-speed rail corridors in the US over the next six years. Oberstar’s bill, however, has got sidetracked due to ongoing debate in Congress about healthcare reform.  

The alternative

California has a head start in addressing all these issues. But not every one of the US’ 10 designated high-speed rail corridors has as advanced a programme in place as California. So one ought not expect the high-speed rail industry necessarily to develop in the same fashion elsewhere in the US.

One alternative would be to run slower-speed trains on existing tracks that are currently being used by freight railroad operators such as Burlington. The main benefit of this alternative is lower upfront costs, since running trains on existing tracks eliminates the need to build an entirely new, stand-alone track, as well as related costs such as right-of-way acquisition. The trains would also use cheaper technology – such as diesel-powered engines – which would eliminate the need for expensive electrification upgrades required for higher-speed trains.

This is the alternative that Posner sees having the best chance of bringing to fruition the Federal Railroad Administration’s “Keystone” corridor, which would produce a high-speed rail across Pennsylvania from Philadelphia to Harrisburg and Pittsburgh. There’s already an Amtrak line from Philadelphia to Harrisburg, where trains can achieve speeds of up to 110 miles per hour. But west of Pittsburgh, there is only one railroad line, which belongs to freight carrier Norfolk Southern. So Posner proposes a public-private partnership with Norfolk that would run lower-speed passenger trains on their line in exchange for capacity improvements and other financial considerations. It’s a realistic approach, he says, because Western Pennsylvania is very mountainous, so it is “less likely that the line to Pittsburgh is capable of being reengineered for the types of speed that you might see elsewhere”.

Robert Chapman, a spokesperson for Norfolk, says the railroad is “open to such a proposition”  – provided four conditions are met: the passenger operations must not interfere with the freight lines; there must be additional rail capacity built in to handle the passenger traffic; there must be adequate liability protection for Norfolk against any accidents; and Norfolk must receive fair compensation for any use of its assets. “If all four of those are met, I’m confident we can work something out,” Chapman says.

And because the US has the world’s largest privately-owned freight rail system, it’s a model that could be used all across the country – not just Keystone. “There are very few corridors in the US where you couldn’t use at least major pieces of the existing right of way,” says Posner.

The major drawback of this alternative is that the passenger trains would probably only be able to reach top speeds of 110 miles per hour, and even lower speeds of 90 miles per hour would be the realistic outcome. That is because of safety concerns linked to running high-speed trains on the same lines as freight trains, which tend to travel at top speeds of only 60 miles per hour. In the UK, points out Steer Davies Gleave’s Collins, this difficulty can be overcome since most freight lines are built with two tracks going in each direction, so trains can bypass each other. The US freight network, however, is essentially a one-track system.  

“This is America”

To some, the speed issue isn’t just a drawback – it’s a deal killer. Andy Kunz, a high-speed rail lobbyist in Washington, strongly believes states should “go for the real thing” and avoid slower-speed diesel trains all together.  Kunz argues that at speeds of 90 miles per hour or so, diesel trains won’t be traveling fast enough to convince people to leave their airplanes and cars for a new mode of transportation. That modal shift, to Kunz, is what high-speed rail is all about.

Collins agrees: “I think people’s perceptions of rail in the states are probably quite different from our perceptions of rail and you won’t get the real advantage unless you […] change that whole perception about what rail is. And a 90 mile an hour, 100 mile an hour diesel train really doesn’t do it,”  he says. “We did that in the 1970s.” During that decade, the UK developed a large fleet of high-speed diesel trains that have been running successfully ever since. “They’re very, very reliable and they’ve just been all refitted. But they are not the future,”  he says.

Collins also believes that the argument about slower-speed diesel train systems being cheaper to implement is not entirely true. Sure, slower-speed networks might be cheaper up-front and easier to implement. But, in the long run, they could actually be more expensive than the “true” high-speed trains. That’s because, if they run faster, they have to make fewer trips. And fewer trips mean lower overhead costs as well as lower personnel and maintenance costs.

Kunz still sees a role for them, though. “Slower feeder systems are necessary to feed people from smaller cities to larger cities,” he says, and slower-speed diesel trains could be ideal for that. But for the larger, regional inter-city passenger services, he urges other states to squarely follow California’s lead.

“This is America,” he says. “We built a state of the art highway system, we built a state of the art space program. Why shouldn’t we be building a state of the art rail system like the rest of the world has?  Why are we thinking small and timidly when we’ve never done that before?”

The debate is bound to continue for a long while. In California, though, it seems all but settled. “The time has well come for us to move forward and add this very substantial investment to our transportation programme,” says Secretary Bonner.

Will California pull it off? “No doubt, no doubt,” insists Bonner.