In recent days there’s been a spate of articles discussing private funding for high speed rail. Some of these articles have been valuable, but only when they’re written by people with an actual understanding of high speed rail around the world. The other articles, produced by members of the California news media or by right-wing op-ed writers, are so lacking in facts that it’s stunning they can be passed off as journalism.

Because private funding will play an as-yet undetermined role in California’s HSR project, it’s important to get beyond the false assumptions peddled by the media. The reality is that there’s a high demand from the private sector to participate in HSR funding, but that private funding is inherently risky and should be dealt with very, very cautiously.

There’s no doubt that right-wing HSR denialism has a proven track record of getting their talking points into the media, even when the evidence contradicts their assertions. A good example is Liam Julian’s op-ed in the SF Chronicle last week. Julian is a fellow at the right-wing Hoover Institution, based at Stanford University, and like his fellow right-wing think tank fellows at the Cato Institute and the Reason Foundation, Julian is a strident opponent of HSR:

First, no one knows how much it will cost. New numbers put the price of the Anaheim-to-San Francisco segment alone at $42.6 billion. California expects to receive about $18 billion from the federal government; so far, Washington has donated $2.3 billion. The state also expects to receive $12 billion from private investors, but the rail authority has provided scant evidence that it can raise that amount.

Aside from the the self-contradictory nature of this quote (if the CHSRA has an estimate, then it’s not accurate to say “no one knows how much it will cost” is it?!), Julian is just plain wrong to imply that private funding isn’t going to materialize. RFF, the French track owner, recently awarded a build-operate-maintain contract to VINCI, a private company that will contribute €3.6 billion euro (roughly $5 billion) in capital to complete the LGV Sud Europe Atlantique, with the French government picking up the other half of the cost.

Julian’s argument was further undermined in the same newspaper by Oliver Hauck, president of Siemens’ USA division:

Private companies, including rail technology suppliers like my own, are willing to accept some of the risk inherent in financing this major upgrade to the American transportation system.

Given the current economic realities, is there an appetite out there to fund high-speed rail? We think there is.

So what is the best format to minimize risk for all concerned and guarantee that projects are delivered on-time and on-budget?

We believe the government should seriously consider public-private-partnerships), typically a concession agreement of 30 to 35 years whereby the government partners with the private sector and allows them to supply infrastructure assets and services traditionally provided by the government.

Nowhere in Hauck’s op-ed is there any mention of a revenue or ridership guarantee. Hauck implies that one isn’t necessary to attract private investment, and in fact states that one of the benefits is that “private companies are willing to accept some of the risk.”

The SF Chronicle also ran an op-ed by CHSRA Chairman Curt Pringle, which did not break new ground but elicited a frothing-at-the-mouth reaction by yet another wingnut, the San Diego Union-Tribune’s Chris Reed, who denounced Pringle on the issue of private funding:

No, Mr. Mayor, these aren’t the two main elements of the “discussion” now going on. Instead, the “discussion” is focusing on the fact the California High-Speed Rail Authority has an illegal business plan that would require future taxpayer subsidies.

Yo, Curt! Can’t you ever address that forthrightly? Please?…

After Pringle downplayed this problem in an e-mail to me, I went directly to Legislative Analyst Mac Taylor, who said the revenue guarantee “did seem to be in direct violation” of the no-subsidy promise. Taylor was also highly skeptical of the idea that a ridership guarantee could be substituted for a revenue guarantee.

I’ve never been a fan of the ridership guarantee notion, and think it has no place in the business plan. But what Reed is implying is that without such guarantees, no private backer would be interested in funding the project. Yet Siemens, in the form of Hauck’s op-ed, is actually saying “we will take on the risk” and made no mention of any ridership guarantee. If they don’t feel it’s important enough to mention in the op-ed, then it is safe to conclude from that and from their willingness to assume risk that no revenue guarantee is needed for at least Siemens to get involved in funding the project.

Put that together with the RFF/VINCI contract and it seems pretty damn obvious that the “private funding won’t materialize” argument is baseless speculation. But what happens when the funding does show up?

As Yonah Freemark points out at The Transport Politic, private funding brings considerable risks to the public:

In both Taiwan and the United Kingdom, private infrastructure firms managing the construction of new high-speed lines have gone broke because of their reliance on loans taken out at high rates, leaving the taxpayer to foot the bill on both line construction and loan back-payments. All the “creativity” in the world bulging from the minds of entrepreneurs didn’t save the people of either of those countries any money compared to what they would have gotten from a fully public operation. In each of those cases, the “risk” supposedly assumed by private corporations was dumped back onto the public sector because you don’t put billions of dollars in a high-speed rail program and then simply throw it away when private funds evaporate.

At least you shouldn’t.

It could be argued that governmental entities can manage infrastructure funding more effectively because they’re able to take out loans at much lower interest rates. This power could be expanded if the U.S. Congress establishes a national infrastructure bank, as has been recently suggested. A fully public operation would allow taxpayers to get some of their investment back through operational revenues; by contracting out a PPP, those profits will all go into the hands of corporations and their shareholders.

It’s worth going into some more detail on the Taiwanese example, since that unfolded in the last year or two. Taiwan’s HSR system met its ridership projections, though it took a year or two to get there. In his seminal Puente AVE article, DoDo explained why Taiwan’s successful HSR system did not translate into a successful PPP project:

For the THSR, cost overruns were largely the consequence of a switch to Japanese suppliers after planning based on European high-speed technology was already well-advanced. The decision was widely rumoured to have been political (and led to an epic political, media and court battle ending in damage payments to Eurotrain), and the overseeing company THSRC did not go with the actual Japanese offer, but stuck to its guns on specifications. Thus f.e. a German maker had to be contracted to supply fixed-track high-speed switches (no need for those on Shinkansen lines with their strictly single-direction tracks).

Likewise, both lines were opened half-finished: one-third of the Seoul-Busan KTX line was delayed (until 2011, now thanks to those sleepers maybe even further), THSRC started with a reduced schedule, both started with some stations unfinished (for the THSR, including both downtown terminuses!) or without urban transit connections. Also, both lines started with hefty ticket prices that had to be reduced later.

And yet Taiwan HSR had begun to overcome these problems:

The failure to meet expectations after the start was widely discussed as a national scandal in both countries. However, you can also see on the graphs that there was steady growth thereafter. And that at the expense of other modes of transport.

The modal shift was particularly spectacular in Taiwan. In just 20 months, all but one single daily flight between the cities served by THSRC was eliminated (last December, THSRC’s share of the air/rail market was 99.95%…), leaving the highway as only competition. Total domestic air passenger transport fell almost by half(!). The steady uninterrupted annual growth of highway traffic was not only stopped but turned back.

In short, Taiwan HSR is a successful project in terms of ridership and achieving many of its goals of shifting transportation modes. The problem with Taiwan HSR is largely with the method used to finance it – heavy private sector borrowing. The 80% private funding method left Taiwan HSR financially vulnerable to poor construction decisions, cost overruns, and the global recession.

Back at The Transport Politic, Freemark argues that private funding could work out for California HSR, but only if it avoids these pitfalls and uses private funding in sensible ways that don’t turn out to be a giveaway of public sector resources to private interests:

But prioritizing profits has many negative side-effects apart from the loss of generalized mobility made possible with low fares: those twenty million potential riders unwilling to pay big money to ride the system will choose air and road alternatives instead of the train and produce increasing congestion and air pollution. Is that an acceptable trade-off?

Nevertheless, if managed correctly, a public-private partnership on the scale of what California is suggesting could be implemented without many negative consequences, especially if the role of the for-profit side of the equation is limited as much as possible. Facing enormous debt trouble, California has little maneuvering room to increase its bonding capacity beyond the $10 billion already committed to the project; meanwhile, the corridor is competing with projects across the country for very limited federal funds.

Getting the PPP process right, though, is vitally important.

A potential compromise would be to focus private involvement on the real estate side of the equation. The residents of California are wealthy, and the state could make billions by selling off development rights for land surrounding stations. Limited private investment in the line itself could mean a diversion of some, but not all, profit away from the public sector, leaving room to fulfill non-profit-oriented goals.

This makes a great deal of sense. The primary purpose of California HSR must be to provide affordable, fast intercity passenger rail service – not to put money into the pockets of corporations and investors. If the latter can be achieved as a side effect of a successful mass transit system, fine, but it ought not be the primary objective.

Typically, HSR deniers aren’t focused on this part of the discussion at all. They’re too busy trying to convince people that HSR is a bad idea by ignoring or cherry-picking the global evidence and not zeroing in on the more useful debate about how to build HSR effectively. Tomorrow, we’ll take a look at what happens when these misleading HSR denier ideas get spun by a credulous and inexperienced reporter.