Privatizing HSR…or not?

Minding my own beeswax yesterday when I got an announcement from Reconnecting American on Representative John Mica’s bill arguing that the US privatize the Northeast Corridor and intercity travel there.

You can find a copy of the proposed legislation here.

The concerns, from the Reconnecting American statement:

1. Very few, if any of the long-distance lines will attract private sector funding. The focus on privatizing the Northeast Corridor will weaken the existing national system. Removing the profitable NEC from the current system of shared benefits deprives the rest of the nation’s rail system of critically needed operating assistance. This approach, as proposed, may weaken or terminate the intercity rail connections that are the lifelines in small towns from Montana to West Virginia, as well as big cities such as Chicago and Los Angeles.

2. Globally, rail privatization has led to costly government bailouts of private companies that have acquired too much risk. Investors have an implicit assumption that taxpayers will provide a backstop for companies that make risky choices to maximize profits.

3. This approach will require an unknown amount of taxpayer funds in an effort to attract private investors to upgrade, maintain and operate the NEC.

Of course, they are correct on all three points, but with caveats. These problems with the private sector also have their analogues in the public sector.

#1 is creaming–a huge problem with privatization across the board. Network goods almost always require some level of cross-subsidy. Small airports do, and it’s likely that high speed rail would, too.

But #1 could be addressed with the leasing agreement, where the private company’s yearly or up-front payment gets used to offer subsidies elsewhere.

And in the public sector, jurisdictions have become louder about refusing to allow redistribution of revenues and tax collections across system. It’s a stretch, but all that return-to-source, donor state squabbling in the tax field illustrates the issue nicely. That type of politics can become regional easily.

Here’s the weird thing: the Reconnecting America people in their message lump Los Angeles and Chicago in with rural Montana and West Virginia as places that aren’t likely to make any money for private investors. That’s certainly not what the California High Speed Rail Authority line about HSR in California–they are banking on relatively high levels of HSr.

The problem with the other two objections to privatization—bailouts and higher costs–is that these issues also plague publicly owned HSR as well.

In the case of #2, yeah, bailouts are embarrassing, but it’s not like taxpayers don’t routinely have to provide operating subsidies to publicly owned services. For example, we’ve been on the hook paying for Amtrack for a long time, and while there’s usually no high drama associated with bailouts, death by a 1,000 cuts of yearly payments for the services can also get expensive. So while Reconnecting would like us to avoid expensive bailouts, they don’t seem to have a better idea. There is nothing to suggest that public-sector managers of HSR are any better than private operators. In fact, the opposite: there are some private operators in the world who already have experience running these systems. Companies can also have a diverse enough portfolio of investments that they can withstand some problems with cash flow–again depending on the leases.

In the case of #3, it’s not clear to me what costs they are referring to: the transactions costs of marketing the investment opportunity? The costs of drawing up and maintaining contracts? The public sector analogue of that is simply the money getting poured into advertising to voters and lobbyist. I suppose you could look at the second set of costs as a given, and the first set of costs as additional costs.

However, these costs, which can get high, are small potatoes compared to the taxpayer risks associated with building the system in the first place–which is Reconnecting America’s raison d’etre. It’s nice of them to worry about costs and all, but there are much bigger risks than the costs of seeking investors, or giving concessions to investors–though those things can be costly. The big-ticket taxpayer hit concerns the cost overruns that are coming, along with the time lag in attracting riders to pay for operating the system.

It’s not high speed rail as a mode, per se, that’s the problem. The problem is undertaking a massive new infrastructure investment–it’s just expensive and financially risky, and I’d be saying the same things if somebody were proposing to expand the Interstate system.