This week, the British government will formalize an agreement with two Canadian pension funds with enormous implications for passenger train development in the United States. In return for the right to operate a high-speed rail line linking London with the Channel Tunnel for 30 years, the Ontario teachers and municipal employee pension funds have agreed to pay the UK government $3.4 billion.
The sale not only represents a big vote of market confidence in the future of high-speed rail, but points to a route for building and operating new train lines in the U.S.
In the wake of the equities meltdown, U.S. pension funds are seeking “safe havens” to invest, while states and the federal government are looking for ways to build expensive rail infrastructure in the face of record budget deficits.
Here’s a solution: Structure high-speed rail projects to attract pension funds and other institutional investors through operating concessions and other long-term cash-generating instruments.
Making Money While Generating Jobs
Consider the $133 billion Florida State Board of Administration, currently winding down its loss-generating equities portfolio and concentrating on core fixed income.
If the Florida State pension fund invested just 3 percent of its portfolio in the state’s high-speed rail line, that would generate $4 billion. That’s enough to cover both the $500 million shortfall in the high-speed segment between Tampa and Orlando (the Obama administration has already allocated $2.05 billion for this project) and the state’s portion of a Miami-Orlando route with excellent ridership potential.
Similarly, the California Public Employees’ Retirement System (CalPERS) has adopted a new investment policy with a targeted 3 percent allocation of assets, or about $7 billion, in infrastructure.
The proposed bullet train between Los Angeles and San Francisco is expected to generate as much as $3 billion in profits by 2030. By allocating some of its funds to the $40 billion rail project, CalPERS could enjoy a stable return while providing the Golden State with an enormous job-generating public work.
Other institutional investors, such as labor unions, could be attracted to rail partnerships and concessions that diversify their pension portfolios while providing direct economic benefits to their members.
Such new-style financing would require a marketplace with transparent trading and timely data, amounting to a new source of opportunity for the investment community. In a sense, Wall Street could come full circle to its origins as the exchange place for European capital seeking profit in American railway construction in the 19th century.
High Level of Investor Interest
Back to the Brits, it is crucial to note that the $3.4 billion interest in High Speed-1, the London-Channel link, exceeded the highest hopes of David Cameron’s coalition government, which inherited the initiative from Gordon Brown’s Labor government.
In the words of one commentator, the asset sale “came as a pleasant surprise” to observers who believed the UK government “would have to settle for knock-down prices” because of the world recession.
The auction also attracted many more bidders than expected. The Ontario Municipal Employees Retirement System and Ontario Teachers’ Pension Plan, allied with Borealis Infrastructure, beat a long list of potential buyers, including insurance giant Allianz and investment bank Morgan Stanley.
Borealis already operates the Detroit River freight rail tunnel between the U.S. and Canada on behalf of the pension funds. The Borealis group will receive a revenue stream from access charges paid by train companies using HS-1. In return, it will be responsible for preserving the line as a high-speed railway and to periodically improve track and structures to state-of-the-art standards.
Eurostar fields trains between London and Paris and London and Brussels. Deutsche Bahn, the German rail carrier, has announced plans to operate from London to Frankfurt and London to Amsterdam.
In addition to these services, the Borealis group has the right to sell access to other passenger carriers and to develop freight traffic.
Setting a Monetary Value on High Speed
The British approach marks a turning point. Prior to now, high-speed lines, such as France’s TGV and Spain’s AVE, were built and operated by government or government-directed entities. The profits or losses from high-speed trains were part of the financial profile of the larger rail systems.
Nearly all experts agree that fast trains earn higher per-mile revenues than conventional-speed trains and substantially more than commuter and branch-line services.
The British concession puts a monetary value on high-speed rail that can serve as a basis for a market in future railway concessions and stock sales in equipment and infrastructure-building companies.
HS-1 was one of the most expensive rail projects in the world due to extensive bridging, tunneling and station construction. Opened in November 2007, the 68-mile line cost $8.3 billion.
The concession sale returns 40 percent of the build cost to the British treasury. When the concession ends in 2040, the railway will revert back to the government, which expects to re-bid the property for an equal or higher price.
By this means, HS-1 will continue to return a dividend to taxpayers and, over the course of its 150-year-plus lifecycle, repay its construction cost, probably several times over.
This prospect differs from the scary scenario presented by U.S. critics (including the Republican governor-elects of Wisconsin and Ohio) who charge that high-speed rail is a money pit requiring long-term government subsidies to operate.
Summing up the rap against rail as “high-speed pork,” Washington Post columnist Robert J. Samuelson recently complained, “If private investors concurred [that fast rail was profitable], they’d be clamoring to commit funds; they aren’t.”
The high-speed chase by investors for High Speed-1 shows just how off track these critics are.
photo credit: Jason Pier
