Background

The Transportation Infrastructure Finance and Innovation Act (TIFIA) is being considered as a part of the ISTEA reauthorization (provisions were included in the Senate passed ISTEA reauthorization in 1997 --- S. 1173, Chapter 2, Sections 1311 through 1322). TIFIA would:

• Provide "federal credit instruments" to support transportation projects --- including secured loans, lines of credit and loan guarantees (including bond guarantees).

• Federal credit instruments would be limited to $10.0 billion over six years.

• All projects must be sponsored by a state or local government.

The Florida High Speed Rail Project: An Example

The Florida high speed rail project provides a good example of the risk that could be assumed by the federal government under TIFIA. Florida is seeking federal bond guarantees for this project, presumably under the proposed TIFIA program (Florida also seeks an outright grant of $300 million toward the project, claiming that this $6.5 billion program cannot proceed without that contribution).

• It is intended by the state that a private developer (Florida Overland Express) will contract to build the project for a fixed price, and operate the project over a 40 year program.

• Projections by the Florida Department of Transportation and the developer indicate that the project will generate enough commercial revenue (largely fares) to pay for its operating costs and much of its fixed costs

• There are indications, however, that despite the best intentions of all parties, the actual financial performance may fall far short of projection.

• The recent USDOT-FRA High Speed Ground Transportation for America report projects that over virtually the same period and over the same corridor, a high speed rail project would earn only 38 percent of its costs through commercial revenues --- that is, it would require a public subsidy of 62 percent.⁽¹⁾

• A recent National Academy of Sciences report noted underestimation of costs and overestimation of usage is a normal pattern for large infrastructure projects:⁽²⁾ The report stated that:

  ... cost overruns of 50 to 100 percent are common and that overruns of more than 100 percent are not uncommon. Traffic forecasts that are off by 20 to 60 percent when compared with actual development are frequent in large transportation projects.

• The James Madison Institute's Evaluation of the FDOT-FOX Tampa-Orlando-Miami High Speed Rail Proposal estimated that --- at best --- a capital and operating subsidy overruns of $10 billion would be likely. Debt service default was predicted by no later than the fourth year. The report's "realistic case" --- relatively consistent with the findings of the National Academy of Sciences report, would involve capital and operating subsidy overruns of $23 billion. (The James Madison Institute report was completed before the National Academy of Sciences report became available)⁽³⁾

• To obtain a sufficient number of passengers, the high speed rail line would need to charge fares that are competitive with airline fares in the same corridor. The Florida Department of Transportation plans assumed that air fares would average 67 percent above the proposed rail fares (in 1995$). USDOT data for the first quarter of 1997 indicates that average airfares in the corridor were 32 percent lower than the projected rail fare. To meet such an air fare level, ad additional public subsidy of $6 billion would be necessary --- fare revenues would be so much lower that debt service would not be covered, even if passenger volume forecasts were reliable (which experience indicates is highly unlikely).

• A high speed rail line of similar length and design has been tentatively approved by the government of Taiwan. The development team includes a Florida project partner (GEC Alsthom). In the case of the Taiwan project, there would be no public subsidy. The developers have proposed a price approximately double that of the Florida price --- perhaps demonstrating that cost estimates tend to be more accurate when developers are faced with commercial reality (as Milton Friedman put it, "people are more careful with their own money than with other people's money).

Failure to meet projections would create substantial risks for taxpayers.

• Despite its advertisement as a public-private partnership, the project involves very little private capital (approximately 5 percent). The developers have limited their financial liability through establishment of a separate corporation, whose obligations would not be guaranteed by the considerable resources of the principals (Fluor, Odebrecht, GEC Alsthom and Bombardier).

• When capital costs exceed projections (and contract amounts) there will be the following alternatives:

  • (1) An upward adjustment of the project cost, with the issuance of additional debt. It is reasonable to believe that a 50 percent to 100 percent increase could occur). There would be political pressure to increase the federal credit guarantees.

  • (2) No adjustment of project cost. This would place the developer in an untenable position. Once the developer became financially incapable of continuing construction, it is likely that the limited liability company would file bankruptcy. This would leave the state with a partially completed project, and bond default would occur. Political pressure would probably require the state to seek a new developer, at a higher cost, and there would be political pressure for further federal credit guarantees.

  • Perhaps the worst case --- and a highly improbably case --- is that the project would be completed within budget, and simply fail to attract the fare revenue projected. It is suggested here that the current lower air fare structure is prima facie evidence that the projected rail fares cannot be sustained, and that to obtain sufficient ridership to meet projections would require a substantial operating subsidy. In this case, revenues would be insufficient to service debt, and the federal credit guarantees would be invoked. There could also be political pressure to provide federal operating assistance for high speed rail operations (following the transit history of starting with capital subsidies, and then adding operating subsidies).

The Broader Risk

But the Florida project is just the "tip of the iceberg" as regards the potential federal liability. Federal programs are necessarily national programs that generally attempt to treat all states equitably, or at least similarly. There will be political pressure to expand TIFIA to provide similar levels of credit enhancements in virtually all other states. The very availability of the credit guarantees will generate any number of projects that are commercially infeasible (though consultant reports will routinely find them to be feasible before the fact).

TIFIA is likely, therefore, to become a costly federal program. The federal credit guarantees would require that project costs be covered by user fees and dedicated sources of revenue. However, projections of user fees have been notoriously flawed. Projections of project costs have been similarly flawed. The "user fees and dedicates sources of revenue" are likely to provide insufficient financial protection to the federal government.

It is not inconceivable that TIFIA could eventually require a "savings and loan" style "bailout." This could occur at both the financial and political level. Federal credit guarantees would be called as a result of the bond defaults. There would be substantial political pressure for a "national" solution, that would not require state and local governments to reimburse the federal government for its losses.

While the proposed program is relatively small at this point --- $10 billion --- it is easy to imagine federal obligations rising to $100 billion or more, as the program is expanded in future years.