Public or private, rail line will need major subsidies from government

By Lisa Mascaro

Sunday, June 14, 2009 | 2 a.m.

Railroad building is not for the financially timid.

Except for a few tourist trains hauling sightseers up scenic mountains, private passenger rail companies don’t exist in this country for a reason.

Railroads don’t make money.

“Transportation of this sort in this country is not something that’s at all profitable,” said Clifford Winston, a senior fellow at the Brookings Institution in economic studies. “Passenger rail on its own cannot make money.”

Two proposed Nevada projects show different approaches to developing rail.

The maglev project is a nonprofit entity, overseen by the California-Nevada Super Speed Train Commission, founded by the governments of both states. It hopes to tap the $8 billion the Obama administration and Congress have unleashed for high-speed rail development as part of the economic recovery act.

DesertXpress is a private undertaking, bankrolled at least in part by a few powerful and profit-minded Nevada figures. The company believes the Vegas-to-California route is so lucrative, it will accomplish what no private venture has successfully done in the United States.

Subsidies Common

Rail has always been a public-private undertaking, from the time the federal government awarded land to build the nation’s first passenger train lines more than a century ago to the formation of Amtrak in 1970.

With the government deeply subsidizing other forms of transportation, it would be difficult for rail to compete without such an assist.

Highways are subsidized by the collection of gas taxes at the pumps. Airports are built and expanded with taxpayer dollars. That rail could go it alone seems doubtful.

Robert Puentes, a senior fellow at the Brookings Institution’s Metropolitan Policy Program in Washington, said the nation’s financial crisis has upturned traditional ways of doing business, creating an opportunity for creative financial endeavors, such as leveraging private money to support innovation.

DesertXpress initially prized its status as the nation’s only privately-proposed passenger rail line. “We think that’s unique feature,” president Tom Stone said recently.

But the company has also increasingly suggested it would be interested in low-cost government loans available for rail development, given the stingy credit market.

An existing government loan program offers 100 percent financing for up to 35 years to develop rail lines.

Winston has seen this private-public financing model before, and his analysis is not kind.

“These private concerns have an interest in these projects. Then they get into it and they say they need funding from the government. Then the whole thing falls apart.”

Public and proud

The publicly-established maglev commission faces its own limitations. It was established by the two states as a nonprofit entity to develop a long-wanted fast train between Las Vegas and Anaheim.

As proud as DesertXpress is of being private, the maglev’s project is equally strident about its standing as a public enterprise that would plow its profits back into operations.

“The commission is going to own it,” said Neil Cummings, president of the American Magline Group, the private consortium of companies that would build the maglev train. “That’s real different from DesertXpress.”

When the group made its case to Transportation Secretary Ray LaHood for stimulus dollars, it vowed to repay any government funding received.

Cummings says the train will make $500 million annually in profit.

“You give us $12 billion to build the whole thing, we’ll pay it back — it may take 20 years,” Cummings recalled telling the secretary. “We’re not looking for a handout.”

Yet the governance of the commission presents challenges.

The California side dropped out of the commission in 1990s, when the state Legislature declined to re-up the law that authorized state involvement.

About that time, California was moving forward on its priority project, the 800-mile north-south line between San Francisco and Orange County that it hopes to break ground on in coming years as perhaps the nation’s most ambitious rail undertaking. The $45 billion route is expected to receive a sizable portion of the $8 billion in economic recovery funds.

As California parted ways with maglev, the commission has been left as primarily a Nevada-sponsored agency, with no official government-backed standing to build a rail line in California.

The maglev commission has pressed on with support from various California government leaders.

County commissioners and transportation agencies along the route support the maglev project, as do high-profile leaders, including the Anaheim mayor. The project also has some documented backing from the California Transportation Department, Caltrans.

Reid takes a stand

Senate Majority Leader Harry Reid, who had long campaigned for the maglev project but has grown weary of waiting for it, now supports DesertXpress. California’s two senators, Dianne Feinstein and Barbara Boxer, have not taken positions on either project.

In Nevada, many political leaders support both projects and say they’ll be happy if either is built.

“I don’t think Sen. Reid’s announcement makes it any easier for them,” Democratic Rep. Shelley Berkley said of the maglev effort. “But if they have their ducks in order, their project is worthy, I see no reason why they can’t receive some of this grant money.”

Winston, at Brookings, has seen this model before, too: a company, or in this case a consortium of companies, that wants to build a massive federal infrastructure project. It partners with a publicly-sanctioned body as its chief contractor, as American Magline Group has done. In many ways, it’s not wholly different from a private venture.

Profits, in this case, are not made in the form of earnings returned to investors, but in the contracts awarded to the companies building the thing.

That is a model used on public infrastructure projects across the nation, he said.

“There won’t be any profit — their profit is their job,” Winston said.

Designation desired

Since Obama took office, Reid has been in frequent contact with the White House, pressing the need to establish the Nevada-California region as a priority high-speed rail corridor.

The Transportation Department has 10 high-speed rail corridors, established during the Clinton administration. But the transportation secretary has the authority under existing law to name an 11th line.

If the Nevada-California route receives a corridor distinction, depending on how the route is drawn, either of the train proposals could become eligible for government grants or expedited treatment.

And that means government money would go toward building this line.

“I can’t think of any time in history when private and public weren’t intertwined in the development of transportation facilities,” said Martin Wachs, a leading transportation expert and director of the Rand Corp.’s Transportation, Space and Technology Program. “I don’t see any possibility it could be private at all without public involvement.”