Public Financing –Private Facilities
Freight in the SoutheastCharlotte, North CarolinaFebruary 10, 2011
Some Public Funding Options for Rail Projects
Trust and freight funds.
Loan programs.
Public sector project programs such as TIGER and High Speed Rail.
Investment Tax Incentives
Two Basic Reasons for Public Investment in Private Rail Networks
To undertake projects that the private entity would not fund under its own capital guidelines but which have substantial public benefits.
To accelerate the timing of projects that the private firm might eventually undertake but that have substantial, current public benefits.
Trust and Freight Funds
Bring no new money to the table.- Public participation in funding process provides no value to
match public benefits.
- Extracts a portion of the value of the commercial transaction.
Expensive to manage. Administrative costs waste a substantial portion of the fund.
Create market distortions if applied regionally.
Often have difficulty funding or managing multi-jurisdictional projects.
Virtually guarantee that contributors will not receive 100% return of value of contributions unless they are very small entities.
Trust and Freight Funds(continued)
Conceptually – do not interact well with the rail business model.- Designed to charge a relatively small, individual user for use of
a public facility.
- Not suitable for funding of private, single user infrastructure systems.
Public has little expertise in selecting projects.
Permit project selection based on political expediency rather than economic / market value.
May alter competitive balance between market participants. The public, not the market, picks winners and losers.
Loan Programs
It all depends on the terms.
Current RRIF program is not attractive.- Risk premiums may make more expensive than
commercial debt.
- Requires subordination of existing debt.
- Terms often violate covenants of existing debt.
A public loan is still debt and thus, creates balance sheet issues.
Unless it is substantially below market rates it brings no new money to the table.
Leaves project choice and selection of winners / losers to public, not the transportation market.
Specific Investment ProgramsExample – “TIGER” Program
May work well for some projects:- Complex projects that include multiple jurisdictional
boundaries if the rules are properly structured.
- Complex public benefits that are difficult to distribute to a specific public entity.
If funded from source other than rail revenues or shipper fees they do bring new money to the table.
Multi-jurisdictional projects may remain a problem.
Still subject to political influence.
Investment tax incentive for projects that expand rail capacity and for Positive Train Control (PTC).
Expense other infrastructure capital expenditures.
Project selection based on market value, not politics.
Does not dissipate funds in program administration.
Leverages private investment.- Accelerates implementation of projects that grow capacity where
the market demands.
- Permits more projects generating market returns to be undertaken.
Short line infrastructure investment tax incentive is an ongoing success story.
Tax Incentives to Leverage Private, Capacity Expansion Capital
Association of American Railroads www.aar.org