As the retrenchment continues in the public sector worldwide, private sector investors are likely to play an important role in paying for fast train systems. PPPs in France provide two potential models that could prove useful.

 

With a depressed economy and little government money available, there is increasing recognition of the potential value of engaging the private sector in infrastructure financing. France, which has recently signed two large deals to extend its high-speed rail network, provides useful examples of varying approaches to PPP contracts.

The first is the €3.4 billion Bretagne-Pays de la Loire (BPL) high-speed link, which will connect western France to the existing northern branch of the Atlantique line with 182 km of new tracks between Le Mans and Rennes by 2016.

This PPP contract is being primarily funded by the public sector; Reseau Ferré de France (RFF), the public infrastructure owner, will contribute €1.4 billion, with state and local governments paying about €1 billion more. Thirty percent of the costs will be financed with loans by the private construction group Eiffage. These will be paid back over twenty years with pre-determined fees from train operators.

Like Lyon’s Rhônexpress airport rail link project, which connects the city center to the airport, this PPP arrangement essentially keeps the operations risks in the hands of the public sector; if ridership comes in under estimates, the government will have to scrounge up funds from elsewhere to pay Eiffage its due. If ridership is above estimates, RFF will profit from the PPP relationship.

All rails lead to Paris

The other French project soon to begin construction is the €7.8 billion Sud-Europe Atlantique line, which by 2017 will extend the southern branch of the existing Atlantique line 302 km from Tours to Bordeaux, bringing that city within two hours and five minutes of Paris—about an hour faster than today.

Because of the expected profitability of the line, RFF signed a concession contract earlier this year with a private consortium called LISEA, made up of Vinci construction company (33.3 percent), the Caisse des Dépôts (25.4 percent), SOJAS investment company (22 percent), and AXA Bank (19.2 percent). The 50-year contract, which includes construction, operations, and maintenance, is the largest-ever PPP for a European rail project.

LISEA will contribute €3.8 billion to the project, with the remainder of costs being granted by public sector sources. Much of the private funding will come from low-interest, long-term loans that will be repaid through charges on trains using the line. These will eventually be passed on to ticket-paying passengers over fifty years.

Unlike with the BPL line—which limited risks of operational profitability and line ridership to the public sector—in this case, the private investors will be responsible if initial estimates fall short.

The business case for Sud-Europe Atlantique line assumes operational profitability. The international record shows that high-speed rail systems have little difficulty achieving self-support, so these are not unsound predictions. The advantage of acquiring private sector support is beginning construction more quickly by delaying public investment, and using future revenues to pay back construction costs.

It would be a mistake to conclude from these examples that private sector involvement will save any significant money over the long term for developed countries with streamlined governmental sectors. The use of PPPs does not mean that the public at large will ultimately be responsible for a smaller percentage of overall costs. PPPs typically require a higher cost of capital than public financing that may not be offset by potential efficiency gains from private sector involvement. This means that such projects may cost more to complete than those funded only by the government, and thus will eventually have to be paid off by users through higher fees.

While the taxpayer may appear to be getting a discount now by using PPPs (and indeed, some projects provide large upfront cash grants to sponsoring governments), infrastructure users will inevitably have to face the costs of future tolls. In the case of high-speed rail, replacing government investment with private financiers means higher ticket prices in the future to pay back a portion of the costs of construction. There is no free lunch.

Who wins?

But do the benefits of a transportation investment bring advantages to the entire public or are they reserved only to those people who use it? Transportation economists argue for user fees such as the tolls charged to trains in the PPPs discussed here; for economists, it makes perfect sense to charge users the full cost of not only the operation but also the construction of the infrastructure they are using. (That said, many economists note that rail projects have significant positive externalities like pollution reduction and land use prioritization that demand direct grants from the government to cover some costs.)

Others, however, argue that the benefits of rail are economy-wide and that they should be paid for not only by users but by all members of the population through general taxes; therefore, charging the riders alone for the costs of capital investments would be inappropriate. Moreover, the unavoidable risks associated with PPPs suggest that any decision to incorporate private investors in public infrastructure should be approached with skepticism.

To diminish these risks, a 2011 report from the Public Interest Research Group suggested aligning “private sector incentives with public sector goals,” only pursuing PPPs “where ample competition exists,” ensuring “clear public accountability,” retaining public control over system decisions, limiting lengths of contracts, and guaranteeing transparency in the contracting process.