The Texas Tribune and the Dallas Morning News are teaming up on a deep dive into the Texas Central Railway’s high-speed rail proposal. This story, the third in their set, explains where the money to build this thing may come from.
But, really, how does a private company go about lining up the billions of dollars it needs to pay for a 240-mile bullet train line? And is it possible for it to actually turn a profit?
First, it’s important to distinguish between financing and funding a major infrastructure project, said Michael Bennon, managing director of Stanford University’s Global Projects Center.
Financing is how Texas Central will get enough money to build the high-speed rail line in the first place. Funding is the revenue that will keep the train running.
“They’re two very different things and people get them really mixed up,” Bennon said.
Financing is the more complicated side of the equation because it’s essentially a high-stakes gamble that may not pay off for decades.
Texas Central executives are confident they’ll be able to find the money, in large part because investors are hungry for “real assets” — tangible projects, basically — that could provide bigger returns than what’s available in today’s market.
Managers of huge pots of money, like private equity funds or pension funds, “have obligations to pay their plan holders and they need long-dated assets,” Keith said.
In other words, low interest rates and other factors have meant that there aren’t a lot of places to park portions of those pools that will reliably pay out to investors over long periods of time.
That’s part of why pension funds, which are supposed to be how workers get paid their retirement, are seeking out safer investments.
Upfront money from investors will pay for roughly a third of the project, Keith said. The other two-thirds will be debt.
So far, Texas Central has raised about $115 million from investors.
Keith said Texas Central is considering a range of financing options, including federal credit programs that would essentially provide cheap loans aimed at spurring infrastructure construction.
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More private capital is finding its way into projects that were once the domain of government.
The McKinsey Global Institute recently noted that institutional investors — like the pension and private equity funds Keith mentioned — “seem like an obvious source of capital” in a world where increasingly urgent infrastructure projects are seriously underfunded.
Its report said institutional investors have $120 trillion to move around. Blackstone Group, the world’s biggest private equity firm, is reported to be raising as much as $40 billion for infrastructure investments.
Of course, there are caveats.
“To attract these investors, governments and other stakeholders need to develop their project pipelines, remove regulatory and structural barriers, and build stronger markets for infrastructure assets,” the McKinsey report said.
Public-private partnerships, like toll roads, have had mixed success, including in Texas.
Still, the McKinsey report underscores the hunger for worthy projects.
“Insurance companies and banks recount instances in which investors outbid each other in a rush to finance the rare infrastructure deals they consider ‘bankable’ and that have appropriate risk-return profiles,” the report said.
All that goes to say there are institutions that could theoretically bankroll a high-speed rail line. But only if it’s a sustainable business.
And that points back to the second part of paying for a big infrastructure project: funding.
Infrastructure projects rely on two main sources of funding — taxes or user fees, Bennon said. For public transit, it’s usually a combination of both.
Texas Central has promised not to use tax money as funding. That leaves ticket sales, plus smaller sources of side revenue from station parking fees and concessions. Texas Central has said the project passes muster, by that measure.
“This project is fully financeable based on ticket sales,” Keith said.
That’s what experts — and critics — are skeptical about.
There’s more, so go read the whole thing. If you want to read the other stories, here they are:
Texas’ rural roots and urban future are on a high-speed collision course
“Come and take it”: Eminent domain dispute at heart of bullet train battles