Number 19 January 1998
Proposed ISTEA Federal Credit Enhancements:
The Next Savings & Loan Style Bailout?
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:
One of the driving forces behind TIFIA is the interest on the part of the state of Florida to obtain
federal guarantees on the bonded indebtedness that will be required to finance the proposed
Tampa-Orlando-Miami high speed rail line (200 mph).
- 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
- 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
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
- (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
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.
1. Public Law 102-240 Section 1036(d) required USDOT to report on the commercial feasibility of
high speed rail. The report indicates that the high speed rail options studied "do not meet the
traditional private-sector criterion for "commercial feasibility." The report then goes on to redefine
commercial feasibility to include "consumer surplus" and benefits to the "public at large" --- wholly
subjective and demonstrably non-economic benefits. It would not be inappropriate to consider the
report as unresponsive to the Congressional mandate.
2. Mette K. Skamris ande Bent Flyvbjerg, "Accuracy of Traffic Forecasts and Cost Estimates on
Large Transportation Projects," Transportation Research Record (Washington, DC:
Transportation Research Board, National Research Council), 1996.
The author prepared this report for the James Madison Institute. Developer spokespersons have attempted to dismiss the report by claiming that the author is "anti-rail." The author is not anti- rail, he is anti-waste. The facts, as outlined in the report, demonstrate that (1) high speed rail would make scant contribution to reducing traffic congestion and (2) that what little it would accomplish would cost many times the cost of available alternatives --- in short the proposed Florida high speed rail line would be wasteful of public (tax) resources. These conclusions are based upon analysis of the data contained in Florida Department of Transportation and developer studies --- using their projections (which experience shows are likely to be overly optimistic). The author would support any cost effective strategy to materially improve transportation, tax supported or truly commercial (non-tax supported).
WENDELL COX CONSULTANCY & THE PUBLIC PURPOSE
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