Private Sector in High-Speed Rail: Why, How, and When

With the passage of the American Recovery and Reinvestment Act (ARRA) in 2009, the U.S. began its first major efforts to develop highspeed rail, a niche market for rail services serving corridors that are too long to drive and too short to make air travel a time-saver. The objective of the program is to provide an environmentally-friendly, fast, and reliable transportation solution that will be able to meet the transportation needs of our current population and the 100 million new residents that will call our cities and towns home by 2050.

At this point, car-loving California’s system is furthest along in developing high-speed rail in the U.S. With a total of almost $13 billion in approved federal and state funding, including state funds that require a match, California is almost ready to start construction on the spine of the network in the Central Valley. This initial segment is the first step of the phased approach recently revealed in the 2012 draft business plan issued by the California High-Speed Rail Authority.

In the case of California, as in most other future systems in the Unites States, private sector participation is directly or implicitly required to reach the necessary level of funding for the HSR program. The real question becomes what is the private sector’s appetite for investment in this kind of project? There are so many deterrents and externalities to affect the private sector’s participation that it is extremely difficult to know how, when, and especially how much it can contribute. In many cases, the attitude has been to optimistically think that “if we build it, the private sector will come,” but too many uncertainties remain for that to be the case.

In the case of California, as in most other future systems in the Unites States, private sector participation is directly or implicitly required to reach the necessary level of funding for the HSR program. The real question becomes what is the private sector’s appetite for investment in this kind of project? There are so many deterrents and externalities to affect the private sector’s participation that it is extremely difficult to know how, when, and especially how much it can contribute. In many cases, the attitude has been to optimistically think that “if we build it, the private sector will come,” but too many uncertainties remain for that to be the case.

And when there are uncertainties, there is fear. High-speed rail opponents have a relatively easy game when it comes to critiquing costs and funding choices but decision makers must look beyond these questions and ask how we can design a high-speed rail project that is “private sector friendly;” in other words, what are the conditions that must be met to ensure that we are not closing the door to private sector participation in the very early stage of project study.

This article presents some views on the requisite decisions the public sector must make and the way a project has to be designed to facilitate private sector participation. It will draw on international examples and look at the roles played by the private sector, the type of contract put in place as part of public-private-partnerships (PPP), and the early decisions that must be made in the design of a highspeed rail program to facilitate private sector participation.

Case for Public Sector Involvement

The private sector brings many advantages to large infrastructure deals as frequently described in literature discussing PPPs. These can be summarized mostly as delivering a project on time and on budget and providing funding capacity and expertise the public sector does not possess. This is very much the case for high-speed rail in the Unites States.

However, programs of this size cannot be sustained by the private sector alone. It is absolutely necessary to keep the public sector involved for many reasons. First and foremost, the private sector cannot provide 100 percent of the required funds. Federal funding will remain the cornerstone of any future projects in the U.S. Secondly, the public sector has to fulfill its regulatory role in the transport industry. Owning shares in the project provides the appropriate regulatory status for the public sector. And finally, as in many instances in Japan and Europe, the public sector will help facilitate the development of new technologies by providing the required institutional environment for new industry sectors. This is especially true as “Buy America” provisions are applied in all future deals.

When Taiwan decided to build its first HSR system in the late 1990s, the program was meant to be 100 percent financed by the private sector in the form of syndicated loans from banks. The project was to be built by a private sector venture with a Build-Operate-Transfer (BOT) model. However, after several delays and financial problems, government intervention was required to complete the project. Subsequently, public sector participation in the capital cost was estimated to be over 50 percent.

Rationale for Private Sector Participation

There are two main reasons why countries around the world have chosen to use public-private-partnerships (PPP) in their high-speed rail systems: the generation of capital and the containment of cost.

With a shortage of public funds, HSR systems around the world have reached out to the private sector to generate more funds. Private partners can raise private financing (both debt and equity) to help pay for part of the capital cost of the system. The amount of private financing will be closely tied to the risks that the private sector is asked to take on; the private sector will require higher returns for riskier investments, decreasing the financing potential. Potential benefits to both sides lie in areas where the private sector will be able to more easily mitigate risks or generate more revenue than a public entity would. However, it is important to acknowledge the limitations on the size of private financing. Based on international experiences, market size, and bonding capacity, the maximum size for a single PPP at this point is roughly $10 billion.

In a traditional design-bid-build contract where the public sector designs the system and issues contracts for  construction, it risks facing delays and cost overruns in the interface between sections or functions (such as the tunnels, bridges, tracks, signals, stations, etc.) of the system. In a PPP, the public sector can bundle the design, building, finance, operations, and maintenance together and issue a single contract to a private entity or consortium in return for the right to passenger revenue or a fixed payment. This greatly reduces the circumstances under which the public sector will have to pay for construction overruns. It will make sense for the private sector to take on a larger role if the private sector is more adept at mitigating the construction risks than the public sector, allowing both to benefit.

Interest from the Private Sector

The private sector has shown tremendous interest in high-speed rail projects around the world because of the opportunities to leverage private sector expertise and financing to efficiently deliver high quality projects while generating a profit. However, various parts of the private sector are able and interested in taking on different roles in high-speed rail projects and expect different returns for their participation.

In broad terms, there are four roles that are part of building and operating a high-speed rail system: governance and oversight, infrastructure delivery, infrastructure operations, and train operations. Examples from the UK, Taiwan, and, most recently, Brazil have demonstrated that the private sector is unable to take on all of the functions alone and requires that the public sector play a strong role. In particular, governance and oversight must remain in public hands to guide the project and assure that the results meet public expectations. On the other hand, infrastructure delivery, infrastructure operations, and train operations can be taken on by the private sector if risks are allocated and mitigated appropriately.

Infrastructure Delivery

Due to the size of most high-speed rail projects around the world, significant public funding will be required to deliver the infrastructure. The private sector can complement that funding by paying for a portion of the up-front capital expenditure. In international examples, where the public sector has taken on the vast majority of demand risk, the private sector has been able to contribute as much as 50 percent of the total project cost. However, typically, private funding covers roughly 10 to 30 percent of the cost.

In most of the PPPs for infrastructure delivery that involve private funding, the sums required and sizes of the construction contracts are too large for one firm to take on. Instead, consortia made up of banks, investment funds, and large construction/ engineering companies with up to 10 or 15 actors are typical bidders. Together, they are able to bring both the large sums of money and the professional expertise required to pay for part of and deliver the project.

The recently closed deal for the €7.8 billion ($11 billion) Tours-Bordeaux high-speed rail line included €3.8 billion ($5.4 billion) from LISEA, a company run by VINCI, the world’s largest construction firm. However, over one quarter of LISEA is owned by the Caisse des Dépôts, the investment arm of the French government. The other three quarters are composed of VINCI (33.4 percent), SOJAS, an investment vehicle that has been purchased by Meridiam Infrastructure (22 percent), and investment funds managed by AXA Private Equity (19.2 percent). 

Out of the €3.8 billion contributed by LISEA, over €2.2 billion is debt guaranteed by the French government. The remaining €1.6 billion is split between equity provided by LISEA (€772 million), non-guaranteed bank debt (€612 million), and credit assistance from the European Investment Bank (€200 million).

VINCI will lead the design, engineering, and construction work for the infrastructure through a consortium that includes eight other construction firms. Additionally, VINCI, in a joint venture with Inexia, will be responsible for the operations and maintenance of the infrastructure for 50 years. In return, LISEA and its investors own the rights to 50 years of track access charges that will be paid by train operators who use the line.1

This example provides several important lessons for PPP contracts for infrastructure delivery:

  • Even when the private sector contributes significant up-front funding, the public sector will need to maintain a large role in reducing financial risk and improving the private sector’s borrowing conditions.

  • Successful PPP consortia for infrastructure delivery will include several classes of investors who will contribute equity funding, debt, or professional services to drive the project forward.

  • The private sector will be willing to take significant construction and demand risk, especially when conventional rail service exists in the corridor, there is sufficient flexibility in project delivery, and long-term revenue opportunities.

Infrastructure Operations

In cases where risks are too high (such as many greenfield projects) for the private sector to contribute up-front funding to participate in project delivery, a long-term concession for infrastructure operations can help recoup public investment once demand is proven and conditions are stabilized. Under these conditions, lower-risk investors, such as pension funds, are more likely to be interested.

The largest recent example of a high-speed rail infrastructure operations concession is High Speed 1 (HS1), known officially as the Channel Tunnel Rail Link (CTRL), which connects London to the Channel Tunnel. Original plans for HS 1 called for the private sector to deliver the project. However, the private sector was unable to handle the full debt burden that it had undertaken and had to be bailed out and restructured by Her Majesty’s government. Eventually, the £5.8 billion ($9.3 billion) line was completed using public funds. After operating the line and collecting access charges and other revenues for three years, the government leased a 30-year concession for HS 1 Ltd. (infrastructure operations company) to a consortium of two pension funds, Borealis Infrastructure and the Ontario Teachers’ Pension Fund, for £2.1 billion ($3.4 billion).2

By going to the private sector after the project was built and demand was proven, the British government was able to attract low-risk investors interested in stable returns. Additionally, the lower risk profile required fewer actors as part of the bidding consortium, making the deal much simpler to execute.

Train Operations

Train operations is the most common role for the private sector in high-speed rail. The private sector often runs the passenger train services, procures, and maintains vehicles as a Train Operating Company (TOC). This is the model used in the United Kingdom and commonly developed across Europe and Asia through franchise agreements. Due to its relatively low start-up costs and significant revenue potential, train operations is a natural role for the private sector to play.

Franchise agreements make it possible to transfer revenue risk once revenue operations have stabilized. However, whether private-sector operators are able to assume full revenue risk often has to be confirmed during a competitive process. If the train operator is responsible for vehicles or other investment (in stations for example), the duration of the franchise would have to be extended.

Recently in Italy, Nuovo Trasporto Viaggiatori (NTV), a private firm, was granted an operating franchise and invested €650 million in equipment to start high-speed rail service. Under this franchise agreement, NTV has ordered 25 Alstrom ultra high-speed AGV trains. The contract covers the maintenance of these trains (not included in the above amount) for a 30-year period, with an option for another 10 trains.

The signing of this agreement, following the Italian Transport Ministry’s decision to grant NTV a Railway Company license and authorization to perform passenger services in Italy, marks the beginning of the implementation phase of the project that will enable the private operator to start services on the new high speed lines in the first half of 2012.

Payment Structures for the Private Sector

There are several ways that the private sector can be reimbursed based on the role or roles that it is asked to take on. Those roles and payment structures will in turn guide what kinds of private sector participants will be interested in the project and how much private funding or financing will be available as described in the subsequent sections of this article. Different payment structures can also be used to assign risks to the private or public sector. Common payment methods are summarized in the following subsections.

Availability Payments

Availability payments (APs) are used in conjunction with contracts where the private sector is in charge of maintaining and/or operating the infrastructure. Payments are made based on the availability of track/systems for usage with incentives given for performance and payments withheld whenever track is unavailable. The returns are guaranteed to the private sector as long as it keeps up infrastructure performance and are not typically linked to demand. Thus, availability payments are relatively low-risk, which typically enhances the amount of private sector funding available.

Access Charges

Access charges are fees charged by the infrastructure operators for trains running on their tracks. Depending on the business models employed, levels of access charges can sometimes be set to allocate demand risk between the private and public sectors. While access charges do not produce the same sets of incentives as APs, they allow the public sector to either maintain or pass along to the private sector as much of the demand risk as is most desirable (given the tradeoffs between risks and private sector funding).

User Fares

Similar to access charges, revenues from user fares can be used to share risks between the public and private sectors. However, while access charges are indirectly tied to demand through the service plans (numbers and types of trains and trips) used by the train operators, revenues from user fares are even more directly linked to travel demand. User fares alone, without public guarantees, will rarely be able to attract major private sector investment unless it is in a corridor that is already established and has demonstrated stable, successful operations.

Joint Development

Many high-speed rail systems around the world use the development rights in and around HSR stations to generate private investment in the rail systems. Joint development often requires the loosening of zoning restrictions and significant amounts of available public land that can be sold/ leased to the private sector.

The Winning Strategy for HSR Programs in the U.S.

To maximize the chances to deliver the U.S. high-speed rail system, the preliminary studies (preliminary engineering and environmental statements) must be integrated with a project delivery strategy that can be paid for by successfully attracting both private and federal capital. While public sector interest will always be granted on the basis of HSR’s public benefits as compared to other modes, the central question becomes how to design a HSR program that will attract private sector participation.

Attracting Private Sector Participation in the U.S. HSR Program

The general proposition discussed in this article is that it should be a realistic objective to expect private sector participation and funding commitment to the U.S. high-speed rail program. The question remains, however, what form and level of commitment?

Let’s start with the operation of a new high-speed rail line and then work back to the development and funding phases.

Future HSR Operations in the U.S.

Recent international experience suggests that, given the right market conditions, all system operations and maintenance costs can be covered from the revenues generated from ticket sales and third party revenues, such as real estate development. In the U.S., it is a reasonable proposition that no HSR system will be built unless the private sector is prepared to take the financial risk for system operation.

To facilitate this, it is therefore imperative that private sector participation be sought in the planning stages of the program to ensure that system characteristics are favorable to 100 percent operations financial risk transfer to the private sector. Examples of system characteristics that will be of interest to the private sector operator include:

  • Total system demand and understanding of the factors that generate the demand, including (but not limited to):
    • Population and population density adjacent to the system end point “downtown” termini
    • End to end trip time—ideally in the two to 2.5 hour range to be more attractive to the business traveler than airline competition;
    • Location of stations relative to downtown business districts, connectivity with regional rail/mass transit, accessibility to highways for kiss & ride/park & ride, other attractions such as convention centers, sporting facilities, colleges, etc.;
    • Demand generated from intermediate stops;
    • Stopping patterns/train service scheduling;

  • Aside from determining demand the above factors will in part determine the fares structures and thus guide revenue generation from ticket sales;

  •  Other factors that will influence fare levels will include:
    • Parallel highway capacity and congestion;
    • Strength of airline competition and the restraining aviation factors of airspace limitations, runway and terminal capacity issues;

  • Aside from fare revenues, the private sector operator will also be interested in third party revenues that might be generated from a multiplicity of sources, not limited to:
    • Real estate development, principally around the location of high-speed rail stations, but also development opportunities along the developed high-speed rail corridor;
    • Opportunities to establish retail concessions at stations;
    • On-board train retail opportunities, such as catering and advertising; and
    • Shared use of right of way – e.g. fiber optic cables.


Private Sector Participation in U.S. HSR Development/Capital Costs

To get the best possible financial arrangement with the private sector operator, it is imperative that critical decision-making that impacts the ability to transfer risk be both understood by the public sector developer and that the private sector participate in those critical system design decisions.

We have already established in this article that, internationally, high-speed rail programs almost always require a high percentage of public funds (federal, state, and local) for construction, principally because of the high costs of construction and lead time from project inception to operation.

However, this does not necessarily preclude the private sector from contributing to the capital costs of the program. A previous section in this article, Payment Structures for the Private Sector, describes the payment structures for private sector financial contribution.

In relation to the contribution to capital financing that can be made from operating revenues, financial modeling will be important. The model will analyze forecasts of capital costs, operations and maintenance costs, passenger revenue, and ancillary and real estate revenues. The key output from the financial model will be the forecasted net operating revenue, a key indicator to the private sector as to the attractiveness of the project for investment purposes. A loose rule of thumb is that the private sector might inject capital funding to a multiplier of 10 times net operating revenue.


This article has laid out: the need for private sector involvement, the roles that the private sector can play in the development of high-speed rail systems in the U.S., and steps that the public sector can take to get the most out of private sector participation. As high-speed rail advances from the planning and design stage toward project implementation and operations, the private sector can progressively take on more responsibility if early decisions by the public sector allow for appropriate flexibility in project delivery and risk mitigation. However, it is too early to tell whether that flexibility will be provided in the designs of the currently planned systems.



  1. Réseau Ferré De France. High-speed Rail Tours Bordeaux: Signature with Vinci. Réseau Ferré De France. 16 June 2011.
  2. High Speed 1 Concession Awarded to Canadian Pension Consortium. Railway Gazette @ www. (5 Nov. 2010)


Image Header Source: California High Speed Rail Authority