Florida High Speed Rail: How to Protect Taxpayers

There is discussion of resurrecting the Tampa to Orlando high speed rail line, on the assumption that this can be accomplished without creating any liability for taxpayers. As this note makes clear, there are substantial hurdles that make achieving this goal nearly impossible.

The starting point must be a guarantee that neither state nor local taxpayers will have any liability, under any circumstances, for increases in capital costs, for operating subsidies or to pay back the federal grant, regardless of whether such circumstances are or could have been foreseen.

This could prove to be difficult, if not impossible, and the minimum requirements of such a guarantee are described below.

(1) Capital cost increases: These will ultimately be the responsibility of taxpayers. It is claimed that the project will cost $2.7 billion. Based upon the international experience, this is a fantasy and cost increases could raise the cost to as much as $5.7 billion (a $3.0 billion increase). There are claims that the private builder/operator would pay any such cost increases. However, no private consortium will have the financial capacity to pay for any such cost increase, nor has any in the past.

(2) Promoters claim that the project will pay for its operating expenses. Few rail systems in the world accomplish this and operating subsidies are likely. Operating subsidies will ultimately be the responsibility of taxpayers. Proponents claim that the private sector will pay any operating subsidies. However, the operating subsidies could become too large for the private consortium to pay.

(3) Any Florida government (state or local) accepting the federal funding would have to guarantee a certain level of service for at least 20 years and would have to pay back the federal government if that level of service is not maintained. This is no idle threat. Florida is already paying millions in subsidies annually for higher service levels on Tri-Rail (Miami) area to avoid a demand to repay one-quarter billion dollars to the federal government.

It is inconceivable for the private company (a company created by other companies, and having limited liability) to have sufficient resources to pay the potential extent of these obligations (at least under normal operating procedures). The private consortium could become insolvent, leaving taxpayers of the government entity accepting the federal grant with the obligations.

The Problem with Private Company Assumption of Liabilities: Under normal circumstances, the companies "partnering" in a consortium have no liability beyond their investment. A consortium could become insolvent and the parent companies would not be required to meet the obligations, leaving taxpayers with substantial obligations.

Protecting the Taxpayers: Thus, the private consortium accepting the liability must take the following actions to protect the taxpayers.

1. Performance Bond: The private companies forming the consortium must post a performance bond in the amount of the highest likely capital cost increase ($3 billion) as well as potential operating subsidies (an amount to be determined) for the period of obligation under the federal grant. This would, in effect, be an insurance policy to guarantee payment by a financially strong third party institution in the event that the private consortium does not pay for all cost increases.

2. Unlimited Corporate Guarantees: The private companies forming the consortium must provide their unlimited corporate financial guarantees for the obligations of the private consortium, including cost overruns, operating subsidies and any eventual requirement to pay back the federal grant.

In view of the confidence of promoters that there will be no cost overruns, these requirements should be no barrier to the project.


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