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Suggested Citation:"Summary ." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Summary ." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Summary ." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Summary ." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Summary ." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Summary ." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Summary ." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Summary ." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Summary ." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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1 This research project sought to identify alternative revenue generation (funding) and financing methods for realizing passenger and freight rail capital investment, operations, and maintenance. The resulting resource—this Guidebook—is designed to help policymakers, planners, and others in identifying opportunities to fund and finance rail projects that otherwise could not be realized. The scope of this research project was very broad and covered funding and financing needs and mechanisms relating to capital, operations, and maintenance of freight rail projects and services, passenger rail projects and services (notably intercity passenger rail, including high- speed rail and commuter rail) and shared corridor and corridor improvement projects (cover- ing both shared passenger and freight corridors, and freight corridor improvement projects). Most public surface transportation infrastructure and services in the United States do not, on their own, generate sufficient revenue to cover their full costs and are dependent on pub- lic funding contributions. A recent report noted that the combined contribution of the federal government, states, and localities to the country’s highways and transit systems is on the order of $207 billion per year.1 Similarly, most public rail projects and services (including intercity passenger rail, commuter rail, and corridor improvement projects) also require public funding contribu- tions to be financially viable. All intercity and commuter passenger rail operations in the United States have a funding gap—revenues generated by these services do not cover their full costs. For instance, since its establishment in the 1970s, Amtrak’s operating revenues from intercity passenger rail service have never covered operating costs, let alone made any contribution toward capital invest- ment;2 operating losses between 2008 and 2012 ranged between $1.1 and $1.3 billion annually. Likewise, not one of the 24 publicly owned commuter rail systems in the United States covers its operating expenses from passenger revenues; cost recovery from commuter rail operations varies from 6% to 63%. Revenues from planned high-speed rail (HSR) projects in the United States are also unlikely to recover their full costs. Some short-line freight railroad projects and services and most shared passenger-freight rail corridor or corridor improvement projects (e.g., Chicago’s CREATE project) also face a funding gap. This is in contrast to most private U.S. Class I freight rail services, which typically gener- ate revenues far in excess of capital, operating, and maintenance costs and pay a return to S U M M A R Y Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 1 The PEW Charitable Trusts, Intergovernmental Challenges in Surface Transportation Funding, September 2014. 2 Operating financial performance for Amtrak’s services varies widely. Acela services and Amtrak services on some routes earn an operating profit, which is then used to subsidize other services. Some reforms to re-invest operating profits into their respective services have been proposed. This could strengthen services with high financial performance but increase reliance on public funding for services with poor financial performance.

2 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects shareholders. In 2013, for example, U.S. Class I freight railroads generated $13.4 billion in profits and invested more than $25 billion in railroad plant and equipment. These invest- ments can be financed based on expected future operating profits, using a range of financial products available on commercial markets. Rail projects and services that have a funding gap cannot be financed privately, although there may be a strong rationale for investing in these projects or services. These rail projects and services, including passenger, short-line, and freight rail corridor improvements can provide a range of public benefits (e.g., increased mobility and accessibility; regional eco- nomic development; and reduced congestion, wear and tear on roads, and emissions). Yet because public benefits are generally measured in economic rather than financial terms and accrue to society at large, rather than to private investors, public funding, in one form or another, is required for these projects to be financially feasible. This Guidebook identifies alternative funding and financing methods for realizing pas- senger and freight rail capital investment, operations, and maintenance, where traditional funding sources, on their own, are insufficient. Funding vs. Financing Funding and financing refer to different things. Funding refers to the sources of revenue that can be used to pay for a project or service. Sources of funding include future revenue streams from the delivery of rail transportation services (whether freight or passenger services) and ancillary revenues or non-repayable grants or subsidies. Financing refers to financial mechanisms or tools to access money to pay for a project or service—generally before the project generates the necessary revenue to pay for the investments. Financing mechanisms include various forms of debt, equity, and capital leases. Financing is typically used when a project’s revenues do not correspond to the cash needs of the project. The use of financing mechanisms, unlike funding, generally creates an obligation to the entity pro- viding the financing. There is no such thing as a financing solution to a funding problem. Short of reducing the cost of a project or service, the only solution to a funding gap is to find other sources of rev- enue. Often, rail projects or services with a funding gap require public funding to be financially viable—typically in the form of grants or other capital contributions (for capital investments) and/or operating subsidies (for operations and maintenance). Grants and subsidies are fund- ing vehicles, but the money used to pay for these funding vehicles must come from somewhere. Typical sources of money for grants and subsidies include taxes and user charges. Alternative Funding and Financing Mechanisms for Rail Projects and Services Beyond the more typical or traditional sources of funding and financing for rail projects and services, this Guidebook identifies alternative funding and financing mechanisms that can be used to pay for freight and passenger rail projects—including operating costs (opex) and capital costs (capex). These are organized under three broad headings (see Figure S-1) and summarized in the subsequent tables: • Service or Asset-Related Revenue (Funding) Mechanisms • Public Revenue (Funding) Mechanisms • Financing Mechanisms (Private and Public)

Summary 3 As used in Tables S-1 through S-3, the criteria used in estimating funding potential are as follows: • Low funding potential ($): funding sources that contribute less than 5% of transportation revenue • Medium funding potential ($$): sources contributing from 5% to 20% of transportation revenue • High funding potential ($$$): funding sources that can contribute more than 20% of transportation revenue. These are necessarily estimates and the potential for any particular funding source depends on circumstances. Project Capital Costs Operaons andMaintenance (O&M) Service or Asset Related Revenue (Funding)Financing Public Funding (in one form or another) Funding Gap Funding Gap Public Funding (in one form or another) Figure S-1. Simplified representation of rail project funding and financing. Service or Asset-Related, Revenue-Genera ng Mechanisms Fr ei gh t Pa ss en ge r Ca pe x O pe x Magnitude of Funding Poten al ($=low, $$$=high) Market Pricing to Maximize Fare Box Revenues (6.4.1) $$ (potenal to increase revenue ~ 10% to 20%) Premium Services to Increase Service Revenues (6.4.2) $-$$ (potenal to increase revenue ~ 5% to 10%) On-board and In-Staon Retail Concessions (6.4.3) $ (potenal to increase revenue ~3%) Track Access Charges (6.4.4) $ (potenal to recover marginal cost +) Selling or Leasing Access to Railroad Rights of Way (6.4.5) (The operator and the owner may be different, which is oen true of passenger operators. The benefits go to the owner.) $-$$ (based in large part on the value of the land adjacent to the right-of- way corridor) Commercial Property Development/Joint Development (6.4.6) $-$$ (extent of revenues depends on the size and type of the development) Branding, Sponsorship, and Naming Rights (6.4.7) $ (e.g., from $200,000 to $2m per year per rail sta’on in major urban areas. Not oen used in U.S. context) Table S-1. Alternative service or asset-related, revenue-generating (funding) mechanisms.

4 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Public Revenue (Funding) Mechanisms Fr ei gh t Pa ss en ge r Ca pe x O pe x Magnitude of Funding Potenal ($=low, $$$=high) Incremental Property Tax Revenues (for Tax Increment Financing) (6.5.1) $$ (depends on the actual increase in property values generated by project – will vary considerably by case) Special Assessment District (SAD) Fees (6.5.2) $$-$$$ (contribuon varies depending on the overall capex requirements for the project and the benefits expected to be generated by the project) Impact Fees Charged to Property Developers (6.5.3) $$ (highest in strong real estate markets) Staon Parking Charges (6.5.4) $-$$ (potenal to generate 5% to 10% in addional revenue) Road Tolling/Congeson Charging (6.5.5) $$ (more typically used to fund transit but can be applied locally for joint road/rail facilies) Heavy Goods Vehicle (Truck) Charges (6.5.6) $$$ (depends on level of charges and amount of traffic – European examples in the $ billions) Gas Tax (6.5.7) $$$ (total funding potenal very large – in UK, £26 billion [$40 billion] each year, 1.7% of GDP) Car Registraon Plate Aucon (6.5.8) $$-$$$ (funding potenal very large) Motor Vehicle Registraon Fees (6.5.9) $$$ (in UK, £6 billion [$10 billion] each year from motor vehicle registraon fees) Vehicle Mileage-Based User Fee (6.5.10) $$$ (for example, a 1-cent per mile tax would yield about $30 billion/year in U.S., with a typical driver paying about $120 per year per vehicle) Payroll Taxes Used for Transport (6.5.11) $$$ (depends on the extent of the program: geographic size of the taxaon zone, tax rate, etc. In the Paris Region, generates about $4 billion per year) Sales Tax (6.5.12) $$$ (total funding potenal very large; somemes a share of sales taxes is assigned to transport projects and can be used to improve rail and road improvement projects from a general fund) Carbon Tax or Credits (Cap-and-Trade) (6.5.13) $$$ (in California, 1 cent/gallon would yield around $170 million/year and 20 cents/gallon would finance the enre HSR program without any other sources) Table S-2. Alternative public revenue (funding) mechanisms.

Summary 5 Potential Application of Alternative Funding and Financing Mechanisms To illustrate how alternative financing and revenue mechanisms could be used in practice, the research team assessed the potential application of these alternative mechanisms on the following U.S. rail projects, which are in planning or early development stages and all with a funding gap.3 • California High-Speed Rail (High-Speed Rail) • Amtrak Virginia (I-81/US-29 Corridor) (Intercity Passenger Rail) • Virginia Rail Express (VRE) (Commuter Service) • Chicago CREATE (Shared Corridor) • New Orleans Rail Gateway (NORG) (Shared Corridor) Financing Mechanisms Fr ei gh t Pa ss en ge r Ca pe x O pe x Magnitude of Financing Potenal and Cost Public-Private Partnerships (PPPs) (6.6.1) Can finance enre project if future revenue streams are sufficient and predictable. Equipment Trust Cerficates (available to private companies) (6.6.2) Amounts available range from about $20 million to $200 million, with interest rates equivalent to a federal rate plus 2% to 5%. Operang Lease Cerficates (available to private and public companies) (6.6.3) Could range from $1 million to billions, cost varies by asset: Market prices – annual lease usually 10% to 25% of new asset price per year. Finance or Capital Leasing (private and public companies) (6.6.4) Finance leases depend on the creditworthiness of the lessee and can be used to finance many different types of assets. Bonds with Public-Sector Backing (6.6.5) Could be significant. Cost typically 25 to 30% below prime rate. Corporate Bonds (available for private en­­es) (6.6.6) $25 million to $1 billion+. Federal Rate +1% to +5%; interest taxable to recipients. Mezzanine Financing (available to both private and public companies/authories) (6.6.7) $100s of millions for large railroads; $10 million to $100 million for smaller ones. Prime; Prime +1-5%. Short-Term Corporate Line of Credit Financing (6.6.8) $20 million to $100 million. Prime rate to prime rate +5%; iniaon charge. Sale of Stock (Ownership Stake) (6.6.9) $100s of millions for large railroads; $10 million to $100 million for smaller ones. Cost typically in range of 12% to 20%. Tax/Investment Credits (6.6.10) Varies significantly on a case-by-case basis and on state and federal tax codes. Table S-3. Financing mechanisms. 3 The research team’s approach in selecting projects was to first ensure inclusion of at least one project per rail sector (i.e., com- muter, regular intercity, HSR intercity, and freight/shared corridor). Thereafter, the research team sought projects having a funding gap. The extent of public information available was also a determining factor in project selection. The detailed case studies are included in Appendix E of this Guidebook.

6 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects The resulting case studies provide examples of very different projects; however, many of the lessons are similar: • If a project has a funding gap after seeking all other available sources of revenue, public funding is needed if the project is to be financially viable. • Public revenue (funding) mechanisms could raise significantly more money to pay for rail projects than revenue mechanisms from the rail project, assets and/or services themselves, but there are more barriers (often political) to obtaining such funding. • For passenger projects, general taxation offers the greatest funding potential. No single funding or financing tool is likely to be sufficient for most large rail projects— multiple sources of funding and financing probably will be necessary. Many of the mecha- nisms identified in this Guidebook are underutilized or not utilized at all, which suggests scope for increasing their use to realize rail projects. Beyond Funding and Financing Mechanisms: Opportunities and Potential Strategies to Realize Rail Projects with a Funding Gap Notwithstanding the other considerations and motivations that drive rail project funding and financing, the extent to which a rail project or service is expected to have a net public benefit or a net private (financial) return is a useful basis for assessing funding and financ- ing requirements and opportunities. This is a notable area for further research and analysis. One option could be to develop and institutionalize a more robust and standardized frame- work, method, and set of indicators for capturing and quantifying the full range of rail project benefits and costs in future assessments of the overall benefit-cost of rail projects and services. Such a framework and related resources could be supported by evidence-based research of the actual long-term benefits of rail projects (too often a project’s benefits are assessed only before a project; it would be useful to assess actual benefits ex-post to inform future benefit-cost analyses). This framework could then be used in a more comprehensive assessment of funding and financing options and their justification. Figure S-2 presents a basis for informing the use of rail funding and financing mechanisms in terms of when they are most appropriate; Fig- ure S-3 presents a basis for informing the use of rail funding and financing mechanisms in terms of how they can be used to achieve specific outcomes. Other opportunities and potential strategies to promote the financial realization of rail projects, some of which exist already in some jurisdictions in the United States, include the following: • Establishing a stable, predictable funding source for passenger rail projects and ser- vices. Predictable and stable public funding (subsidies) for passenger rail services is needed to plan and sustain these operations effectively. Many public funding models, including federal appropriations for Amtrak, however, are neither predictable nor stable from one year to another. This creates a problem for planning and investment. Virginia’s Intercity Passenger Rail Operating and Capital (IPROC) Fund provides one model for predictable and stable funding. The IPROC fund provides funds to passenger rail projects that exhibit strong public benefits, with funding guaranteed year-over-year over the life of the asset, subject to meeting certain requirements and performance obliga- tions. The $19 billion in rail funding announced as part of the Grow America Act could

Summary 7 also help in creating more certainty about funding for rail projects and services, were it to be enacted. • Strengthening the Transportation Investment Generating Economic Recovery (TIGER) Discretionary Grant program to improve multi-modal project planning and funding. The TIGER grant program has proved popular as a way to help fund transportation proj- ects that demonstrate a high benefit in relation to project costs. As a multi-modal funding program, it addresses a gap in federal funding programs, although it has not been with- out controversy. Nevertheless, a stable and strengthened TIGER program could be one ( ) Net Financial Returns Net Public Benefits (+) Private financing, against future operang revenues (e.g., U.S. Class 1 Freight Line) Operang revenues insufficient to cover project costs, insufficient public benefits to jusfy public funding support (Project should not go ahead) Can be privately financed, but potenal to increase public benefits further with public funding support Public funding support to address funding gap, realize project and related public benefits (e.g., commuter rail services) ( ) (+) Source: CPCS Figure S-2. Net public benefits vs. net private (financial) returns. Source: CPCS (-) Net Public Benefits (+) (-) (+) STOP Mechanisms to decrease public costs (e.g., taxing emissions regulang tariffs, safety) Mechanisms to increase financial viability (e.g., grants, subsidies, concessional lending) Mechanisms to increase both public benefits and private returns (e.g., cost sharing corridor improvements, shared corridors) Net Financial Returns Figure S-3. Use funding and financing mechanisms to increase public benefits, financial viability, or both.

8 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects genesis of a much-improved approach to complex transportation issues (and associated funding requirements), including for rail projects, especially with implementation of the recommendations of the Government Accountability Office (GAO) management review.4 • Establishing model institutional and commercial frameworks for complex, multi-party corridor improvement projects. The institutional and commercial frameworks for rail- way development are complex, particularly for multi-party shared corridor and corridor improvement projects, and are often major barriers to obtaining funding. Several major rail improvement projects (e.g., Alameda Corridor, CREATE, and New Orleans Rail Gate- way [NORG]) have had large complicated transactions involving many different parties. This has been driven by the complexity of the U.S. rail environment (i.e., multiple private railways control most of the existing rail infrastructure, except in the largest urban areas where some public rail infrastructure exists) and the complexity of the public environment (which comprises cities, counties, suburban cities, public author- ities, states, and state authorities). Different approaches have been used to address this complexity. So far, each approach has been unique and largely unrelated to other experiences. It could be worthwhile to develop a set of standard practices (based on the examples herein) for dealing with the complex U.S. environment. These models could be managed by a multi-disciplinary team from a central resource (e.g., in the U.S. DOT’s office). • Establishing expertise and resources on Public-Private Partnerships (PPPs) at the national level. Many cities, states, and metropolitan areas are ill-equipped to identify, structure, and manage PPP deals. It is costly (and often unnecessary) to build long-term skills to structure and procure PPPs across all staff in every government department. The United States might benefit from establishing expertise at the national level, along with a repository of information on best practice and expertise in the design, procurement, implementation and management of PPP projects, generally, and rail projects specifi- cally. Creation of the Build America Transportation Center, recently announced as part of the executive order creating the Build America Investment Initiative, is a step in this direction. • Improving insurance market for shared corridors. There has been a trend by freight railroads to demand the highest possible insurance coverage and the maximum degree of transfer of liability to the non-Amtrak passenger operator whenever possible. As a result, passenger rail operators are finding it more difficult to increase or obtain new access to freight rail infrastructure. This trend has implications for increasing/advancing the development of shared corridors for passenger rail services in the United States. Potential solutions for addressing this issue are outlined herein. • Concessioning passenger rail operations. Most passenger rail operations in the United States are funded in part through annual appropriations. It is difficult to obtain financing in this context because these funding streams (appropriations) are neither predicable nor stable. An alternative model, based on the successful rail franchising model in the United Kingdom, would be to tender existing intercity and commuter rail services, on the basis of the least cost (annual subsidy) required to operate the service at a pre-defined service level for a multi-year period. This would be a form of PPP, whereby the rail service is provided on a contractual, rather than annual, appropriations basis. 4 Management Report MAY 2014: Surface Transportation: Actions Needed to Improve Documentation of Key Decisions in the TIGER Discretionary Grant Program.

Summary 9 Conclusions No silver bullet financing model or truly new and previously unknown source of revenue can be accessed to fully fund and finance rail projects that have a funding gap. The research identified and indicated the potential importance of several alterna- tive funding and financing mechanisms that could be used to realize passenger and freight rail projects and services, where traditional funding sources, on their own, are insufficient. In general, if projects can be properly structured, knowledgeable private financing institu- tions and private capital are available to invest in rail projects. What is lacking is a mecha- nism to fund such projects. This Guidebook identifies other opportunities and strategies for promoting the real- ization of rail projects or services that have a funding gap. However, using these mecha- nisms and approaches requires careful consideration and making hard decisions—to raise money from the public, to allocate scarce public resources to rail projects, and potentially to disrupt the status quo in the funding and provision of rail services. Many of these decisions may be politically sensitive. Nevertheless, if the general premise is that a rail project or service is worthwhile and delivers value—a net benefit—then there could be a strong justification for making such decisions. As and when new funding and financing mechanisms are put to use in the United States, further research on their application and results would be important and beneficial. Such research could help disseminate lessons and promote the use of the funding and financ- ing mechanisms that prove to be most effective in realizing rail projects, given different contexts.

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TRB’s National Cooperative Rail Research Program (NCRRP) Report 1: Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects identifies alternative funding and financing tools that can be used to realize passenger and freight rail project development, including capital investments, operations, and maintenance. The report summary is available online.

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