Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects (2015)

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40 The following discussion of alternative financing and revenue mechanisms is organized under three headings: 1. Service or Asset-Related Revenue (Funding) Mechanisms 2. Public Revenue (Funding) Mechanisms 3. Financing Mechanisms (Private and Public) 6.1 Service or Asset-Related Revenue (Funding) Mechanisms—Overview Typical service or asset-related funding sources relate to revenues that can be generated from the rail project and/or its services. This most commonly includes transportation fees paid by shippers to freight railroads and fares paid by passengers to passenger rail service providers. Other mechanisms that could be used to increase revenues from a rail project and/or the provision of rail service include those in Table 6-1. Table 6-1 indicates the type of rail project to which these mechanisms can be applied (passenger/freight), the type of cost that the mechanism can be used to fund (capital cost [capex]/operating costs [opex]) and, in a very general sense, the magnitude of the funding potential of each of these revenue mechanisms. C H A P T E R 6 Alternative Funding and Financing Mechanisms for Rail Projects and Services Criteria for Estimating “Funding Potential” ($, $$, $$$) The research team developed a rough estimate of the funding potential of each alternate funding mechanism, where “potential” is a reflection of the extent to which the funds generated could be sufficient for financing capital projects by contributing to transportation revenue. As used in Tables 6-1 through 6-3, 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 revenue These are necessarily estimates and the potential for any particular funding source depends on circumstances.

Alternative Funding and Financing Mechanisms for Rail Projects and Services 41 6.2 Public Revenue (Funding) Mechanisms—Overview Public funding through grants or subsidies can help address a rail project or service’s funding gap, as discussed in Section 4.4. Grants and subsidies are funding vehicles but the revenue used to pay for these funding vehicles must come from somewhere. Generally, the source of revenue for public funding for rail projects comes from some form of tax instrument (e.g., general taxes and fuel taxes). Other mechanisms used to increase public revenues for rail projects or services include those in Table 6-2. The magnitude of funding potential from public revenue mechanisms can be far greater than revenues generated solely from a rail asset or service—largely because these mecha- nisms can be applied more broadly and to a larger potential revenue base. In addition to these alternative funding mechanisms, the public sector can raise general revenues in various ways [e.g., through lotteries and casinos and new taxes on things such as hydraulic frac- turing (fracking) projects or fast foods]. It is beyond the scope of this research project to describe all the potential funding sources available to governments. For any revenue mechanism to be an effective and sustainable means of funding rail projects, the revenue stream should be dedicated, in whole or in part, to rail projects or, more broadly, transport projects. 6.3 Financing Mechanisms (Private and Public)—Overview Financing mechanisms include debt, equity, and other financial tools. Financing can be obtained from the private and public sectors. Private finance providers (e.g., commercial banks and investors such as pension funds, hedge funds, and equity investors) provide loans, equity, and other forms of financing in order to generate a commercial return. The cost of capital (i.e., the rate of return that an investor seeks 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) $-$$ (potenal to increase revenue ~ 5% to 10%) On-board and In-Staon Retail Concessions (6.4.3) $ (potenal to increase revenue ~3%) Track Access Charges (6.4.4) $ (potenal to recover marginal cost +) Selling or Leasing Access to Railroad Rights of Way (6.4.5) $-$$ (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 o­en used in US context) (The operator and the owner may be different, which is o­en true of passenger operators. The benefits go to the owner.) Table 6-1. Alternative service or asset-related revenue-generating (funding) mechanisms.

42 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects in exchange for financing) is generally commensurate with the level of risk of a project. The riskier the project, the higher the cost of capital, and vice versa. When a project’s revenues are not expected to cover project costs, or when this revenue is uncertain, private finance providers will generally not invest in the project or service in question. In some instances, private finance may be attracted to a project because of innovative design and use of alternative financing products that minimize the risk or cost of the project to the private sector (e.g., where the public sector takes on risks not in the control of the private sector), such as government-backed loan guaran- tees or PPPs. 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) Developers (6.5.3) Impact Fees Charged to Property $$ (highest in strong real estate markets) Staon Parking Charges (6.5.4) $-$$ (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) $$$ (total funding potenal very large – in UK, £26 billion [$40 billion] each year, 1.7% of GDP) Car Registraon Plate Aucon (6.5.8) $$-$$$ (funding potenal very large) Motor Vehicle Registraon Fees (6.5.9) $$$ (in UK, £6 billion [$10 billion] each year from motor vehicle registraon fees) Vehicle Mileage-Based User Fee (6.5.10) $$$ (For example, a 1-cent per mile tax would yield about $30 billion/year in US, with a typical driver paying about $120 per year per vehicle.) Payroll Taxes Used for Transport (6.5.11) $$$ (depends on the extent of the program: geographic size of the taxaon zone, tax rate, etc. In the Paris Region, generate 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 alone, 1 cent/gallon would yield around $170 million/year and 20 cents/gallon would finance the enre proposed HSR program without any other sources). The currently planned cap-and-trade program may raise up to $5 billion annually. Table 6-2. Alternative public revenue (funding) mechanisms.

Alternative Funding and Financing Mechanisms for Rail Projects and Services 43 Providers of public finance (e.g., state infrastructure banks and government loan programs) also seek to invest in projects that are commercially viable, and these financing products typi- cally have features that make them more attractive (e.g., lower interest rates, longer term loans, and flexible repayment terms). This is sometimes referred to as “concessional” financing. The focus of these public finance providers is typically on financing projects that have some form of public benefit, but that cannot obtain private finance (at a reasonable cost) given perceived project risks and/or the long payback periods. Capitalizing public infrastructure banks or loan programs can be a major challenge, though this is a funding, rather than a financing, issue. Concessional Financing Concessional debt products are similar in structure to those issued by private banks (e.g., loans, loan guarantees, and lines of credit), but which typically have features that make them more attractive to borrowers (e.g., lower interest rates, longer-term loans, and flexible repayment terms). • Low-interest loans and loan guarantee programs exist for rail projects, includ- ing freight rail projects. These are available exclusively for capital investments (not operating costs). At the federal level, an example is the RRIF Program, which extends direct federal loans and loan guarantees to finance develop- ment of railroad infrastructure with repayment periods of up to 35 years and interest rates the same or comparable to U.S. treasury rates. Another example is the Transportation Infrastructure Finance and Innovation Act (TIFIA), which provides loans, loan guarantees, and standby lines of credit, when not other- wise available through commercial markets. • Loan Guarantees: When risks associated with an investment are perceived as high, a mechanism that can be used to attract private finance is a government- backed loan guarantee. In such cases, the guarantor (e.g., federal, state, or local government) promises to assume the debt obligation of a borrower if the borrower defaults on the loan. Government guarantees are not new—they were used to finance the first transcontinental railroad in the 1860s. Railway projects are usually complex with multiple technologies (e.g., infrastructure may include bridges, signaling and train control systems, rail tracks, stations and other buildings, and locomotives and other rolling stock), multiple property owners (e.g., railroads, other ease- ment holders such as public utilities, and others), several regulatory interests, and many differ- ent financing structures. In any financing relationship, better terms are generally available from financing institutions familiar with (1) the industry, (2) the type of financing structure proposed, and (3) dealing with financing arrangements of the size and type contemplated. The experience and knowledge of the financing institution can make a significant difference in the amount, cost, and term of any debt-financing product. Alternative mechanisms that could be used to finance rail projects or services include those in Table 6-3. This is followed by more detailed description of each of the identified Ser- vice or Asset-Related Revenue (Funding) Mechanisms (Section 6.4), Public Revenue (Funding) Mechanisms (Section 6.5), and Financing Mechanisms (Section 6.6).

44 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 6.4 Service or Asset-Related Revenue (Funding) Mechanisms 6.4.1 Market Pricing to Maximize Fare Box Revenues 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%-30% below prime rate. Corporate Bonds (available for private en€€es) (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-$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-$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 6-3. Alternative financing mechanisms. Sector Freight Passenger Type of cost Capital Expenditure (Capex) Operang Expenditure (Opex) Descripon A major source of revenue for passenger railroads is cket sale proceeds from passengers. Revenue collecon is a funcon of ridership level and fare structure. Revenue maximizaon is oen constrained by polical acceptability (and in some other countries by regulaon); even without this, it depends on railroads’ ability to accurately predict elascity of demand from passengers. Raise prices too high and passengers will use other modes; keep cket prices low and operators may be missing an opportunity for higher revenues. Many transit operators have very simple fare structures, with a flat fare per trip, with discounts depending on status (e.g., seniors, students, and children), and

Alternative Funding and Financing Mechanisms for Rail Projects and Services 45 30 Based on discussions with Shashi Verma, Director of Customer Experience at Transport for London. TfL is the local government body responsible for the planning, delivery, and daily operaon of London’s public transport system, including buses, light rail, some overground (commuter) rail, and the underground subway system. In 2003, TfL introduced the Oyster Smart Card system, which can now be used across all of the transport modes. This means riders can travel by bus, subway, and commuter rail all using the same Oyster Card. TfL esmates that this system increased revenues by 10% 20%30 and also increased ridership a similar amount. Oyster Card update was encouraged by dramatically raising fares not purchased using the Oyster Card (i.e., creang an incenve to purchase the Oyster Card). Before full integraon with the Oyster Card, TfL already had a fare by distance system, with higher peak fares, and integraon with most subway (“underground”), bus, and commuter rail services. Now, occasional transit users can now also travel using “wave and pay” credit cards on bus services and this is being extended to all services. Passengers can pay either for each trip, for a daily pass, or use an Oyster Card for “Pay as you Go” (PAYG) travel. Daily PAYG fares are capped (in effect offering a day pass) at different levels, depending on which modes are used, when trips are made, and which zones are entered. Oyster Card balances can be topped up online or with “auto top up.” TfL caps the Oyster Card at a low daily level, about $7.50, for a passenger who only uses the buses. For passengers who also use the subway or commuter rail system somemes with free transfer between routes. These simple fare structures usually do not maximize either use of public transport or revenues. More complex fare structures exist which can generate addional income through more market based pricing, while increasing ridership. Examples include “zone” or distance based fares, higher peak fares, targeted discounts for off peak travel, daily “capping” of total fares paid, integrated prices (fares) with other modes, and charging for related purchases (e.g., car parking). Extent of funding potenal Compared with flat fare systems, market pricing is believed to increase both revenues and passenger volumes, each by 10% to 20%. Although plenty of anecdotal evidence supports this, as well as economic theory, this research team is not aware of any controlled study. Implementaon costs Capital and operang costs of more complex fare systems depend on system characteriscs, but conversion of modern fare collecon systems using smartcard and/or smartphone technology can usually be offset enrely by staff and equipment cost savings and reduced revenue “leakage” with a payback within 2 or 3 years. Fare collecons systems now can be acquired with a service provider structure, with equipment and soware all financed, installed, and maintained by a private contractor; and with payment enrely on a per transacon basis, so no upfront capital expenditure is required by the transport system owner/operator. Case study Smartcard systems are common across large urban systems around the world, including the United States. An example from the United Kingdom is presented below. (1) Transport for London (TfL), UK

46 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects peaks, thereby reducing the need to buy new trains. Most operators also provide off peak service in excess of the minimum requirements: routes that had two trains each hour through the day before privazaon now oen have three or four. About half of the London regional (commuter) services now operate with lile or no subsidy, with fares covering all costs, including capital charges. Enabling requirements for success Legal: Most U.S. transit authories already have freedom to set fares at any reasonable level, although some consider income redistribuon with low fares to be a part of their policy mandate. There can be significant polical pressure to keep fares low. Very few cies offer cheaper off peak fares. Policymakers: Policymakers and operators must be willing to abandon the “flat fare” structure, which exists in many U.S. cies; it has been popular tradionally and is easily understood by administrators, users, and voters. Instuonal capacity: In the case of mul modal transit systems (e.g., bus, subway, and urban rail) with diverse operators, the operators must also be willing to cooperate and to determine reasonable joint fares and a workable basis for apporoning revenues between different operators. Just as airlines offer cheaper fares for connecng passengers than the simple sum of point to point fares, because these generate more traffic, it will usually make commercial sense to offer mul operator fares that are less than the separate fares charged. Typically, revenues from joint fares are shared proporonal to the distance traveled on each operator’s system, but somemes there are adjustments to reflect higher costs, and a “flagfall” element to reward operators who provide a short but vital feeder or distributor mode. In some cases, these will be operators from different states. For example, passengers using the New Jersey PATCO commuter rail system, which runs into downtown Philadelphia, can use their "Freedom Pass" smartcard to (including commuter rail under central government jurisdicon), the card is capped at $10 to $25 per day, depending also on which zones are entered and whether the card is used in the morning peak period. Giving low income travelers the ability to make mulple trips for a low daily maximum fare, but only on the buses, has helped make it acceptable to charge much higher fares to those who use the faster rail and subway network. Capping the bus only fare at a relavely low level addresses concerns that transit is expensive, while allowing TfL to maximize revenues from rail and subway users and thereby raise money to pay for new investment. In 2000, TfL covered almost 100% of total operang costs from fares, including infrastructure maintenance and renewals. However, a policy decision was made to increase transit services, so that fares now cover about 60% of total costs. (2) London regional rail services These are mostly operated by private companies under franchise agreements. They set a minimum service frequency on each route, at each me of the day. They also set the maximum fares, which are usually the fares charged to peak hour travelers and the weekly commuter fare. However, virtually all London operators offer off peak ckets at 40% to 50% below the full regulated fare. They do this for commercial reasons: the lower fares aract more off peak travelers who might otherwise drive or not travel at all, and also divert some riders out of the crowded

Alternative Funding and Financing Mechanisms for Rail Projects and Services 47 31 See Ruth Miller and Matthew Schabas “Sketch modeling alternative fare structures: Can BART do better?” paper presented at TRB Annual conference 2013, available at: http://assets.conferencespot.org/fileserver/file/42589/filename/39dunf.pdf San Francisco BART has always had a distance based fare structure and has introduced a smartcard, which gives a small discount (25 cents or 12.5% on the $2 single fare) for passengers transferring between BART and the Muni Metro light rail system. However, fares do not seem to bear much relaon to market demand. Arguably, BART should be able to charge the highest fares to passengers traveling directly to downtown San Francisco, where roads are most congested and parking most expensive. To maximize revenues, it should charge less to passengers traveling to other locaons, requiring a transfer onto the Muni Metro.31 The Boston Metropolitan Transportaon Authority (MTA) Charliecard is valid on bus, subway, light rail, and commuter rail. New York MTA Subway has integrated fares with city buses, but no integraon with commuter rail, or with New Jersey transit bus, rail or subway services. Passengers traveling from, say, Newark Airport to Conneccut may actually need to purchase three or four separate ckets. NJ Transit and NY MTA could almost certainly aract more riders and increase their revenues if they operated a single integrated fare system with market pricing. Although somewhat disnct from the market pricing debate, another means to raise direct revenues from passenger cket sales for transport investment is to add an explicit addional charge to ckets sold to passengers, with funds dedicated to a specific transportaon account (e.g., “Central Station Improvement Fee”). This approach is common in the air sector, where charges added to ckets for each enplaned passenger are returned to the airport (typically between $1 and $4.50). Of course, if fares are set using market methods, then adding a “surcharge” is effecvely a zero sum game. purchase discount fares for connecting journeys on selected SEPTA bus and rail routes in downtown Philadelphia. In effect, this is a joint fare, although passengers need to purchase the connecng fares in Philadelphia using their PATCO smartcard. If both operators used compable smartcards, a wider range of joint fares could be offered, extending onto the SEPTA suburban and commuter rail routes. Workforce: Staff must be willing to accept changes in working pracces. In some cases, tradional jobs will be eliminated or radically changed. For example, staff who have previously spent the day inside a cket booth may be redeployed helping passengers on staon plaorms. Public Acceptance: Transit users need to be persuaded that the changes to fare structures will, overall, be of benefit. On average, passengers will pay the same or potenally less and all will find it easier to travel due to convenience of fare paying opons. Some peak passengers may need to pay more, but will benefit from less crowded services and will be able to pay less by changing their travel mes. U.S. applicaon Several U.S. cies have introduced smartcard based fare collecon systems, and some have moved part way toward market pricing. For example, Washington, DC, has a multi mode fare collecon system, with zones, peak pricing, and discounted transfer onto connecng buses. However it is not integrated with commuter rail.

48 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Sector Freight Passenger Type of cost Capex Opex Descripon One means of raising cket revenues is to charge higher fares for higher standards of service on public transport (e.g., First Class or express trains). Extent of funding potenal Premium fares might generate higher revenues, but may also impose higher operang costs. The benefit will be greater if premium services aract passengers who would not otherwise use public transportation (e.g., aracng business travelers on the Amtrak NEC who would otherwise drive or fly). The net effect of offering First Class on commuter rail might be a 5% to 10% increase in revenues. No definive research exists because no operators are prepared to forego revenue in order to conduct a controlled study. Implementaon costs The implementaon costs for providing a higher standard service depend very much on the application and strategy. Case study UK Rail Many UK rail operators, including commuter rail operators, offer First Class services. Commuters benefit from a higher standard of seang and a beer chance of geng a seat, although there is no guarantee of a seat. Dubai Metro The Dubai Metro offers a “Gold Class” with one car at the end of each train reserved for passengers paying a higher fare and benefing from higher standards of seating, and (usually) less crowding. The Gold Class car has an onboard aendant who stands at the door and checks fares on boarding. A seat is not guaranteed; however, the Gold Class car is usually less crowded. Enabling requirements for success Implemenng a higher standard opon is a policy decision for the transport operator. This decision needs to be made based on the financial benefit evaluated on a case by case basis. Services that provide more space are not suitable if there is limited capacity. U.S. applicaon Most U.S. airlines and Amtrak offer a higher standard of comfort and service for a higher fare, usually in a designated First Class or Business Class. Several transit operators have higher fare express bus services, in effect a premium service but not on the same vehicle. However, we are not aware of any U.S. commuter rail or metro operator that operates a mul class service. 6.4.2 Premium Services to Increase Service Revenues

Alternative Funding and Financing Mechanisms for Rail Projects and Services 49 32 Amtrak Annual Report 2012. 6.4.3 Onboard and In-Station Retail Concessions Sector Freight Passenger Type of cost Capex Opex Descripon Transport operators can raise addional non-cket revenues from sales of other products and services both onboard trains and at staons. Examples include selling refreshments on board, selling access to Wi-Fi, and retail shopping opportunies. Extent of funding potenal Onboard concessions sales typically do not make up a large poron of overall operang revenues, although revenues depend on the services offered and the innovaon in products. In 2012, approximately 5% of Amtrak’s passenger-related revenues were from the sale of food and beverages.32 Addional costs can be associated with providing such services (e.g., if an addional person is needed to handle sales on board a train), which need to be balanced against potenal revenues. In some countries, the transit authority sells a concession for onboard services. Implementaon costs The implementaon costs for providing a higher standard service depend very much on the applicaon and strategy. Case study VIA Rail, Canada’s intercity passenger rail operator, offers a paid food and beverage service on most of its routes, with quality and price depending on the route and level of service. The company also now offers free Wi-Fi on its primary corridor service between Windsor and Québec City (passing through Toronto and Montreal), as well as the long-distance Montreal-Halifax service (in select cars). While not a source of addional revenues, the addion of complimentary onboard Wi-Fi is an added aracon for travelers, parcularly considering other opons where free Wi-Fi is not available throughout the journey (driving, bus, rail travel) and so may generate revenue indirectly. In November 2013, Swiss Railway Company SBB partnered with Starbucks Coffee to introduce a coffee and retail shop fully on board a train. The coffee shop is set up in a double-decker train car that has been made to look like a regular Starbucks shop, with a coffee-inspired color scheme, contemporary design elements and seang arrangements like that of a regular Starbucks. The shop seats a total of 50 people. The outside of the railcar is branded with Starbucks logos and graphics. In terms of in-staon retail concessions, these already exist in many staons across the United States, including in Chicago and Philadelphia, where Amtrak owns the buildings and receives rent from retail tenants. In the public transport sector, airports provide a leading model of this potenal. Airports in the United States have evolved over the last 40 years from playing an exclusive transport role to include retail services and complete property development soluons, including hotels, shopping amenies and industrial business parks. This form of revenue diversificaon has become an integral part of airport finance. Some railroad staons in Europe (e.g., St. Pancras in London) have similar schemes. Enabling requirements for success Policymakers and operators need to be willing to adopt a commercial mindset and approach to idenfying services travelers are willing to pay (or pay a premium) for. U.S. applicaon We are not aware of any legal or other restricons on opportunies for increased revenue generaon on board U.S. railroad experiences and such services already exist in some places.

50 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Sector Freight Passenger Type of cost Capex Opex Descripon Rail tracks can have mulple operaons in one of two ways: a host railroad owns the infrastructure and operates its own trains, but allows other operators limited access for a fee; or the infrastructure is owned and managed independently and all operators pay a fee. The host railroad can be either a freight operator or a passenger operator, and the tenant operators can be passenger or freight as well. The common U.S. model (“trackage rights”) has been freight on freight with fees mutually negoated, though trackage rights have also been ordered by the STB in the case of freight rail mergers. Extent of funding potenal The objecve of track access charges is to support an efficient method for mulple uses of the same tracks: this can lower cost (for complementary users such as passenger and freight) and promote compeon in freight versus freight or passenger versus passenger services. Depending on the level and structure of the charges, it can generate net income for the owner, but that is not generally the purpose. In Europe, the basic objective is only to recover at least marginal costs from users, with public funding providing funding for most fixed costs. Some EU infrastructure owners aempt to recover a poron of fixed costs from operators, but none recover full costs. Some eastern EU countries aempt to set freight access charges high enough to permit lower passenger access charges, but this raises rail freight costs and thus makes rail freight less compeve. Implementaon costs Raising track access charges in the U.S. context would require sophiscated cosng systems that might be expensive. However these costs would be offset by ensuring the costs of providing infrastructure capacity are fully taken into account by the operator. Class I freight railroads in the United States have sophiscated cosng systems and access charges are generally set to recover incremental cost and a poron of fixed costs. Case study Measured by the length of its system, Amtrak is the world’s largest tenant passenger operator on freight infrastructure. Amtrak’s access rights were fixed by law, and it is supposed to pay “avoidable cost” to the freight railroads hosng its trains. In pracce, the access charges are negoated separately for each railroad and are kept confidenal for commercial reasons: Amtrak’s access charges paid to freight railroads total over $100 million annually, an average of around $3.50/train mile. In addion, Amtrak pays addional charges if it needs extra capacity or a higher operang speed than the freight railroad would otherwise provide. Some U.S. commuter railroads operate at least parts of their system over freight tracks and pay for these access rights. VIA in Canada has a similar approach to that of Amtrak, except that the basic access rights and standards for the charges imposed in the United States (variable costs) were not specified in Canada, and there is no regulatory authority in Canada that can intervene on VIA’s behalf to ensure that VIA’s access charges or access priority are reasonable. 6.4.4 Track Access Charges

Alternative Funding and Financing Mechanisms for Rail Projects and Services 51 By comparison, EU railways have separated their opera ons (i.e., commuters, conventional intercity passengers, high speed passengers, and freight) from the infrastructure providers. In this jurisdic on, the infrastructure providers are required to be independent in their decision making from any operator, with all operators (freight and passenger) paying access charges. Access charges are supposed to cover at least marginal costs (maintenance, energy) but are permied to recover some, or all, of the fixed charges as well. EU access charges can be different: on the same line for different types of service, on different lines according to allowable speed, and by me of day. The charges can include a component that varies by traffic volume (usually gross ton km and/or train km) and some mes a fixed component charged in advance per scheduled train slot. Each EU infrastructure owner sets its own access charge regime (the approach must be approved by the na onal regulator), so the various na onal access charge regimes can be quite different. The access regime cannot discriminate either in access rights or charging structure as between operators. Enabling requirements for success The fundamental right of access for operators must be clear and non discriminatory. In the U.S. freight system, where the financial profitability of each rail shipment is based on discriminatory pricing, there is con nuing tension between the owning railroad and tenants as to the compe on achieved and the loss of the ability of the owner to recover fixed costs. The second requirement for successful track access regimes is development of a transparent charging regime that, on the one hand, reaches the right balance between the financial goals of the infrastructure owner (recovery of marginal cost at a minimum plus some targeted share of fixed costs not otherwise paid by government) and, on the other hand, sending the right price signals to users in order to encourage efficient equipment choice and train scheduling. When access prices are too low, for example, operators run too many trains, especially when there is a shortage of capacity. If charges are based solely on train miles, operators will run trains that may be too long and heavy (this is exaggerated if charges are per train passenger). If there is a large fixed charge, such as advance charges per train slot, smaller potential compe tors may be pushed out by large operators. U.S. applica on The basic non discriminatory access system under which Amtrak gains access to freight railroads by paying avoidable costs was developed in 1971 when U.S. freight railroads had a lot of spare capacity. Since then, however, traffic density on the U.S. freight network has quadrupled and the variable cost of Amtrak’s use of capacity is a legi mate issue. In addi on, only Amtrak has a legislated right to access on freight tracks; commuter railroads and new operators do not. So while Amtrak faces increasing charges, poten al new operators may not be able to gain access at all (or not at any acceptable price). The net revenue generated by a loaded freight train mile is many mes (at least 20) larger than the access charge for a passenger train mile, and passenger trains actually consume more capacity than freight trains because of the speed disparity. This dilemma is partly mirrored in the Northeast Corridor, where Amtrak charges commuter trains and freight trains for access. The commuter charges were set by law

52 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects at avoidable cost, which ignores the heavy impact of commuter trains on system capacity, especially in and out of New York City at rush hours. By comparison, Amtrak has set extremely high charges for freight, partly because some freight customers can only be served from NEC tracks and partly because heavy freight traffic imposes higher costs on higher speed passenger tracks. Because most U.S. rail trackage is freight dominant (99% of traffic is freight), the United States is likely to connue a system of owner/tenant trackage rights (mainly for freight) and access charges (mainly for passengers), although increasing congeson on the network is likely to put more pressure on access charges for Amtrak, and it is likely to further aggravate the reluctance of the freight railroads to allow access by new competors. Because all of the passenger operators are supported by public funding, improved access to freight owned tracks is likely to come only at public expense. One alternave example can be found in California (LA to San Diego and San Francisco to San Jose) where public authories have bought old freight infrastructure to ensure passenger access on reasonable terms; in these cases, the original freight owner retained access rights for a stated amount of freight service with access charges and maintenance responsibility the result of negoaon. Freight railroads can somemes be incenvized to accommodate passenger trains through an on me performance regime. Such incenve plans mean monetary rewards or penales when interacon with freight affects the on me performance of passenger services. Many of the shared commuter rail corridors in North America use some type of incenve plan, including Capital Corridor intercity train service in Northern California, Metrolink in Southern California, and METRA in Chicago. Such incenve systems can be highly complex, however, because the specific cause of and responsibility for any delay (or part thereof) is not always clear. In any case, opmizing the use of privately owned infrastructure from a public interest perspecve effecvely requires that the private infrastructure owners are appropriately financially compensated for any adverse effects on their business. Sector Freight Passenger Type of cost Capex Opex Descripon Railroad companies typically own the rights of way along their rail corridors that accommodate their trackage as well as excess land alongside tracks that can be used for such things as maintenance access, for safety reasons, or simply set aside for future expansion of exisng railroad lines. All railroads generate addional revenues by leasing or providing easements to users who wish to have access to their right of way corridor. The most well known examples are public utility companies, wireless technology companies, and pipeline and fiber opc companies. In many instances, more than one external company is using a railroad’s right of way at any given me (e.g., a parking lot, pipeline, and fiber opc cable in the same space). 6.4.5 Selling or Leasing Access to Railroad Rights of Way

Alternative Funding and Financing Mechanisms for Rail Projects and Services 53 Enabling requirements for success The owner of the right of way and the user must be able and willing to agree on a reasonable price and condions for access to the right of way. U.S. applicaon The granng, leasing, or renng of easement for rights of way in the United States is common pracce among railroad companies. http://www.shenehon.com/staff/john t schmick 2/ Extent of funding potenal The extent of funding potenal for railroads depends in large part on the value of the land adjacent to the right of way corridor and on the size and density of the populaon centers it serves. Historically (over 100 years ago), most easements were negoated between railroads and public ulity companies. Typical easements resembled leases with relavely low annual payments, with a periodic adjustment (every 5 years or so) based on mutual agreement. As land became scarcer and land values increased in the United States in the 1980s, the rent model changed and became much more formalized. In parcular, railroads realized the value of providing access to a fully connected, “pre assembled” corridor, usually directly into developed urban areas. Appraisers now recommend rents that consider the value of adjacent land to the right of way.33 Over the past 20 years, the sale of access to railroad rights of way has increased dramacally, parcularly for public ulies, fiber opcs enterprises, and land for cell towers and related facilies.34 Implementaon costs The implementaon costs of charging third party users for rights of way access are relavely low. Case study Leasing arrangements for use of rights of way along rail infrastructure are common across the world and the United States. For example, all U.S. Class I railroads have mulple agreements for fiber opc lines. Similarly, Amtrak has leasing agreements with fiber opc and telecommunications companies along its properes in the Northeast Corridor. 6.4.6 Commercial Property Development/Joint Development Sector Freight Passenger Type of cost Capex Opex Descripon Commercial property development refers to the development of land or other property with the objective of obtaining some form of commercial revenues from the development. Amtrak has a history of generang revenues through real estate development on land that it owns, primarily along the NEC and the NEC staon areas. Generally, it has limited its parcipaon in real estate ventures to providing land use rights in joint ventures where the private partner does the development and manages the facility. A good example is the Union Staon Redevelopment Corporaon. 33 Schmick, J. and Robert Strachota, “Appraising Public Utility Easements, Part I and Part II,” Railroad Right of Way magazine, January/February 2006 (Part I) and March/April 2006 (Part I). 34 Most major railroads had substantial internal telephone systems to manage their operations. Sprint Telecommunications grew in part out of the efforts of Southern Pacific Railroad to commercialize its internal telecommunications network consisting of fiber-optic lines, microwave backbone services, and digital switches and PBX’s in two major cities. The name SPRINT derives from Southern Pacific Railroad Internal Networking Telephony, a name given to the unit prior to its sale. SP bundled its telecoms assets and the rights to use its rights of way into a joint venture with GTE which eventually became Sprint Communications.

54 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects contribute funds (e.g., construcon of passenger rail facilies where real estate developers contribute to costs as transport services will increase value of their real estate developments).36 In addion to revenue and cost sharing, joint development can benefit transit agencies through increased transit ridership, increased staon area density, and adding desnaons on transit lines, both of which increase farebox revenues. Extent of funding potenal Revenues from joint development projects can be a good source of income for local authories, although they are not typically a significant proporon of overall operating budgets. Revenue yields from joint development vary widely, ranging from tens of millions of dollars to a few hundred thousand dollars annually. The extent of revenues depends on the locaon, size, and type of the development, as well as the negoaons/structuring of lease revenue agreements between public and private pares. Implementaon costs Transit authories engaging in joint development projects need significant capacity (either in house or outsourced) to conceive, plan, and negoate these relavely complex partnership agreements. Building such capacity can be costly and takes me. Once partnerships have been established and operaons have started, the costs to oversee lease arrangements should be minimal. Joint development is a form of commercial property development, which involves a partnership between a public enty and a private developer to develop certain assets.35 In some cases, the public agency may own the asset and solicit the involvement of a private sector partner in its development. In other instances, a private enterprise in possession of an asset (e.g., parcel of land) may seek to partner with a public agency or a land developer to improve the asset through addion of commercial development structures (office buildings), transportaon infrastructure, or related services (e.g., parking, shopping, equipment storage & warehousing). Various opons exist for partnering arrangements. Revenue sharing arrangements include Leases (air right, ground leases, and subterranean leases) whereby the owner leases land or space to a developer Sale of land to a developer Staon Connecon fees where the private sector pays the public agency for a connecon between the transit facility and their private property Cost sharing tools include Incenve based agreements where the public agency grants special development privileges (e.g., density bonuses) in return for a fee used to fund transport infrastructure Voluntary agreements to coordinate and fund planning, construcon, or operaons around the investment areas that will benefit both pares Equity parcipaon, where both the transit agency and private developer Major freight railroads have industrial development departments that accumulate and manage land that might be used by customers. For example, many auto factories are built on railway provided land. Many buildings have been constructed on railroad (or transit authority) owned land or above urban rail facilies. For example, many of the buildings in Chicago’s famous loop are built on air rights purchased or leased from railroad owners. 35 See also: Mineta Transportation Institute, “A Decision-Support Framework for using Value Capture to Fund Public Transit: Lessons from Project Specific Analyses,” MTI Report 11-14, May 2012. 36 For example, land developers contributed several hundred million pounds to the development of the Docklands Light Rail service and the Jubilee underground line extension in London, UK, both serving Docklands, a developing part of London.

Alternative Funding and Financing Mechanisms for Rail Projects and Services 55 Enabling requiremen success C s a c r g S w H T D r w T b a N ts for L A p s i d olumbia ($4 taon’s rest nd as a reta ity of Washi eceives no f arage and m ource: Union St ww.usrdc.com udson Berg he diagram evelopmen esidenal co ith the cons he light rail ooming dev nd down th ew Jersey D egal primary ba rohibited fr tates and co ntensity of d evelopers to 0 million), an oraon and il/entertainm ngton. USRC ederal funds anagement aon Redevelo en Light Rail at right, prep t Corporaon nstrucon u trucon of t line was “on elopment of e Hudson Co epartment o rrier to great om parcipa unes acros evelopment aract inve d private de renaissance a ent center t is a privately and generat of the develo pment Corporat Line ared by the , shows the nderway in J he Hudson B e of the drivi office and re unty coastlin f Labor (Janu er use of join ng in prope s the United around the t stment and velopers ($4 nd Amtrak’s hat has beco owned, non es revenue t per’s lease. ion website Jersey City E new office a ersey City as ergen Light R ng forces be sidenal spa e” according ary 2001). t developm rty developm States. With ransit stao ideas. 0 million). Th corporate h me an econo profit corpo hrough the o conomic nd sociated ail line. hind the ce up to the ent is when p ent, which i no control o n, these agen e USRC ove eadquarters mic generat raon that n peraon of t ublic agenci s the case in ver the type cies cannot rsaw the buildings, or for the ow he parking es are several and work with Bethesda Metro Joint Development (BMJD) One project example is the BMJD, a development located above the Bethesda Metrorail subway staon in Maryland close to Washington, DC. The BMJD sits atop the staon and contains a 17 story office tower with office space, retail space, a 390 room hotel, and a five story parking garage. The BMJD is owned and operated by the private Meridian Group, which leases land and air rights from WMATA for a minimum annual rent of $1.6 million. The partnership not only generates revenues for WMATA, but also provides WMATA with some opportunies to share construcon and operang costs around the staon. In this joint development case (though not in all cases), WMATA also shares in BMJD revenues when gross revenue exceeds $31 million. Union Staon Redevelopment Corporaon (Amtrak) By the 1970s, Union Staon in Washington, DC, had deteriorated into a poor condion, in large part because of relavely low rail traffic levels. In 1981, Congress approved $8.1 million in funding as part of the Union Staon Redevelopment Act, and in 1982 the Union Staon Redevelopment Corporaon (USRC) was created with the mission of restoring Union Staon and developing it into an intermodal transportaon center. Funding for the inial renovaon came from Amtrak ($70 million), the District of Case study The Washington Metropolitan Area Transit Authority (WMATA) has completed over 30 joint development projects since the 1970s, in part through their successful creaon of a real estate development department that acvely seeks out joint development opportunies.

56 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects projects are most commonly associated with transit staons and Transit Oriented Development (TOD), though they have been used for intercity passenger rail staons (e.g., Amtrak’s Union Staon Redevelopment in Washington, DC, and its 30th Street Staon in Pennsylvania). The primary barrier to greater use of joint development is explicit or implicit prohibion of public agencies engaging in property development acvies. U.S. applica C T d i n t b o F a p d r on J i b apacity and ransit agenc evelopers a nformaon d ot always ex he risks of jo idding proce utcomes). rom a jurisd gencies agre rivate secto isagreemen egional tran oint develop ncluding New egan in the Instuonal ies also need nd the real e eficit compa perienced w int developm ss, high regu iconal pers e on the app r developme ts may take p sit agency. ment projec York; Geor 1980s and a Challenges specific skil state develo red to devel orking in pa ent opport laons, and pective, joint roach to tak nt, which is lace betwee ts have occu gia; Californi GAO study r ls to work w pment proce opers. In the rtnership wit unies as too “social” exp developme e (and who w not always st n the local c rred in urban a; and Wash eported 166 ith and nego ss. The publi same vein, h public age high (e.g., r ectaons fro nt can requir ill have con raighŠorwar ommunity/m areas acros ington, DC. S projects in p ate with pri c sector usua private devel ncies and ma isks of comp m developm e that mulp trol) with res d. For exam unicipality a s the United uch develop lace in 2010. vate sector lly has an opers are y perceive eve ent le public pect to ple, nd the States, ments 37 Such 37 United States Government Accountability Office. “Public Transportation: Federal Role in Value Capture Strategies for Transit Is Limited, but Additional Guidance Could Help Clarify Policies.” GAO-10-781, 2010. 6.4.7 Branding, Sponsorship, and Naming Rights Sector Freight Passenger Type of cost Capex Opex Descripon Transport operators may “brand” their product, facility, or service with the name of a commercial enterprise in exchange for regular payments from the enterprise. Examples include naming a train staon aer a corporate enterprise. Extent of funding potenal The extent of funding potenal is limited, depending on the locaon and number of ancipated viewers of the branding (e.g., number of passengers who will pass through the staon plaorm). In very approximate terms, funding can range from $200,000 to $2m per year per rail staon. Implementaon costs Markeng and legal costs are associated with arranging for branding of staons, although these would be relavely small – on the order of 5% of the proceeds. However, there may be costs of several hundred thousand dollars or more to change names of exisng staons on all maps and signs through a large system. Case study Dubai has shown the potenal to sell “naming rights” to staons in the Dubai Metro. Several staons have been branded, usually with the name of an adjacent development (e.g., a large shopping mall). The Dubai Land Transport Authority (LTA) is understood to charge about $2m per year, per staon. Altogether, the LTA gets 30% or more of its revenue from naming rights and adversing. The LTA has been willing to play “hardball” to extract the branding fee. For example, the staon at BurJuman juncon was going to be given a different name, unl the owner of the adjacent shopping center, also called BurJuman, agreed to pay for sponsorship.

Alternative Funding and Financing Mechanisms for Rail Projects and Services 57 6.5 Public Revenue (Funding) Mechanisms 6.5.1 Incremental Property Tax Revenues (for Tax Increment Financing) for facilies such as sports arenas that are usually built at least partly with public funds. U.S. applicaon This funding source is not often used in the U.S. context. Transit authories have been reluctant to use branding extensively. One reason given is a concern that changing staon names will confuse passengers.38 Obviously this greatly limits the potenal for sale of naming rights, as most staons are already built and have recognized names associated with local landmarks. There seems to be considerable potenal to increase revenue from this area, parcularly for new staons. TfL sold naming and branding rights for its cycle rental (bikeshare) system to Barclays Bank and for the cross river cable car to Emirates Airlines. The “Emirates Air Line” is now shown on most official TfL maps. The Barclays Cycle Hire scheme is always referred to as such by TfL officials. Bicycles and docking staons are colored in Barclays’ blue and there is extensive and highly visible branding. Similar bikeshare schemes are being supported by major banks in New York, Washington, and Chicago, in return for adversing on bikes and bike stands. The New York MTA renamed Atlanc Avenue staon in Brooklyn as “Atlanc Avenue Barclays Center.” The MTA sold the naming rights to Forest City Ratner Companies, which is redeveloping the area, for $200,000 per year. Forest City then sold the rights on, together with the naming rights for the basketball arena, for $400 million or about $20m per year. Enabling requirements for success Legal: There do not seem to be significant legal issues associated with branding of public facilies. Instuonal: Transit operators must be commercially astute and willing to accept changes to staon names. Policy and Public Acceptance: Some stakeholders may object “in principle” to the commercial naming of facilies built and operated with public funds. However, branding and naming rights are commonly sold in the United States to raise revenue 38 A New York MTA draft policy states: “Station names should be accurate and help orient customers as they navigate the MTA network. Recognizing the importance of ensuring that customers are able to navigate the system easily, requests for the Re-naming of a Facility will only be accepted from Sponsors with a unique or iconic geographic, historic or other connec- tion to such Facility that would readily be apparent to typical MTA customers. An example would be a stop associated with a particular destination such that the vast majority of customers exiting at such station are headed to that destination. MTA will not consider Re-naming requests from third parties looking merely to brand a Facility in the absence of such a compelling nexus between the Facility and the Sponsor” (Metropolitan Transit Authority July 22, 2013). 39 This summary draws heavily on the following report: Shishir Mathur and Adam Smith, “A Decision-Support Framework for Using Value Capture to Fund Public Transit: Lessons from Project-Specific Analysis,” May 2012. Mineta Transportation Institute MTI Report 11-14. Sector Freight Passenger Type of cost Capex Opex Descripon Tax Increment Financing (TIF) is a method of value capture financing used especially for new or redeveloped infrastructure areas where the value of the property around the new infrastructure is expected to generate increased revenues for a public authority through higher property tax receipts.39 An example would be to finance development of a new passenger commuter rail staon next to a housing development.

58 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Case study TIF is widely used in the United States. Forty eight states have some form of TIF policy and it has been used since the 1950s in California. Bay Area Rapid Transit (BART) and Contra Costa Centre (CCC) Transit Village, California BART is San Francisco Bay area’s heavy rail based commuter transit system. The BART Pleasant Hill Staon is in the CCC Transit Village, which includes residenal apartments, condominiums, retail space, office space, and parking. The transit village was developed through a PPP partnership between Contra Costa County, Contra Costa Redevelopment Agency (RDA), BART, and two private property development companies. The transit village was financed through various mechanisms, including TIF and cost sharing agreements between public and private partners. The RDA used TIF funds to construct the transit village. The TIF revenues came from the “CCC Redevelopment Area,” a 125 acre area around the Pleasant Hill BART Staon. Enabling requirements for success Legal: Most U.S. states have TIF enabling legislaon. Most legislaon requires tesng of a “but for” requirement to establish a TIF district; this consists of proving that the area would not develop “but for” the creaon of the TIF district. Planning: To establish a TIF district, most states require studies to ensure the investment is needed, as well as preliminary project plans, a redevelopment plan (TIF is oen used for “blighted” areas), public hearings, and approval from elected officials. TIF is implemented by creang a geographic district administered by a TIF authority, usually a redevelopment agency. Aer the district is created, the assessed property value for properes in the area is frozen for a period of me, usually 10–25 years. As new public funds are invested (e.g., new retail, new train/bus staons), the property values increase and so do the property tax revenues. The incremental tax revenue (new property taxes less frozen property taxes) is diverted to the TIF authority rather than the agencies that would normally receive it (e.g., local municipality). Funds can be raised using a “pay as you go” method, by spending incremental tax funds only as they are collected. This can be a slow process because development is financed only once the revenue is generated. The alternave is a “pay as you use” approach, in which the TIF authority (or local authority) issues bonds to finance development, which are then repaid by TIF revenues. TIF can be used to fund various public infrastructure projects, including sewer, water, urban roads, park improvements, public facilies, and public transportaon. One of the cricisms of TIF is that direcng all incremental tax to repayment of development bonds leaves no addional funds for the oen larger demands for public services resulng from increased property values. For example, the use of TIF to create a residenal development means increased demand for schools, without addional funding. Extent of funding potenal The extent of funding potenal depends on the actual increase in property values in the TIF district. This will vary case by case. Implementaon costs There are significant upfront costs in developing the framework and administrave processes to implement a TIF district. There are also upfront costs to develop instuonal capacity to create and maintain a TIF district – including municipal bond finance experts, financial analysts, and planners.

Alternative Funding and Financing Mechanisms for Rail Projects and Services 59 Public Approval: Public buy in is crical for TIF success. Whereas some local residents may appreciate/desire the new development, others may be concerned about disrupon, change, removal of historic buildings, and so forth. Instuonal Capacity: Significant instuonal capacity at the municipal level and within a TIF authority is required to plan, create, and manage a TIF district. Instuonal capacity is also required to garner public support from the community and other public agencies at the me of district formaon. Real Estate Market Condions: The intensity and quality of redevelopment efforts, and resulng increase in property values, affect the impact that TIF can have on generang revenues. The success of TIF in the long term rests on an increase in property values, which is not always guaranteed; if property values fall, the district may face challenges repaying the TIF backed debt. U.S. applicaon All states except Arizona and California have state level TIF enabling legislaon, although further research would need to ascertain whether TIF could be used in all of these states for transportaon/transit projects. TIF has tradionally been associated with development of economically disadvantaged or “blighted” areas within urban areas, and transport projects may not always be eligible. 6.5.2 Special Assessment District (SAD) Fees 40 Shishir Mathur and Adam Smith, “A Decision-Support Framework for Using Value Capture to Fund Public Transit: Lessons from Project-Specific Analysis,” May 2012. Mineta Transportation Institute MTI Report 11-14. Mechanism Name Financing Support from Shipper Sector Freight Passenger Type of cost Capex Opex Descripon SADs (also known as “Benefit Assessment Districts”) are a tradional method of financing local improvements whereby individuals in a special “district” pay a disnct levy, tax, or fee for local infrastructure investments that will directly benefit them (and typically only them).40 This is a form of value capture where the funds raised are typically used to cover financing costs. Most SADs require some type of landowner or voter approval before fees can be levied. SADs oen work more effecvely if coupled with a design overlay district (a local zoning plan for public and private development and construcon projects in the area) that provides greater densies in return for enhanced improvements to rail staons. Properes within the SAD limit are assessed for fees based on such aributes as property value, parcel size, street frontage, likely increase in property value due to investment, and relave proximity to new investment. Infrastructure and services within a SAD can be financed using a “pay as you go” method, by spending funds only as they are collected, or “pay-as-you-use,” in which bonds (commonly called special assessment bonds) fund the project and SAD fees pay the debt. Extent of funding potenal Large sums of revenue can be generated from SADs. Their relave contribuon to cover costs varies depending on the overall capex requirements for the project. SAD revenues are highly stable because they are usually fixed at the me of the SAD formaon, with fees collected upfront or annually.

60 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 41 Sources: M. Miller and C. Hale, “Innovative Finance for New Rail Infrastructure,” for the Australian Transport Research Forum 2011. Centre for Transit-Oriented Development (2008) Capturing the Value of Transit Washington, DC. United States Government Accountability Office (2010) Report code GAO-10-781: Public Transportation—Federal role in value capture strat- egies for transit is limited, but additional guidance could help clarify policies Washington, DC. http://www.gao.gov/new.items/ d10781.pdf 42 Shishir Mathur and Adam Smith, “A Decision-Support Framework for Using Value Capture to Fund Public Transit: Lessons from Project-Specific Analysis,” May 2012. Mineta Transportation Institute MTI Report 11-14. streetcar in Seale ($25 million of $53 million); and the Fairfax County component of the Dulles Rail Transit Improvement District ($400m in properes in Tyson’s Corner).41 We are not aware of any examples of SADs being used for intercity passenger rail (Amtrak) staons in the United States. In the United Kingdom, SAD approaches are also being used for the new Crossrail Link commuter rail system. Before the central government agrees to pay any grants to a local authority, it expects to see evidence that all other possible funding sources have been exhausted. Before it agreed to partly fund the £15 billion ($25 billion) Crossrail Link project, the UK government obtained an agreement from the Mayor of London that he would introduce a special levy on businesses and commit to regular increases in fares. The mayor also commied to negoate contribuons from several property owners along the route that would benefit from the project. Enabling requirements for success Establishing a SAD typically requires enabling state level legislaon, as well as a local SAD authorizing ordinance. Instuonal capacity is required within local government agencies to understand, assess, and collect the fee, particularly when mulple SADs may be in place (e.g., mulple municipal agencies each applying a special fee — water, ulies, transport, etc.). Capacity is also required in the formaon of a SAD to build community support for the approach (e.g., securing property owner buy in, city council approval). SADs need a strong real estate market to thrive (because fees are o˜en partially linked to property values). SADs typically rely on future growth, and exisng property owners can bear a heavy burden if ancipated growth does not materialize. SADs are more likely to be created when states restrict local government taxing or borrowing powers (e.g., by placing limits on issuing bonds). Debt raised by special districts does not qualify as tradional municipal debt, so special districts can be formed to fund infrastructure and services that would normally be the local government’s responsibility. Relevance for U.S. context All 50 U.S. states make use of special districts to varying degrees, covering a full range of infrastructure sectors: water, environmental services, housing, transport, and so forth. The use of SADs to fund transport has grown more popular since the 1980s and has taken place in Los Angeles; Washington, DC; Sea‰le; Portland; Charlo‰e; and Atlanta (among other cies).42 Implementaon costs Implementaon costs are relavely low. They focus first on building community/stakeholder support for the SAD approach, to convince stakeholders that paying some extra fees for beneficial services is worthwhile. There are also upfront costs associated with esmang the specific fees each household/neighborhood should pay, which may differ because the fees should be directly proporonal to the benefit to be received. Once in place, the costs of operang a SAD are relavely low. Example/case study Capital financing of the New York Avenue staon in Washington, DC, was parally financed through funds raised from a “Transit Benefit District.” The benefit district involved collecng a benefit fee from property owners within approximately 200 meters of the new staon—which was then allocated to service and rere $25 million in general obligaon bonds. This $25 million was matched by funding from the FTA. Other examples of SADs for transportaon include the LA metro line in 1993; 17% of the first phase of the Portland Streetcar; 47% of capital costs for South Lake Union

Alternative Funding and Financing Mechanisms for Rail Projects and Services 61 6.5.3 Impact Fees Charged to Property Developers 43 Shishir Mathur and Adam Smith, “A Decision-Support Framework for Using Value Capture to Fund Public Transit: Lessons from Project-Specific Analysis,” May 2012. Mineta Transportation Institute MTI Report 11-14. Mechanism Name Impact Fees Sector Freight Passenger Type of cost Capex Opex Descripon Impact fees are a fee whereby a real estate developer pays money to the local government for (and prior to) the development of infrastructure and services that will serve their new development. The fees can be used to fund a spectrum of public infrastructure needs: water, sewerage, libraries, schools, transport, etc. This is another form of capturing some of the value in increased property costs to fund the services that help generate the addional value. Impact fees have been used across the world where increased urbanizaon has led to the need for new property development, which in turn creates higher demands for transportaon (and other) public infrastructure—roads, highways, transit, etc. Fees are typically a one off fee, levied during the perming process for a new project development. This is in contrast to other types of value capture—special assessment districts (SADs) and tax increment financing (TIF)—which can levy fees/taxes over the course of many years. Fees can be used for capital expenditures (including track and/or rolling stock in the case of rail) and/or ongoing operang and maintenance costs, depending on the jurisdicon. Extent of funding potenal Impact fees are likely to lead to highest revenues and be most successful in jurisdicons with consistently strong real estate markets and ample greenfield or in fill development opportunies. In mes of economic downturn when new property development is slow (e.g., since the recession started in the United States in 2008), the revenues can be significantly lower. Implementaon costs There are upfront costs to establish consistent approaches and valuaon methods for assessing impact fees; the level of costs will vary depending on the number and types of development projects to which fees can be applied. Once such methods are in place, implemenng them is relavely straighorward. Example/case study Transit Impact Development Fee, San Francisco Established in 1981, a transit impact development fee (TDIF) is levied by the city and county of San Francisco to help cover the costs of the city’s public transportaon system. The fee is assessed on all new non residenal land uses within San Francisco with area of more than 3,000 square feet and is computed and charged to the developer prior to the issuance of the building or site permit. Fees are adjusted annually based on inflaon; in 2010, the fee ranged from $8 $10 per gross square foot of space. The fees contribute a small percentage of the overall San Francisco Municipal Transportaon Agencies (SFMTA) revenues (1.5% in 2007).43 The city uses the fees to cover a poron of capital and operang spending costs of the SFMTA, which manage the funds. Permied uses include capital costs associated with establishing, expanding, or increasing service on transit routes (including rolling stock, bus shelters, staons, and tracks) and operang and maintaining rolling stock associated with new or expanded transit services.

62 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 6.5.4 Station Parking Charges 44 Shishir Mathur and Adam Smith, “A Decision-Support Framework for Using Value Capture to Fund Public Transit: Lessons from Project-Specific Analysis,” May 2012. Mineta Transportation Institute MTI Report 11-14. 45 Abdelfatah, A. and Asma Aljassmi, “Estimating Transportation Impacts Fees.” Association for European Transport, 2010. Enabling requirements for success State level legislaon is not a prerequisite for charging impact fees, and only half of the 50 U.S. states using impact fees have passed such legislaon. However, the extent to which impact fees can be used specifically for transit/transportaon varies. Some states prohibit the use of impact fees for transportaon/transit, while others have adopted legislaon explicitly allowing them.44 Significant instuonal capacity is required to design, implement, and charge impact fees. In parcular, standardized and clear procedures for assessing fees on real estate developers are essenal to avoid different fees for different developers and/or manipulaon of fees by developers.45 Instuonal capacity is also needed to face pressures from developers who may resist the fees. The enty responsible for charging impact fees (municipal government or county) is oen separate from the enty providing the transit (public transit authority); this organizaonal separaon can complicate the appropriaon of fees for transit. Like other types of value capture, impact fees are suitable for rapidly growing jurisdicons with a high demand for property and increasing real estate values. Without such demand, developers need incenves (not disincenves such as addional fees) to develop property. Relevance for U.S. context Impact fees exist in all 50 U.S. states. The extent to which they can be used for transportaon/transit projects varies across states. Sector Freight Passenger Type of cost Capex Opex Descripon Staon parking charges can be set at different levels to reflect market demand and to encourage off peak transit use. Parking rates can be varied not just by duraon of use, but by other factors to encourage public transit use and generate addional revenue. For example: Higher charges can be levied for spaces closer to the staon or under cover Lower charges or even free parking can be offered for mid day use, of say less than 4 hours. This encourages off peak use, when trains are empty. It also can reduce enforcement costs, as cars only need to be checked in the peaks Free parking on weekends and holidays Higher rates for use by non transit riders Mul day rates, which can be useful for people who may need to travel during the week or are using rail for access to an airport. Some operators offer reduced rates for monthly users. Although there are lower collecon and enforcement costs for these customers, a monthly discount can be counter producve because it means, in effect, that occasional users, who more oen travel off peak when there is capacity, pay more and are therefore discouraged from using transit.

Alternative Funding and Financing Mechanisms for Rail Projects and Services 63 UK commuter rail staon parking is usually managed by the franchised train operator. Parking rates are not regulated and are set to maximize overall revenues (and somemes to reduce peak rail demand). Washington Metro Metro charges $4.50 to $5 per day, with monthly charges of $45 to $65. There is no part day or off peak rate; however, some staons also have meter parking at $1 per hour. Capacity is limited and some staons have waing lists for monthly parking. Multi day rates are offered at a few staons. Parking can be paid using the SmarTrip card and by cash and credit card. At some locaons, use of staon parking by non transit users is discouraged by requiring payment using the SmarTrip card and charging a much higher rate ($8) if the card has not been used immediately previously for a transit trip. Enabling requirements for success Parking charges are a policy decision by the transport operator and/or owner of the parking facilies. Financial benefit needs to be evaluated on a case by case basis. Charges also need to be targeted so they are not just seen as another “fare increase.” U.S. applicaon Many U.S. metro and commuter rail operators offer free parking at staons, which is in effect a discount to passengers who drive rather than use feeder buses. With smartcard and smartphone technology, charging for parking can be integrated with the rail fare, allowing further market segmentaon. Parking charges can potenally increase revenues on commuter rail lines by 5% to 20% or more. Some operaons offer reduced rates for car pools. Car parking charges can actually be designed to increase demand for public transit use, where parking is constrained, because some “early birds” who take scarce spaces may be encouraged by high charges to switch to bus or car pool for staon access, leaving spaces open for addional users. Extent of funding potenal Varies, but might generate 5% to 10% in addional revenue. Implementaon costs Depends on the applicaon and strategy. Smartcard and smartphone based fare collecons systems now can be acquired with a service provider structure, so no capital expenditure may be required. Case study Toronto Transit Commission In Toronto, car parking charges at transit staons vary depending on local demand. All day rates are $3 to $5. At some staons, there are higher charges for parking at lots closer to the staon, with lower charges for users arriving aˆer 9 am. TfL In London, parking at Underground (subway) staons (where it exists) is managed by a contract operator with pay by phone technology. This allows mul day parking. UK Commuter Rail

64 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 46 Evans 2007, Central London Congestion Charging Scheme: ex-post evaluation of the quantified impacts of the original scheme. 47 Transport for London, 2012, Congestion Charge: Changes Consultation Impact Assessment. 48 http://www.lta.gov.sg/content/ltaweb/en/roads-and-motoring/managing-traffic-and-congestion/electronic-road-pricing-erp. html and http://ltaacademy.lta.gov.sg/doc/ERP 6.5.5 Road Tolling/Congestion Charging Sector Freight Passenger Type of cost Capex Opex Descripon Road tolls are used in the United States and worldwide to collect revenues from drivers passing specific checkpoints on a given highway, road, or interchange. The revenues are then typically allocated to cover the financing of the infrastructure and/or for use toward future highway (or other) transportaon improvements. Congeson charging is a form of tolling, whereby charges are applied on roads/highways leading into a parcularly busy urban area. In comparison with general road tolls, such schemes are typically designed to both reduce congeson (by encouraging passengers to use other modes) and raise revenues. Extent of funding potenal Revenues from highway tolling account for only 5% of highway funding receipts in the US. Highway tolling is common pracce elsewhere in the world, including in Europe. The costs of tolling may decline with new technology and approaches (e.g., High Occupancy Toll [HOT] lanes), making this a more feasible way to raise funds for transport (typically only used for highway investment) and to also discourage car use. The main purpose of congeson charging is rarely revenue generaon; the focus is primarily on reducing congestion. However, revenue from congeson charging is oen used for public transit purposes. Implementaon costs Tolling: Highway tolling is a relavely costly approach to revenue generaon and is only used on controlled access highways, major bridges, and tunnels, and a few city centers in the United States. In some cases, manual toll booths must be passed and payments made by individuals to a machine or aendant. Some states have electronic tagging technology that automacally bills license plate holders based on the point passed/route used. New toll road projects can be built with virtually any mix of public and private financial sponsorship, with actual and/or ‘shadow’ tolls (paid by government, not user) paid to the private sector to contribute to covering the cost of debt financing. In Europe, several countries (e.g., France and Italy) charge high tolls on privately financed highways (e.g., for Paris Lyon, 250 miles, the toll for an auto is $50 and for a truck $150). Tolls are even higher in Japan. Congeson charging schemes are also costly to implement. The technology to monitor and enforce the charging zone must be put in place and significant markeng and communicaons material must be developed and disseminated to the general public well in advance of the scheme. The capital cost of London’s Congeson Charging system (described below) was about $200m.46 Operang cost is about $140m per year (about 40% of revenue of $360m).47 The capital cost of the Singapore system was $120m in 1998. Operang cost is about $10m per year (about 20% of revenue).48 Case study Vehicle Miles Traveled Given the declining purchasing power of fuel taxes and inflaon in the costs to maintain highways, alternaves are being considered in the United States. For example, in July 2013, the Oregon legislature passed a bill to replace the state's gas tax program with a "pay per mile road usage charge" oen known as a vehicle miles traveled (VMT) tax. Drivers who make the switch will pay 1.5 cents for every mile they drive instead of 30 cents per gallon at the pump. This is the first state to make such a move, and the extent of the current law is greatly limited — parcipaon will be

Alternative Funding and Financing Mechanisms for Rail Projects and Services 65 49 http://www.theatlanticcities.com/commute/2013/07/era-pay-mile-driving-has-begun/6150/ 50 Clifford Winston. “On the Performance of the US Transportation System: Caution Ahead. Clifford Winston.” Journal of Economic Literature, 2013, 51 (3), 773–824. 51 E. Reagan and Steve Brown, “Building the Case for Tolling the Interstates,” Tollways¸ Spring 2011. 52 US Department of Transportation, Federal Highway Administration, Tolling and Pricing Program. http://www.ops.fhwa. dot.gov/tolling_pricing/interstate_constr.htm (accessed January 8, 2014). 53 Bipartisan Policy Center, “Performance Driven: a New Vision for US Transportation Policy.” National Transportation Policy Project, June 9, 2009. http://bipartisanpolicy.org/sites/default/files/NTPP%20Report_0.pdf (accessed February 1, 2014). voluntary and capped at 5,000 drivers — but it sll presents an interesng model for addressing the shorall in funds for highway maintenance.49 Congeson Charge Example: London, UK In an aempt to cut traffic levels and ease congeson on the severely clogged central London roads, the London Congeson Charge scheme was introduced in 2003. TfL defined a charging zone of 8 square miles in the heart of the city defined by the inner ring road. Motorists driving into the charging zone have to pay a daily standard flat fee of $20, either in advance or on the day of travel. License plate trace technology is used. If payment has been made in advance, or if the vehicle is exempt from charges, the image is automacally deleted from the database; otherwise a penalty of $200 is applied. Charges apply between 7 am and 6 pm from Monday to Friday, excluding public holidays. In 2007, the number of chargeable vehicles entering the zone had decreased by 30% since introducing the scheme, while the level of traffic from all vehicle types was 16% lower than pre charge levels (there were many exempons, including taxis). By law, all surpluses must be used for London’s transport. Approximately 80% of net revenue was used for improvements to the bus network, 11% on road and bridge maintenance and the rest on road safety, markeng, and pedestrian and cycling programs. Other examples of congeson charging in Europe are Stockholm, Milan, and a number of small cies. Enabling requirements for success Significant polical will is required to implement both tolling and congeson charging schemes. The key requirement is strong local polical leadership. In New York, former Mayor Michael Bloomberg developed a plan to charge motorists and trucks to enter Midtown and Lower Manhaan during the busiest weekday travel hours. Bloomberg’s proposal passed several polical hurdles, gaining approval from the governor, city council and one house of the state legislature, before it failed to be approved by the other house.50 U.S. applicaon Toll roads are common in the United States at the state level, although sll very strongly opposed polically (parcularly by trucking interests). Construcon of new tolls on the exisng interstate highways is generally not permied on the federal interstate highway system,51 although the FHWA now has pilot programs in place that permit tolling on interstate highways, including the “Interstate System Construcon Toll Pilot Program.”52 Given the declining ability of the Highway Trust Fund to finance highway infrastructure, and the relavely poor condion (growing reinvestment needs) of much of the U.S. interstate highway system, using revenues from toll roads for rail projects seems unlikely in the near to medium term. Praccally, revenue is more likely to be used on local services such as buses and metro than on suburban rail. This has been the experience elsewhere even where there is one authority covering a wide area that includes suburban rail services. Opposion to congeson pricing is somemes made on the basis of equity – people fear that poor people will simply be priced off roads and transit systems, leaving free flowing systems for the wealthy. However, such concerns ignore research indicang that higher income travelers tend to spend a larger share of their travel me in traffic congeson than do lower income travelers. As such, shi¨ing to a transportaon system that charges users more on congested routes and less elsewhere would improve equity compared to the current system, because higher income drivers would be paying a greater share of the costs of transportaon.53

66 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 6.5.6 Heavy Goods Vehicle (Truck) Charges 54 VIFG, 2012, PPPs for Transport in Germany: Present and Future Dealing with PPPs for Transport in Times of Economic Uncertainty. 55 C. Nash et al., 2004, Charges for heavy goods vehicles: EU policy and key national developments. 56 VIFG, 2012. Sector Freight Passenger Type of cost Capex Opex Descripon Heavy Goods Vehicle (HGV) charges are supplementary charges (in addion to vehicle registraon or excise dues, fuel taxes, and tolls) for HGVs to use highways. The funds are then placed in the general fund and/or used as part of a dedicated transport fund. Tradionally charges have been levied for a me period (from a day to a year). In several European countries, including Germany, France, and Switzerland, these flat rate charges have been replaced by distance based charges. To determine the charge, the distance traveled in the country is usually multiplied by the maximum authorized weight according to vehicle license (this avoids the problem of collecng data on actual loads). The ton kilometers calculated are then mulplied by the charge rate. The purpose of the fee is to charge actual road users for the cost of highway maintenance and emissions and provide funds for investment in alternave, more environmentally friendly modes (usually rail), thereby keeping the funds in the transport sector. Together these lead to a modal switch of traffic from road to rail. Extent of funding potenal The funding potenal depends on level of charges and amount of traffic to which it applies. It can be considerable. In Switzerland (populaon 8 million) in 2012 distance based HGV charges provided nearly $1 billion for financing major rail projects across the Alps (a further $800 million was provided from other sources – mainly from Value Added Tax). In Germany (populaon 82 million), where HGVs over 12 tons are subject to a distance based charge for the use of motorways and four lane roads, revenues were $6 billion in 2010.54 Of this, $1.4 billion was invested in rail, and the rest mainly in highways. Extrapolang this to the larger United States economy and its higher transport intensity, these examples suggest the United States could raise tens of billions of dollars for rail investment from this source. Implementaon and operang costs In Switzerland in 2002 (the year aer implementaon) the implementaon costs for the charging system were roughly 8% of gross revenue.55 In Germany the operang costs were 30% of revenue in 2010.56 Case studies Some countries in Europe charge fees on HGVs, with revenues transferred to a central transportaon fund. Switzerland introduced distance based charges, known as a Heavy Vehicle Fee (HVF), in 2001 following a popular vote. It applies to all vehicles for the transport of goods with a total permissible laden weight over 3.5 tons. Switzerland has higher HGV charge rates than other countries partly because of the very sensive environment in the Alps and public concern about transit traffic impact on the roads and environment. Average charges were 3.5 U.S. cents per ton km in 2012. A further aracon of HGV charging in Switzerland (and Germany) is that a high proporon of trucks are from outside Switzerland and so they pay no local excise or registraon tax. This HGV charge ensures that out of country users of the Swiss transport infrastructure contribute in part to its maintenance.

Alternative Funding and Financing Mechanisms for Rail Projects and Services 67 57 National Surface Transportation Infrastructure Financing Commission, US Senate, Washington DC, 2009, Paving the Way. 6.5.7 Gas Tax Partly with the proceeds of distance based charges, Switzerland adopted an innovave approach to funding investment in rail lines through the environmentally sensive mountainous Alps that separate Italy from Northern Europe. Investment in rail has been financed by a special fund (FinöV), which is mainly financed by a HVF. This combinaon of the carrot of new railway infrastructure and the sck of higher road charges has had a significant impact on modal split for freight through the Alps. FinöV also receives funding from value added tax (VAT – up to 0.1% of VAT receipts) and fuel tax (up to 25% of fuel tax receipts are assigned for the transalpine base rail tunnels). Finöv is the most important means of funding the New Rail Links through the Alps (known as NEAT), providing funding even aer construcon. Originally up to 25% of FinöV‘s funds could come from loans from the government (to be repaid by the railway receiving the funds) but, due to its impact on railway finances (the freight part of SBB is heavily loss making), this was abandoned and all financing is now provided in the form of grants. In Germany, HGVs must pay tolls for all long distance trips. The toll is paid on the internet and enforced by random inspecon. The toll rate varies from about $0.30 to $0.60 per mile, depending on vehicle size and type. Lower rates are charged to low emission vehicles. Between 2005 and 2010 a mul modal transport infrastructure fund (VIFG) received funding from tolls on HGVs with more than 12 ton loaded weight and from users of inland waterways. Its funds were only used for investment in transport infrastructure. Unl 2010 this included all modes but since then the funds have only been used for roads. Enabling requirements for success To increase acceptability, it is important to gain polical and popular support and it can help provide a compensang advantage to truckers. The high charges in Switzerland were made acceptable to the trucking industry by a simultaneous increase in vehicle weights from 28 to 40 tons (the limit in most other European countries), which offset the increase in cost. U.S. applicaon Oregon has been charging heavy trucks a weight mile tax since 1947 and does so in lieu of fuel taxes for this vehicle class only. Kentucky, New Mexico, and New York also use variaons of the weight mile tax in combinaon with fuel tax for their highway use taxaon.57 Before HGV charges can be used widely in the United States, the key challenge is how to gain polical and popular support as in Switzerland. It may be easiest to gain acceptance in areas with sensive environments, such as across mountains. Sector Freight Passenger Type of cost Capex Opex Descripon Gas taxes have been used to fund road costs for over a century as a form of road use charge. They are simple to administer and generally simple to enforce. They are also perceived as equitable, because payment is proporonal to fuel consumpon, which in turn is broadly proporonal to road usage. They are also a good surrogate for carbon emissions. In reality, a gas tax has flaws. Heavy vehicles cause disproportionate damage to the road and the environment, more than reflected in gas taxes which are proporonal to gas usage. Peak hour commuters pay more than the costs of the damage they do

68 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 58 European transport policy, progress and prospects, Institute for Transport Studies, University of Leeds. 2009. http://www.cer.be/ publications/studies/studies-details/european-transport-policy-progress-and-prospects/ 59 FHWA “Status of the Highway Trust Fund,” http://www.fhwa.dot.gov/highwaytrustfund/ (accessed July 31, 2013). 60 FHWA “Status of the Highway Trust Fund,” http://www.fhwa.dot.gov/highwaytrustfund/ (accessed July 31, 2013). per gallon on gasoline, 24.4 cents per gallon on diesel fuel, and excise taxes on re, truck, and trailer sales, as well as heavy vehicle use. The HTF can be used for two accounts: the “Highway Account” which funds road construcon (opening balance of $9.7 billion in October 2012) and the smaller “Mass Transit Account” for mass transit projects (opening balance of $5.2 billion in October 2012). In recent years, the revenues of the fund have been inadequate to meet needs and the HTF has been propped up by transfers from the Federal General Fund.59 Most states impose fuel taxes on about the same level as the federal taxes. Enabling requirements for success More than anything, a polical will to increase gas taxes is required. State legislaon would also likely need to be in place to facilitate increased taxes. Charges need to be targeted so they are not seen as just another “tax increase.” U.S. applicaon The U.S. HTF is funded through a federal fuel tax of 18.3 cents per gallon on gasoline, 24.4 cents per gallon on diesel fuel, and excise taxes on re, truck, and trailer sales, as well as heavy vehicle use. The HTF raises about $30 billion annually but the shift to more fuel efficient vehicles and a slowing in the number of vehicle miles driven has reduced trust fund revenues in recent years. The fund is now being supplemented by transfers from general tax revenues.60 Discussions are ongoing about a long term fix of the HTF at the federal level in the United States. As the gas tax is eroded by use of hybrid and plug in electric vehicles, many states may follow Oregon’s lead toward use of VMT charging approaches. to roads, but do not usually pay enough to reflect the costs they impose on others due to congeson. With improvements to fuel economy and the emergence of hybrid and plug in electric vehicles, gas tax revenues are now falling and it may become unsustainable as a revenue source (as is the case for the Highway Trust Fund in the United States). The transportaon community agrees that alternaves to a gas tax need to be considered, including mileage based user fees of some sort. One important difference between Europe and U.S. transport funding is that fuel taxes and other road user charges (e.g., vehicle registraon and road tolls) are generally much higher in Europe. In some countries, fuel taxes and other road charges are several mes higher than the funds actually spent building and maintaining the road system. Although these charges do not generally cover all the external costs of road use,58 they encourage moretrafficto usepassengerrai lby discouraging people from driving cars. For example, Germany uses fuel taxes to support regional and suburban passenger transport. Extent of funding potenal The total funding potential from gas taxes is very large (though eroding, given points menoned above). For example, each 1 cent/gallon of transportaon fuels tax in the United States yields about $1.7 billion/year and, in the United Kingdom, gas taxes raise £26 billion or $40 billion a year, 1.7% of GDP. Allocang funds from gasoline tax for non highway investment purposes can be polically challenging, although possible (e.g., part of the Highway Trust Fund revenues from gas tax in the United States goes to the Mass Transit Account). Implementaon costs Implementaon costs for simply increasing the current gas tax in the United States would be minimal. Shi¤ing to a mileage based system would, however, be relavely costly to implement. However, smartcard and smartphone based road charging systems now can be acquired with a service provider structure, so no capital expenditure is required. Case study The U.S. Highway Trust Fund (HTF) is funded through a federal fuel tax of 18.3 cents

Alternative Funding and Financing Mechanisms for Rail Projects and Services 69 6.5.8 Car Registration Plate Auction Sector Freight Passenger Type of cost Capex Opex Descripon The number of new vehicle registraons issued each period (month or year) would be strictly limited, below the actual demand, with the available registraons sold by aucon. Although there would be no limit on the purchase of automobiles, without a registraon they could not be used on public roads. Extent of funding potenal The fundraising potenal from this tax is very large. Implementaon costs Implementaon costs would be minimal because most states already levy a registraon charge. Case study Singapore and several cies in China limit the number of new motor vehicle registraons each year as a form of traffic restraint. Arrangements vary by city, but usually only locally registered cars are allowed to be driven in peak hours, within a designated area. Few new car registraons are sold each year, by aucon. Exisng registraons may be transferred to a new vehicle. Enabling requirements for success State legislaon would be required. U.S. applicaon Enforcement could be difficult, other than in geographically isolated Hawaii and Alaska, if the charge is set at a high level. Addional regulaon might be necessary to prevent people from avoiding it by registering their vehicles in neighboring states. 6.5.9 Motor Vehicle Registration Fees 61 See http://webarchive.nationalarchives.gov.uk/20130129110402/http://cdn.hm-treasury.gov.uk/budget2012_annexd.pdf Sector Freight Passenger Type of cost Capex Opex Descripon Most states set motor vehicle registraon fees at a level that covers the cost of administraon, typically $25 or $50 per year. However, much higher charges can be levied to raise funds for transport investment and to encourage more sustainable forms of transport. Extent of funding potenal The fundraising potenal from this tax is very large. For example, the UK government collects about £6 billion ($10 billion) each year from motor vehicle registraon fees or about £100 per resident on average.61 Implementaon costs Added implementaon costs would be minimal because most states already levy a charge. Case study UK Motor Vehicle Registraons In the United Kingdom, motor vehicle registraon fees are set to discourage car ownership and encourage use of lower emission vehicles (and use of public transport).

70 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects avoiding them by registering vehicles in neighboring states. This might also be achieved with legislaon and perhaps also multi state compacts. The inial registraon and annual renewal fees vary by age and emissions, in 13 “bands.” Registraon is actually free for very low emission vehicles. Fees for a medium sized car are $400 to $600 for a new car, and then typically $200 to $400 per year. The fee for a new SUV can be about $1,600 in the first year, then about $700 per year.62 For heavy vehicles, the annual fees are up to $3,000. Hawaii Motor Vehicle Registraons Although most states charge a flat registraon fee, a minority charge by vehicle weight, age, weight and age, or value may be levied. In Hawaii, cars are charged by weight. The annual registraon fee for a large car can be $500.63 state with 5 million motor vehicles, an average charge of $200 could raise $1 billion per year in addional revenues. Enabling requirements for success Legal: State legislaon would probably be required. Jurisdictional/Instuonal Coordinaon: Enforcement could be difficult. U.S. applicaon Other than in the geographically isolated states of Hawaii and Alaska, if the fees are set at a high level, addional regulaonmight be necessary to prevent people from In a medium-sized 62 See http://en.wikipedia.org/wiki/Vehicle_Excise_Duty for full details. 63 See http://www.civilbeat.com/articles/2010/11/08/5028-hawaii-vehicle-registration-fees-favor-the-rich/. Like most taxes other than income tax, it is sometimes criticized as “regressive” because it takes a higher proportion of income from poorer people even though the actual amount they pay will be less because they usually own fewer and older cars. In the United Kingdom, there is anecdotal evidence that the resale price of cars is reduced to reflect the tax. 6.5.10 Vehicle Mileage-Based User Fee Sector Freight Passenger Type of cost Capex Opex Descripon A simple mileage based highway user fee is an alternave to a fuel tax. In this plan, highway use fees would be added to annual tax return statements with filers reporng last year’s odometer reading (from last year’s tax report) and this year’s odometer reading, subtracng so as to provide a mileage driven quanty to which a fee can be applied. In the simplest applicaon, a constant fee (say $.01 per mile) can be applied to the miles driven and reported on a taxpayer’s 1040 form and collected with annual income tax filings. The mileage fee would directly fund the HTF or a new “transportaon trust fund,” not go to general revenues. A fee so collected can be transparent and can provide an annual funding source for transport projects. Fees so collected could, under new legislaon, be allocated to the states based on mileage reported for taxpayers in each state or on any other basis defined by law. This simple tax could be modified in straighorward ways to collect more from heavier vehicles (using a table idenfying already designated vehicle classes based on weight— would result in use charges more closely related to highway damage. Jurisdicons that elect to have more technologically sophiscated road use reporng systems could provide that informaon in lieu of cizens reporng on their tax returns. Commercial enes can be subject to a mileage charge treatment using a similar simple format for compung addional or supplemental usage fees. This tax could replace gasoline taxes or be used to supplement exisng fuel tax systems. e.g., Class I and Class II). Different mileage rates for each class of vehicle

Alternative Funding and Financing Mechanisms for Rail Projects and Services 71 The Oregon VMT Pricing Pilot Project conducted in 2006 tested the viability of replacing motor fuel taxes with a mileage charge. In this pilot, 5,000 vehicles are parcipang in a GPS based vehicle mileage tax scheme at a price of $0.015/mile; volunteers for the experimental system are refunded some state fuel tax charges. The U.S. Senate Commission report concluded that the pilot project demonstrated that the concept of moving to a comprehensive pricing scheme is viable but that various technical, administrave, and public concern hurdles will need to be overcome. The report further concluded that the mileage based user charge is the most viable and sustainable long term “user pay” opon for the federal government to raise adequate and appropriate revenues to provide the federal share of funding for the system. A VMT fee system was the only opon the commission evaluated that would both raise revenues and reduce the amount of necessary addional capacity on the highway system. The simplified vehicle mileage based tax proposed here could be implemented while allowing states and local authories wishing to implement more complex congeson based charging schemes in urban areas to do so. Or, like Oregon, a more technologically advanced system could be accommodated within the simple vehicle mileage based federal system. Over me, if cizens in some states voted in favor of more technologically based mileage tracking schemes, the data collected could be forwarded to taxpayers or to the IRS in a 1099 like filing to inform income tax filers without referencing their odometer readings. States with periodic vehicle inspecons could also issue advisory 1099 type statements reporng vehicle mileage to simplify taxpayer reporng. Enabling requirements for success A new federal law implemenng a simple vehicle mileage based tax would be required. Polical opposion to a vehicle mileage based tax scheme would be likely. It would be seen as a tax increase. However, this is a problem that must be faced by any revenue raising scheme if the HTF is to be adequately funded. The simplified vehicle mileage tax is straightforward and provides a transparent method to raise funds for federally supported highway programs. A tax increase will be needed in any event; the SVMT is simple, immune to reducons in fuel consumpon, and respects privacy concerns held by many cizens. U.S. applicaon U.S. cizens file tax returns each year in a system based on honest self reporng and is generally considered to be effecve and efficient. As tax laws have become more complex, more taxpayer diligence has been required. The simplified vehicle mileage based tax system proposed here requires relavely simple taxpayer effort. Extent of funding potenal The total funding potenal from a vehicle mileage tax is very large. For example, a 1 cent per mile tax would yield about $30 billion/year, with a typical driver paying about $120 per year per vehicle. Allocang funds from fuel and mileage based taxes for non highway investment purposes could be polically challenging but should be possible, especially where the investments can be shown to reduce congeson. Implementaon costs Implementaon costs for a simple vehicle mileage tax would be minimal but not inconsequenal. Shi˜ing to a simple mileage based system would require audit capabilies but there are many sources of such audit informaon. Most states have periodic vehicle inspecon systems for vehicle emissions and safety which require odometer readings. These data could be cross checked against the simple tax return odometer readings to ensure rough mileage reporng. Odometer readings are also captured on sales and licensing renewals, providing another source to cross check annual reported odometer readings. The simple method that depends on annual reporng of total mileage driven eliminates privacy fears associated with more intrusive data capture systems. It also eliminates the need to equip vehicles with GPS or other tracking systems and technologically related miles traveled collecon systems. Case study Some states are already experimenng with vehicle mileage based taxes.

72 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 6.5.11 Payroll Taxes Used for Transport Sector Freight Passenger Type of cost Capex Opex A number of areas worldwide require employers to pay a payroll tax for employees working in specific urban areas. The revenues from the tax are typically allocated (in whole or in part) for use toward transpor investment, and transit specifically, in those urban areas. Extent of funding The funding depends on the extent of the program, including geographic size of the zone, tax rate, and minimum threshold above which taxes must be paid (small businesses are typically exempt from such schemes). Implem costs costs are associated with establishing the payroll tax n systems (e.g., new forms, public awareness, and online filing ability), but once these are in place the n costs are low. Case study The State of Oregon has a “Transit Payroll Tax” in place. The tax rate is approximately 0.7% and applies to gross salary. The Oregon Department of Revenue administers tax programs for the Tri County Metropolitan District (TriMet) and the Lane County Mass Transit District (LTD). Nearly every employer who pays wages for services performed in these districts must pay the transit payroll tax. Wages include all salaries, commissions, bonuses, fees, payments to a deferred comp plan, and other items of value. The tax must also be paid by the self employed. Transit tax is reported and paid quarterly.64 The state of New York also has a payroll tax in place for the New York City area, with proceeds going to the MTA. The metropolitan commuter transporta on mobility tax (MCTMT) is a tax imposed on certain employers and self employed individuals engaging in business within the metropolitan commuter transpor district (MCTD). This includes the of New York Bronx, Kings (Brooklyn), Queens, Richmond (Staten Island), Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester. The tax rate applied ranges from 0.11% to 0.34%, with employers with larger payrolls paying more (employers with a total payroll of less than $312,500 per quarter are exempt from paying the tax in that quarter). Taxes are due quarterly.65 In France, a key tool for public transport financing is the “Versement de Transport” (VT), a tax levied on gross payroll for companies employing more than nine workers. Established in 1971, the tax originally applied exclusively in Paris, but the applicability of the scheme has been extended to smaller and can now be used by any town with more than 10,000 inhabitants (as of 1999). The use of the VT has now been introduced in more than 85% of urban areas. The tax rate varies by size of the ; in Paris it ranges between 1.4% and 2.6%. The funds were originally intended to raise capital for investment in infrastructure, but are increasingly used to cover g costs. The VT revenues are a l source of financing; for example, in 2011, the VT receipts accounted for 37.4% of revenues for public transport in the Paris metropolitan area, while sales accounted for 30.3%. Enabling requirements for success must be established to enable tax Significant l will is also required at the state and local level to make this tax acceptable to voters. U.S. Some U.S. states have a transit payroll tax established through state le . No such taxes exist at the federal level. 64 Government of Oregon, Department of Revenue. http://www.oregon.gov/dor/BUS/Pages/IC-211-503.aspx (accessed January 14, 2014). 65 New York State Department of Taxation and Finance, “Guide to the Metropolitan Commuter Transportation Mobility Tax.” http://www.tax.ny.gov/pdf/publications/mctmt/pub420.pdf (accessed January 14, 2014).

Alternative Funding and Financing Mechanisms for Rail Projects and Services 73 6.5.12 Sales Tax 66 “Virginia’s Road to the Future” (HB 2313). 67 Retail Sales and Use Tax in the state ranges from 5.3%–6% for most purchases. Virginia Department of Taxation http://www.tax. virginia.gov/site.cfm?alias=changesandupdates#RetailSalesUse Sector Freight Passenger Type of cost Capex Opex Descripon Sales taxes in various forms have been used for many years to support highway construcon. Various states and localies have used sales taxes (expressed as a percent of the sales price) on fuel and other road transport items (e.g., on res, baeries, and other equipment) to fund transport infrastructure. Some communies and states have voted to add a fracon of a percentage to the local and state approved sales tax burden to support local transport services. For example, in 2008, Los Angeles County voters approved a ballot measure to raise sales taxes by 0.5% for 30 years with the proceeds dedicated to transit and freeway improvements. Extent of funding potenal Depends on local tax base and the size of the sales tax increase. Can be billions per year. Implementaon costs Implementaon costs are not high unless polical costs are considered. In congested areas, ballot measures generally win approval. Many tax increases are term limited (e.g., they are for 5 years or 30 years). Most extensions of transit/transportaon based sales taxes also win when there is experience in improving road transport, expanded bus services, or other results. Case study California A 0.25% sales tax increase dedicated to transport was enacted by the State of California in 1971 (Transportaon Development Act), and this is generally allocated to the jurisdicons where the taxes are raised. Los Angeles County voters approved a 0.5% sales tax dedicated to transport through Proposion A in 1980; they approved an addional 0.5% sales tax increment for transport through Proposion C in 1990. Proposion R, another 0.5% dedicated sales tax increment was approved in 2008 but was limited to a 30 year term. These measures, totaling about 1.75% sales tax, provided about $2.2 billion in funding for Los Angeles County transportaon services; the funds include subsidy support for transit and highway operaons as well as contribuons to transport infrastructure investment projects. The original proposal for HSR in California (2000 Business Plan) was based on a 0.25% sales tax that would have fully funded the system. In 2013, the voters did not approve an extension of the 2008 tax increase (Proposion R) for another 30 years beyond the term approved in 2008. Virginia In 2013, Virginia passed legislaon66 to create a sustainable revenue stream for its IPROC fund by allocang part of retail and sales use tax to IPROC. Specifically, in July 2013, the state raised the retail and sales use tax rate by 0.3% statewide, with an addional 0.7% increase in Northern Virginia and Hampton Roads districts.67 Of this increase, 0.125% was allocated to transportaon funding: 40% to IPROC and 60% to the Mass Transit Fund. Comming this poron of Retail Sales and Use Tax revenue to IPROC is expected to yield $44 million for IPROC in 2014, with growth expected to reach $56 million annually by 2018, represenng an increase in rail funding of 86% compared to 2013.

74 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Enabling requirements for success In most cases, a voter referendum is required. In some jurisdicons, referenda increasing tax rates (sales and property taxes) requires a two thirds majority. Sll, most sales taxes dedicated to transport infrastructure and services are approved (about a 75% approval rate in recent years). U.S. applicaon Dedicated sales taxes are in common use in the United States and are applied statewide and on local sales. These taxes provide a predictable source of funding for transit operaons and infrastructure projects requiring matching funds from state and federal agencies and oen provide a basis for guaranteeing tax exempt bonds. Innovave ideas to fund transport infrastructure include a proposal by a New Jersey lawmaker to legalize marijuana, tax it, and use the revenue to pay to fix the state's roads and bridges. 6.5.13 Carbon Tax or Credits (Cap-and-Trade) Sector Freight Passenger Type of cost Capex Opex Descripon Another potenal means to raise funds for passenger services may be by collecng revenues from carbon taxes or carbon trading programs. Experience to date with these opons is uneven, but they may offer potenal for raising funds for passenger rail projects. Carbon taxing is not popular because of the polics of raising taxes. Carbon emissions trading, in which emiers purchase permits in an open aucon, might accomplish the same objecve with less polical opposion. Emissions trading, also known as “cap and trade,” is a market based approach in which, at least in theory, the price of emissions will be borne by those who most need to make the emission, and the cost of reducons will be borne by those who can achieve it at least cost. The system works through a central body (typically a government agency) seng a limit on the amount of a pollutant that may be emied, with permits sold to pollung enes (firms and presumably state agencies if they are significant emiers) based on their levels of emissions. The revenue is generated through the sale of permits. The total number of permits cannot exceed the cap, and any firm wishing to increase its volume of emissions must buy permits from those who require fewer permits. Over me, emissions can be reduced by reducing the volume permied. The United States has had cap and trade programs for SOx and NOx in operaon since 1990 with considerable success. Carbon trading has been more controversial and no such program exists at the naonal level. California has said one source to raise funds for its HSR program will be from California’s quarterly aucons of greenhouse gas (GHG) emissions allowances. Extent of funding potenal Carbon taxes or carbon cap and trade regimes could generate enormous revenues for funding various programs, including passenger rail. This would be especially true if taxes or caps were extended to emissions from motor and aviaon fuels. For example, each 1 cent/gallon of transportaon fuels tax in the United States yields about $1.7 billion/year (equivalent to a tax of $1.2/ton CO2 equivalent and about $4.2/ton carbon). 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. The expected proceeds generated in California have been esmated at approximately $5 billion annually. The queson is whether or not rail passenger service is the most cost effecve way of reducing emissions of all kinds as compared, for example, with invesng in electric charging staons for electric automobiles.

Alternative Funding and Financing Mechanisms for Rail Projects and Services 75 must also be significant, and there could also be economic costs if the permit prices or carbon taxes significantly distort the market. The net result is debatable, but many esmates have argued that the benefit cost rao of cap and trade or carbon tax programs is substanally greater than one. Case study The California cap and trade program is designed to reduce greenhouse gases (GHGs) from mulple sources to 1990 levels by 2020. The program will cover electric ulies and large industrial facilies at first, but will expand in 2015 to cover distributors of transportaon, natural gas, and other fuels. The program sets a firm limit or “cap” on GHGs that, beginning in 2013, will decline by approximately 3% each year. With a carbon market, a price on carbon is established for GHGs, spurring technological innovaon and investments in clean energy. Aucon of permits by the State Air Resources Board will generate nearly $2 billion annually, although this amount may change in future years, depending on the balance between new permits and trading of exisng permits. When transportaon fuels are added, the total amount raised could increase to as much as $4 billion to $5 billion annually. In its 2014 Business Plan, the CA HSRA showed a total investment cost of the high speed system from San Francisco to Los Angeles/Anaheim of $68.4 billion ($68 billion in YOE terms, $54 billion in 2013$), leaving an enormous gap from the $11.7 billion reliably in hand ($8.2 billion from Prop 1A bonds and $3.5 billion from federal sources). The gap was actually larger because Prop 1A bond funds require a 50/50 match, so only $3.5 billion had actually been “unlocked.” The Authority proposed to fill this gap with an added $38.4 billion in federal support (assuming a new federal program) along with unspecified private investment of $13.1 billion and other state, local, and private funding of $5 billion. If federal funds are not available in the amounts projected, the governor supported the HSRA’s proposal to dedicate $250 million to $400 million of the cap and trade funds to fill at least part of the gap needed to unlock the Prop 1A funds. Revenues from the program are dedicated to projects that reduce CO2 emissions, and HSR would arguably be an eligible use. With this said, the proposal has been met with skepcism and opposion for several reasons, primarily because there are multudinous claimants for the money, and also because the HSR system would at most account for 0.2% of the overall state reducon target, raising a substanal queson about the relave benefits of HSR versus other uses. In addion, it would in effect take the enre income from the trading program (from $2 billion to the highest esmate of $4 billion or $5 billion/yr.) to close the gap fully, so there is ližle queson that other sources would be required. In his 2014/2015 budget, Governor Brown proposed $250 million for HSR (raised to $400 million), along with use of 33% of the cap and trade income in future years. The final compromise was for $250 million in 2014/2015 along with 25% of all future funds generated, which could yield up to $1 billion annually. Even so, a substanal gap will connue to exist between total costs and revenue sources in hand. The program will require reauthorizaon in 2021. Implementaon costs The administrave costs of cap and trade programs are not excessive, involving staff and facilies to set up the cap levels and then manage distribuon either through aucon or distribuon. For example, the California Air Resources Board (CARB) reports that the CA cap and trade program administrave costs are about $7 million annually. There is no reason to believe that a carbon tax program would cost more. Administrave costs are not, of course, the only costs involved. The cost of each parcipant to decide what its costs are and the related value of emissions permits

76 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects U.S. applicaon Carbon taxes or carbon trading regimes could generate enormous revenues for funding various programs, including passenger rail. This would be especially true if taxes or caps were extended to emissions from motor and aviaon fuels. The queson is polical will in the first instance and deciding whether rail passenger service is the most cost effecve way of reducing emissions of all kinds as compared, for example, with invesng in electric charging staons for cars. programs, but revenues would need to accrue to government(s) rather than accruing to exisng emiers. Enabling requirements for Posive polical support for reducon of CO2 emissions is required, including acceptance of the price impacts (on fuels and energy) of tax or trading regimes. The legal framework already exists in the United States in the clean air cap and tradesuccess 6.6 Financing Mechanisms 6.6.1 Public-Private Partnerships (PPPs) Sector Freight Passenger Type of cost Capex Opex Descripon The term Public Private Partnership or PPP is very broad, but typically refers to a cooperave and legally binding venture between the public and private sector that allocates responsibilies, risks, and rewards in the delivery of an infrastructure project and/or service. A PPP can have financing features, but it is more than a financing mechanism. It is a project and service delivery mechanism. Basically, in a PPP, the public sector defines the specific output and/or service level it is seeking—for example, a commuter rail system and operaon that will deliver a specified level of service/capacity. The public sector then contracts with the private sector (generally through a competive procurement process) to deliver a soluon that meets those output and/or service standards. PPP contracts typically leave it to the private sector to determine how to most efficiently and innovavely deliver the infrastructure and/or service in queson. Purpose PPPs can use private capital to finance a project. For instance, a PPP project may see a private sector enty raising capital to cover a rail project’s capital costs, and this investment would be recouped over me through revenues associated with the project. When a project has a funding gap, public funding is required to make PPPs work. PPPs are also used as a project delivery mechanism to transfer project risks to the private sector, including design, construcon and operang risk. When properly designed, PPPs effecvely promote on me, on budget delivery of projects. PPPs also encourage innovaon and efficiency in the delivery of the project or service. From a financial standpoint, PPP financing could be used by a public sector enty to defer the capital cost of the project unl its compleon (e.g., where the private sector partner is not paid unl it delivers the infrastructure to the set standard). PPP financing can also smooth future payments for the infrastructure service over the life of the asset/operaon. Typical terms Amounts available Cost of money Term Structure $50 million to mulple $ billions Varies with project risk. Generally greater than 15% Depends on PPP structure. Generally 5 to 30 years Many different structures (See Table 6 4)

Alternative Funding and Financing Mechanisms for Rail Projects and Services 77 potenal design and construcon), with no financing component; (2) include basically everything involved in the delivery, financing, and management of infrastructure and services (i.e., design, build, finance, operate, and maintain); or (3) include something in between (see Table 6 4). Implementaon and operang costs PPP projects are generally more complex than projects developed using tradional procurement approaches and can require significant upfront planning costs, typically requiring the use of external advisors (e.g., lawyers, financial advisors, and process advisors) and related transacon costs. Private capital is also more risk/return driven and thus more expensive than public money. Case studies PPPs have been used extensively internaonally for the development, financing and operaons of transportaon projects. PPPs have been used most in the United Kingdom, including for High Speed 1 (formerly the Channel Tunnel Rail Link), which is the largest rail scheme in the United Kingdom financed through a PPP. The use of PPPs on rail projects has been largely limited to greenfield projects, for which a revenue stream can be clearly linked to the investment, but it is difficult to make traffic and revenue forecasts for greenfield projects. PPPs have been most successful for small to medium sized, off network projects (e.g. freight interchanges, car parking, train maintenance facilies, and staon refurbishment). Enabling requirements for success PPPs typically require some form of enabling law. Beyond this, they require significant upfront planning to ensure that the project is structured appropriately (e.g., appropriate allocaon of project risks) and that it will deliver value for money. PPPs also require a relavely predictable and sufficient future revenue stream, failing which a project would be very difficult to undertake as a PPP. U.S. applicaon The concept of PPPs is relavely new in the United States in the transportaon sector. The degree to which PPPs can become more broadly used in the United States will in part depend on the extent to which the lessons learned from exisng experiences can be built on and shared for the benefit of stakeholders across the country. The unique context of the U.S. rail sector is discussed in Chapter 2. Extent of financing What the private sector is actually contacted to deliver and finance in a PPP can vary greatly. A PPP project could (1) be limited to the delivery of infrastructure (i.e., PPP Project Components Descripon Typical Risk allocaon* De si gn Co ns tr uc o n Fi na nc in g Re ve nu e Design-Build (DB) Design-Build- Finance (DBF) O pe ra o ns / M ai nt en an ce Ri de rs hi p/ Fr eq ue nc ie s Private sector responsible for design and construcon only. Public agency finances, operates, and maintains system. Examples: Chiltern Railways, UK Contract length: limited to length of design and construcon period. Similar to Design-Build, but private sector also finances the design and construcon of the project and gets paid by the public sector only once the infrastructure is completed to the standards established in the PPP contract. Used mostly for smaller projects. Examples: demolion and reconstrucon of Coventry Road Bridge in Birmingham, UK Contract length: limited to length of design and construcon period. Table 6-4. Alternative PPP Project Structures and Risk Allocation (continued on next page)

78 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Table 6-4. (Continued). Design-Build- Operate-Maintain (DBOM) Design-Build- Finance-Operate- Maintain (DBFOM) Franchising or concessioning of exisng operaons N A N A *Light Shading: Public. Darker Shading: Private or part private Source: CPCS Analysis Private sector to operate and maintain a system/service, in addion to designing and building it. The operang and maintenance component is akin to a management contract. This approach works best when public sector wants to increase role of the private sector but sll wants to hold on to a significant share of control. Examples: Outsourcing of operaons to private sector, management contracts Contract length: variable and typically between 5 and 25 years • DBFOM—Availability payment. Payments made to contractor based on provision of minimum level of service. Private sector faces no risks related to ridership or demand revenue. • DBFOM—Shadow fee. Contractor receives periodic shadow fee payments from government in place of, or in addion to, real or explicit tolls paid by users. Government retains revenue risk. • DBFOM—Real user fee. Contractor receives revenues directly from users and takes all ridership risk. Typically only used when service has potenal to be profitable. Similar to DBOM, but private sector finances all or part of construcon. Public-sector role is limited to acquiring rights of way and establishing system and service standards. Key types of DBFOM contracts discussed below. Examples (some with construcon, some without): Denver Eagle Commuter Line, France/Spain Perpignan-Figueras Project, UK Channel Tunnel and High Speed 1, Intercity Express Programme Contract length: varies, but typically longer than DBOM in order to enable the private sector to realize returns, 5-30 years or longer Public sector contracts with the private sector for the provisions of rail service on exisng infrastructure (typically though a compeve procurement process). This results in a shiš from funding annual operang losses directly to providing a subsidy on a contractual basis to the private operator. Depending on the structure, the private operator may be allowed to set prices and determine operang frequency and capacity, subject to minimum government specificaons and regulaons. These private operang companies can issue bonds and borrow commercially on the open market, thereby providing an addional opportunity to a›ract private financing. Example: UK Passenger Train Operang Companies Contract length: varies, 5-10 years typical

Alternative Funding and Financing Mechanisms for Rail Projects and Services 79 6.6.2 Equipment Trust Certificates (Available to Private Companies) Sector Freight Passenger Type of cost Capex Opex Descripon Equipment trust cerficates are a form of secured debt financing. A trust cerficate is “sold” to financial instuons or other investors (pension funds). The railway selects the equipment owned by the “trust” during the payback term. The equipment, with the large down payment, represents the security for the investors. The equipment is not considered railroad property in bankruptcy. Equipment trust cerficates usually provide low cost financing because of the security provided by the equipment. When there is an investment tax credit, interest costs are even lower because the owners of the cerficates earn the tax credit. Usually, equipment trusts are cheaper than a finance lease, but have different payment structures. Equipment trusts are also used to finance aircra. Purpose Equipment trust cerficates are typically used to finance fungible but expensive vehicles (e.g., railway rolling stock and airplanes). Equipment trust cerficates were more popular in the past when investment tax credits could be used by investors. Now they are used to finance new equipment, usually in series (e.g., new freight cars coming off a producon line in a numbered series). The equipment must be registered and AAR approved. Enabling requirements for success The most important factors for successful issuance of equipment trust cerificiates are a knowledgeable financial instuon or investment group and a creditworthy issuing company. U.S. applicaon Equipment trust cerficates were very common for financing rail equipment. The development of leasing, including finance leasing, has reduced their use in recent years, in part because of the need for a large down payment. Typical terms Amounts available Cost of money Term Structure $100 million Federal Funds Rate + 2% to 7% Typically 20 to 25 years Usually requires 20% inial payment, level principal, and interest payments over the term Extent of financing potenal The amount that can be raised through equipment trust certificates depends in part on the creditworthiness of the issuer, the type of equipment acquired, and the extent that the equipment is fungible. Investors do not want to face a high probability of needing to resell the equipment given that they will have to take at least a paral loss on the sale. It is typically a passive investment for the financial instuon. Amounts available range from approximately $20 million to $200 million, with the cost of money (interest rate) equivalent to a federal rate plus 2% to 5%. Most equipment trust cerficates are long term, in the 25 year range and typically require a sizeable (20%) down payment. Implementaon costs The cost of issuing an equipment trust cerficate is not high. Issuing documents must be reviewed by legal experts. The issuing company has to be creditworthy and financially stable. Case study In the United States, equipment trust cerficates are bonds issued by the railroad to a financing enty (e.g., bank or pension fund). The cerficate gives the bondholder the first right to the equipment if scheduled interest and principal are not paid when due.

80 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 6.6.3 Operating Lease Certificates (Available to Private and Public Companies) $1 million to $ billions Varies by asset: Market prices – annual lease usually 10% to 25% of new asset price per year From 1 to 9 years Level lease payments over the term of the lease Extent of financing poten al For common assets (e.g., freight cars, locomo ves, and heavy maintenance equipment), the amount of funding is limited only by the market poten al of the assets being leased. For example, in recent years, there has been great demand for tank cars for oil movements in the United States and the order backlog for tank cars in 2013 was valued at more than $4 billion. Nearly all of these tank cars will be leased. discussions about changing this rule in which the value of future lease payments would be recognized on the balance sheet). The investor in the asset accepts the long term risk of asset ownership while the lessor accepts higher payments for control of the asset during the lease term than the asset might cost if acquired. Leasing is oŽen used to meet peak period or short term needs for assets. Although leasing is generally more expensive than acquiring the asset, the lessee avoids the risk that the asset may not be needed in the long term or that some technological or market change makes the exis ng asset economically obsolete. Because of the risk associated with long term ownership, leasing companies prefer to acquire common or universally useful assets—generally less specialized assets are easier to lease to others (e.g., commonly used rolling stock). Highly specialized assets are more oŽen acquired directly or leased through a finance lease. In some cases, suppliers such as rolling stock manufacturers become involved in financing rail investments. The most common cases involve supplier financing of rolling stock (e.g., GE Capital financing investments in locomo ves or Bombardier financing passenger rolling stock). Suppliers increasingly provide not only equipment but also maintenance services for that equipment. This usually means that suppliers build maintenance facili es (e.g., workshops, depots, and storage yards) and finance those investments on the basis of a supply and maintenance contract. Supplier financing can be used simply to spread the cost of the purchase or to also leave performance risk with the manufacturer. In the la˜er case, if equipment fails to perform as expected or costs more to maintain or operate, the supplier bears the risk. Typical terms Amounts available Cost of money Term Structure Sector Freight Passenger Type of cost Capex Opex Descripon Many rail industry assets have long lives—oen 20 to 50 years. As the need for the asset (or the profitability of the traffic which the asset is intended to service) cannot be easily predicted 20 to 50 years in the future, it oen makes sense to lease such assets over a shorter term. An operang lease is an instrument that gives a company or authority (the lessee) the use of an asset over a typically short (less than 10 years) period of me in exchange for periodic payments. At the end of the lease term, the lease can be renewed (usually at the then prevailing lease rate for similar assets) or the asset is returned to the lessor. The lessor selects and specifies the assets it will acquire; the lessee has no ownership interest in the asset. Lease payments are recognized as an operang expense and the asset does not appear on the lessee’s balance sheet (although there are some

Alternative Funding and Financing Mechanisms for Rail Projects and Services 81 Implementaon and operang costs The cost of entering into a lease is not high. Lease documents must be reviewed by legal experts but many asset leases are similar, so this is not too expensive. Case studies Some large leasing companies in North America specialize in leasing freight cars, locomoves, track maintenance machinery, workshop machinery, and other equipment (e.g., trucks, automobiles, and computers). Sale and leaseback arrangements are sll viable for many assets (including buildings and some facilies). In the passenger industry, locomoves are o en leased, as are buildings, staon facilies, and office equipment. In the past, cross border and service leases were used to reduce the cost of new rolling stock to public agencies. Under typical public agency accounng pracces, profit and loss is not an important metric and asset depreciaon is not as useful as it is to for profit enterprises. Many techniques were used to sell assets to companies looking for depreciaon expenses to offset profits for tax purposes. The U.S. IRS has eliminated most of these depreciaon transfer leasing techniques, but public agencies sll lease some equipment where there is an established market. and new equipment based on market needs without any government money being spent directly (although the government does influence cascading through the franchise process). Enabling requirements for success The most important factor for successful leasing is an observable market with mulple potenal lessees. It is difficult to lease highly specialized equipment and fixed assets (e.g., bridges) because the owner has no recourse if the lessee does not meet the terms of the leasing agreement. U.S. applicaon The rail leasing market in the United States is large and vibrant. About 50% of all freight cars are leased; 15% of all locomoves are leased; and 95% of commuter equipment is leased. The lease market can be accessed by smaller railroads, which o en lease older and less expensive equipment. Although most wishing to lease rolling stock should have a reasonably good credit rang, given that the equipment being leased provides its own security, a spotless credit rang is not required. In the United Kingdom, leasing of rolling stock is common for all of the passenger train operang companies. At the me of privazaon, because Brish Rail already had trains running on all the routes and it was not praccal to replace them immediately, it was decided to tender the franchises with rolling stock leases in place. Three rolling stock leasing companies (ROSCOs) were established and these took over Brish Rail’s passenger rolling stock, with 5 to 7 year leases in place with the passenger train operang companies. The ROSCOs were then privazed and have since bought more rolling stock. The ROSCOs are essenally providing a banking service to operators, mainly to reduce the capital requirements of operators and to make it easier to change the operator of passenger franchises (i.e., they broke the link between the age of the rolling stock – typically 30 or 50 years – and the life of the franchise – typically 5 to 7 years). But they also manage the long term ownership, including heavy overhauls and rebuilding in response to changing needs. They are also in a good posion to manage rolling stock “cascades,” where older trains are transferred to other train operang companies as new trains are brought into service. The ROSCOs invest in rehabilitaon

82 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 6.6.4 Finance or Capital Leasing (private and public companies) Sector Freight Passenger Type of cost Capex Opex Descripon A finance lease is an instrument that gives the lessee the use of an asset over a long period of me in exchange for periodic payments. It is a long term lease considered by accounng standards as the economic equivalent of asset ownership. At the end of the lease term, the lessee can acquire the asset at a price agreed at the beginning of the finance lease (usually well below expected market value at the me) or the asset can be turned back to the lessor. Generally, the lessee selects and specifies the asset to be leased. The lessor is oen a finance company or bank and has no long term interest in the asset. The lease term represents a significant proporon of the life of the asset. The lessor is the owner of the asset unl the end of the lease. Finance leases generally reduce working capital but increase debt equity raos. Both the value of the asset and the liability associated with the finance lease are carried on the books of the lessee. Lease payments are structured as principal and interest, and principal charges are not expensed, but are reflected on the balance sheet as a reducon in the liability associated with the lease. Interest payments are usually recognized as an expense. Extent of financing potenal Finance leases depend on the creditworthiness of the lessee and can be used to finance many different types of assets. Implementaon and operang costs The cost of entering into a finance lease is not high. Lease documents must be reviewed by legal experts but many asset leases are similar, so this is not too expensive. The lessee has to be creditworthy and financially stable. A financial instuon with experience with equipment finance leases is more likely to enter into such agreements than a local bank. The lessee is responsible for maintenance and warranty issues. Usually, if the asset is destroyed during the term of the lease, the lessee either replaces the asset with a similar one or pays out the lease. For the most part, finance leases are structured such that the lessee carries the risk associated with ownership of the asset. Amounts available range from $1 million to $ billions, with the cost of money (interest) varying by asset, based on the funcon price of the asset and length and structure of the lease. The financing term is usually at least 75% of the useful life of the asset. The structure is typically for level lease payments over the term of the lease, with a balloon payment at the end of the term. Purpose A financing mechanism used to acquire capital equipment or facilies with payments spread over the life of the asset Typical terms Amounts available Cost of money Term Structure $1 million to $ billions Varies by asset: Payments are a funcon of the price of the asset, the length of the lease, and the structure of the lease At least 75% of the useful life of the asset Level lease payments over the term of the lease with a balloon payment at the end of the term

Alternative Funding and Financing Mechanisms for Rail Projects and Services 83 6.6.5 Bonds with Public-Sector Backing Case studies Most railroads use finance lease arrangements to acquire rolling stock. A finance lease is generally less expensive than an outright lease, but more expensive than buying the asset outright. Finance leases are used to create addional leverage on the balance sheet. Enabling requirements for success The most important factor for successful finance leasing is a creditworthy lessee. A finance lease can be used to acquire specialized equipment. U.S. applicaon The railway finance leasing market in the United States is large and well developed for both freight and passenger equipment. No significant barriers to the use of this type of financing exist in the United States. Sector Freight Passenger Type of cost Capex Opex Descripon A bond is a form of debt whereby an enty issues (sells) a bond to a lender and is then obliged to pay them a fixed interest rate (coupon) and/or repay the principal at a set maturity date. Bonds issued by public enes in the United States (e.g., local, state, and federal governments) include general obligaon bonds and general revenue bonds, both of which encompass municipal bonds (issued by municipal governments). In the United States, interest income received by holders of municipal bonds is oen exempt from federal tax and is somemes exempt from state income tax. Because of this exempon, municipal bonds typically pay lower interest rates than non exempt bonds. General obligaon bonds are aracve to investors because of the government backed certainty of payment. This security is in contrast to general revenue bonds where repayment is based on future revenues generated by a project and where, if the project does not raise sufficient revenue, there is the possibility of default. For example, toll road revenue may be pledged to pay for the bonds and if tolls are not realized to the extent predicted, there may be challenges in repayment. These types of bonds carry more risk because they depend on demand for the facilies. In recent years, several toll roads have underperformed traffic expectaons and financing has had to be restructured. Because of the somewhat higher risk, revenue bonds generally have higher interest rates than general obligaon bonds. Purpose Can be used for any approved investment project Typical terms Amounts available Cost of money Term Structure $15 million to $ billions Federal Rate +2 to +5%; interest not taxable to recipients 10 to 30 years No grace, level payments Extent of financing potenal The financing potenal of general obligaon and municipal bonds is limited by the credit rang of the authority or issuer, by the type of bond issued, and oen by statute.

84 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects scheduled payments are guaranteed by the issuer (e.g., authority, local government, and state government). These bonds are the least expensive and usually carry an interest rate that is usually about 25% to 30% below prime rate (and usually somewhat higher than federal treasury bonds of similar duraon). The actual rate depends on the size of the bond offering and the credit rang of the authority issuing the bonds. A few local governmental jurisdicons have gone bankrupt in recent years; this increased the cost of municipal bonds and has prohibited some authories from issuing bonds altogether. Property assessment bonds promise repayment from increases in property tax receipts. These bonds are usually used to finance local redevelopment projects, which somemes include transport facilies. These bonds usually have higher risks than revenue bonds because they depend on acon at a distance—increases in property values from the development projects. They, too, have higher interest costs than “full faith and credit” bonds. Case study General obligaon bonds are used extensively by U.S. states and municipalies to raise finance for public works projects and are backed by government guarantee. These are the largest financing mechanism available to public authories and municipal governments. Municipal bonds are used to provide most public infrastructure, even when federal and state grants are also used. Municipal bonds fund investments in community redevelopment, regional and local hospitals, schools, stadiums, water systems, roads, and transit systems. Implementaon and operang costs It is not expensive to issue government backed bonds, but polical costs may be higher. For example, municipal bonds must be authorized by a state or local government and, depending on the type of bond, such authorizaon must be balanced with other funding requirements and with the credit rang of the issuing or guaranteeing body. There are many different types of municipal bonds, depending on the source of funding used to make required principal and interest payments on the bonds. Generally, the most secure municipal bonds are “full faith and credit” bonds wherein normally hold tax exempt debt (e.g., pension funds and sovereign wealth funds). In the first year of the program, over $106 billion of BABs were issued by state and local governments across 49 states, the District of Columbia, and two territories. The program was cut a™er 2 years (expiring on December 31, 2010), further highlighng the importance of securing support from the federal government for major infrastructure projects. Source: Website: www.treasury.gov/iniaves/recovery/Pages/babs.aspx (As of May 15, 2013). Efforts to reinstate the program failed. California has used general obligaon bond finance to secure private sector investment for its HSR development efforts. In 2008, voters in California approved by ballot the establishment of the Safe, Reliable High Speed Passenger Train Bond Act for the 21st Century. The law allocates $9.95 billion to the California High Speed Rail Authority, of which $9 billion is allocated to construct core segments of the HSR project from San Francisco to Los Angeles. If all legal challenges can be resolved, the money will be raised through general obligaon bonds that will be paid off over a period of 30 years. (Source: California HSR Authority. www.hsr.ca.gov). The U.S. federal government has also supported issuance of local bonds for many public infrastructure projects, by making the terms of bonds more favorable to the market (e.g., through the Build America Bonds [BAB] program). The program was an opportunity for states and local governments to raise addional private finance for transportaon (and other infrastructure) projects. Tradionally, state and municipal agencies issue tax free bonds to raise finance, which offer a lower interest rate than market rate bonds. When the financial crisis hit, such agencies were increasingly struggling to find buyers for non taxable bonds, especially foreign buyers who are not interested in tax exempt bonds because they do not reap the advantages anyway. The BAB program—established under the ARRA in 2009—enabled municipalies to issue taxable bonds by providing support to two types of product: Tax Credit BABs provided a federal subsidy as a refundable tax credit directly to bondholders, while Direct Payment BABs provided a federal subsidy of 35% on the interest paid on the bonds to the issuer. The program successfully broadened the market for municipal bonds to include investors who do not

Alternative Funding and Financing Mechanisms for Rail Projects and Services 85 68 Kahn, M. E., and David Levinson. “Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways.” The Hamilton Project (Brookings Institution), Discussion Paper 2011-03, February 2011. 6.6.6 Corporate Bonds (available for private entities) Enabling requirements for success Municipalies or state authories (e.g., development, transport, and port authories, sanitaon districts, and environmental districts) must be duly authorized by superior governmental units that have bonding authority. Ulmately, state governments give various in state public enes the authority to issue municipal bonds and almost always specify the type. In addion, credit agencies have to issue a credit rang. Finally bonds must be legally drawn and issued by licensed sellers. One of the challenges with municipal bonds is that tax exempon does not appeal to all lenders. Tax exempon is an implicit subsidy (relave to taxable corporate bonds) taken into consideraon when investors price bonds. Enes not seeking a tax exempon— non profits, federal government, pension funds, or internaonal lenders—do not enter this market.68 U.S. applicaon General obligaon bonds and municipal bonds are the predominant form of financing public investment in the United States. Sector Freight Passenger Type of cost Capex Opex Descripon A corporate bond is a long term debt obligaon (generally with a term more than 1 year) issued by a corporaon. Corporate bonds can be secured by some real property (e.g., a mortgage bond secured by land or property; an equipment bond secured by rolling stock or other equipment) and usually pays a periodic interest rate unl the bond reaches maturity when it is redeemed or bought back, usually at face value. Some bonds are not secured by property but by a claim on the assets of the corporaon (e.g., secured by its balance sheet)—these non secured bonds are typically called debentures. Senior bonds give bondholders first call on company assets (ahead of other creditors and shareholders). Subordinated debt has a lower call on corporate assets should a company default on the payments. Corporate bonds generally receive credit rangs (e.g., AA, BBB) from rang agencies. Interest rates paid on corporate bonds vary by exposure to risk, with more secure bonds (e.g., secured, senior, and those issued by companies with high credit rangs) paying lower interest rates and other, more risky debt paying higher interest. Interest payments from corporate debt are not tax exempt. Purpose Railway enterprises generally issue (sell) corporate debt instruments (bonds) to raise capital for investment projects, although unsecured debt can be used for any purpose. Bonds are an alternave to selling stock and are generally considered cheaper. Rail corporaons typically try to maintain a debt equity rao of between 50% and 65%. Higher debt relave to shareholder equity generally results in lower credit rangs and more costly debt (in which case, rail corporaons would have to pay higher interest rates to raise funds). Typical terms Amounts available Cost of money Term Structure $25 million to $ billions Federal Rate +1% to +5%; interest taxable to recipients Usually 7 to 100 years Interest payments to maturity, then balloon payout of principal

86 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 6.6.7 Mezzanine Financing (available to both private and public companies/authorities) Enabling requirements for success Generally, corporate bond sales are limited to large corporaons with a long credit history and good credit rangs. Bond issuance requires legal preparaon, approval of the board of directors and, under some condions, approval of shareholders and other debt holders. U.S. applicaon This is the predominant form of financing used by large freight railroads in the United States. managing corporate debt low. Case studies Many railroad bonds are traded on naonal markets and all major North American railroads have bonds on the market now. In recent years, some railroads have issued “Century Bonds” that have a term of 100 years. For example, Norfolk Southern, a Class I railroad, issued $250 million in 100 year bonds in 2010 at a cost of about 5.95%; it also sold $500 million in 100 year bonds in 2005 that carried a 6% interest rate. CSX issued $300 million in 31 year bonds in 2012 with an interest rate of 4.5%. Smaller railroads raise capital by direct placement of debt with banks and financial instuons. These are typically not corporate bonds but short term debt obligaons that carry much higher interest rates and may have restricve covenants that limit other debt or place restricons on how capital is used and when it must be repaid. Extent of financing potenal Railroads can raise up to 100% of shareholder equity through bonds (e.g., CSX, a Class I railway, has a total debt to equity rao of about 100%; UP, also a Class I, is about 45%). CSX has shareholder equity of about $9 billion; UP about $20 billion. Implementaon and operang costs The costs to issue corporate bonds (including legal fees, registraon, credit review, and issuance costs) are high enough that most corporaons try to issue bonds in mul million dollar increments—$50 million to $100 million increments. Smaller railroads may issue corporate debt to local banks, but will pay many of the same fees. A relaonship with a banker or fund manager can help keep the cost of issuing and Sector Freight Passenger Type of cost Capex Opex Descripon Mezzanine financing is more expensive than secured debt or corporate bond financing. Mezzanine financing is usually secured in some way (by potenal ownership interest or warrants for shares of the company). Purpose Mezzanine financing, a kind of middle level financing, is usually used for a specific purpose unl longer term financing can be arranged. Specific purposes include acquisions or to finance a major construcon project in process (e.g., building a new railway line, terminal or structure or acquiring land for a future investment project). Typical terms Amounts available Cost of money Term Structure $100s of millions for large railroads; $10 million to $100 million for smaller ones Prime; Prime +1 5% 5 to 7 years typically Inial cash payment, then cash interest with a balloon payment

Alternative Funding and Financing Mechanisms for Rail Projects and Services 87 6.6.8 Short-Term Corporate Line-of-Credit Financing Extent of financing potenal Funding potenal depends on the size and creditworthiness of the company. Most railroads seek to reduce mezzanine financing because it is more expensive than longer term debt. Typically would be less than 10% of the equity value of the company. Implementaon and operang costs Mezzanine financing usually requires a cash payment up front and interest during the term of the financing and oen requires the pledge of some security (e.g., preferred stock). Case studies Most railways use mezzanine financing for major capital projects. Enabling requirements for success Legal instruments related to the financing and the assets pledged (may require an appraisal or that the company secure approval of shareholders). Companies will need to be creditworthy, have an investment or purpose for the funds that appeals to investors, and good prospects for increased earnings. U.S. applicaon Most major North American railroads use forms of mezzanine financing at mes. Sector Freight Passenger Type of cost Capex Opex Descripon Railroad companies usually have access to commercial line of credit financing for short term credit needs. Typically issued by banks or other financial instuons, such financing can be structured for very short terms (weeks to months) to as much as 5 years. Line of credit terms are typically non secured (and expensive), although there are many forms of secured credit (e.g., receivables or owned assets can be pledged). The railway usually pays for the line of credit (typically as a percentage charge on the maximum amount that can be borrowed under the line of credit agreement). Purpose Typical use is for cash flow to cover lumpy investment or opex spending paerns. Short term financing is used to address liquidity issues that arise from me to me for most railways. The railway company can use the line of credit for any purpose and pays interest on the amount borrowed. Typical terms Amounts available Cost of money Term Structure $20 million to $100 million Prime rate to prime rate +5%; iniaon charge 1 year Short term financing, usually with interest and a balloon payment Extent of financing potenal Funding potenal depends on the cash flow and credit rang of the railway. Collateralized line of credit or on demand financing can be somewhat less expensive. Implementaon and operang costs Short term corporate financing is the most expensive type of credit for railroad companies. The company pays a fee to establish the line of credit—usually the fee is a percentage of the total amount that can be called on. A line of credit that represents a significant proporon of free cash flow is more expensive than a smaller line of credit. The company seeking short term financing or a line of credit has to be creditworthy and financially stable.

88 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 6.6.9 Sale of Stock (Ownership Stake) Case studies Short term financing is used when a railroad has a short term liquidity issue, which might arise from the need to make a large cash investment or cover the cost of higher maintenance expenses during a low traffic period, a work stoppage at the railway or at a major customer, or for any other reason. Enabling requirements for success Most important factors for short term financing are a knowledgeable financial instuon and a creditworthy company. U.S. applicaon All railroad companies have short term financing arrangements with local banks and financial instuons. Sector Freight Passenger Type of cost Capex Opex Descripon Railroad companies can issue common stock in public offerings through stock exchange related financial instuons. Common stock entles the owner to share in company profits, usually paid as dividends. Common stockholders can influence company policy by vong on company objectives, stock splits, issuance of addional company stock and by elecng the company’s board of directors. Shareholders expect to earn a return from dividend payments or through price appreciaon (increasing value of common stock). Returns to common stockholders are uncertain given that dividends are not guaranteed. Common stockholders are parcularly vulnerable in bankruptcy proceedings because common stockholders are usually the last to receive any proceeds from asset sales and liquidaon. However, common stock has performed beer than many other financial investments over a long period of me. The issuance of new shares of common stock must be explicitly authorized by a vote of exisng shareholders. Typical terms Amounts Available Cost of money Term Structure $100s of millions for large railroads; $10 million to 100 million for smaller ones Considered to be in the 12% to 20% range No term Stock sale results in immediate cash Extent of financing potenal Funding potenal from the issuance of new common stock depends on the size of the company and the willingness of shareholders to authorize the creaon of new stock. Issuing new stock dilutes the value of exisng shares unless the stock is to be used to change the underlying value of the enre enterprise (e.g., for an acquision that will be addive to value). Except in an inial public offering, the value of common stock is set by market forces. If a stock is selling for $10 and the company issues new shares equivalent to, say, 20% of exisng shares outstanding, the value of all stock would be expected to decline to $8, represenng the diluon.

Alternative Funding and Financing Mechanisms for Rail Projects and Services 89 6.6.10 Tax/Investment Credits Implementaon and operang costs Issuance of common stock requires a vote of the shareholders. Addional reporng and registraon requirements also must be met. The company usually pays a fee to a stock exchange company to handle the share sales. Case studies All large railroads in North America are shareholder owned enterprises. Many smaller railroads are also shareholder owned, and some are closely held by family or major investors (e.g., Berkshire Hathaway owns most of the common shares of BNSF). Enabling To issue new shares, most companies will need to be creditworthy and have a strategy requirements for success that appeals to shareholders as well as good prospects for increased earnings. U.S. applicaon Most North American freight railroads are shareholder owned. Acquision of a controlling interest in a registered railroad company must be approved by the U.S. STB and by the SEC. Sector Freight Passenger Type of cost Capex Opex Descripon A tax credit is an amount deducted from the total amount a taxpaying individual or company owes to the government. Governments worldwide grant tax credits for various reasons, including acng as a type of subsidy (incenve) to encourage investment in specified property or operations. Purpose Can be used for any approved purpose. Typical terms Amounts available Cost of money Term Structure Depends on legislaon establishing the tax credit Investment tax credits reduce tax liabilies for commercial companies Usually no term Immediate tax credit; depending on the legislaon, can be carried forward to offset future tax liabilies Extent of financing potenal Varies significantly on a case by case basis. Implementaon and operang costs Administrave costs are associated with establishing a tax investment credit program. The benefits of any tax credit program (greater investment) need to be weighed against the cost of lost revenues (taxes), taking into consideraon the ancipated public benefits and raonale for the credit.

90 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 69 AASHTO Center for Excellence in Project Finance, “Conference Report: The forum on Funding and Financing Solutions for Surface Transportation in the Coming Decade,” January 2011 (Conference held on September 30, 2010). http://www. transportation-finance.org/pdf/featured_documents/sep_30_report_final_2011_02_02.pdf (accessed January 10, 2014). Case study Although not common, tax credit programs do exist in the United States to help support freight rail projects. At the federal level, although it recently expired (December 31, 2013), an example is the Railroad Track Maintenance Tax Credit (45G Tax Credit), which is specifically targeted to short line railroads and can provide a tax credit amount up to 50% or $3,500 per mile of eligible track maintenance and improvement expenditures. At the state level, an example is Minnesota’s Tax Credit Program, which provides an income tax credit for 25% of the annual amount spent on track capacity expansion, and a Maintenance Tax Credit, which could offset up to 10% of costs for short line rail improvements to track and structures to accommodate standard 286,000 lb. train cars. A 2011 report by the AASHTO Center for Excellence in Project Finance69 highlighted the poten–al for a tax credit approach for bondholders inves–ng in surface transporta–on infrastructure through tax credit bonds. Such tax credit bonds could reduce the project sponsor’s borrowing cost by a federal government subsidy of all or a por–on of interest expense (for projects exhibi–ng certain public benefits). In lieu of cash interest payments, the investor (bondholder) would receive annual federal tax credits that could be used to offset other federal tax liability. The report noted that, although such programs do not exist for surface transporta–on, they are in place for forestry conserva–on, renewable energy projects, energy conserva–on, qualified zone academies, and new school construc–on. Enabling requirements for success A tax credit program is only beneficial if it can provide incen–ve for investment that would otherwise not happen. In other words, a tax credit program requires an otherwise ašrac–ve investment opportunity, all else being equal. U.S. applica–on The U.S. system permits tax credits across a number of jurisdic–ons for a wide range of reasons.