Part of planning a HSR system is determining the most effective and efficient means of operation. As an element of the SEHSR study, Price Waterhouse LLC (PW) was retained to provide suggestions on public-private partnership scenarios. This section provides an overview of the public-private partnership potential and will discuss the partnership goals set forth for the PW study. The purpose of this section is to lay the groundwork for subsequent cash flow modeling to take place at a later date. This modeling will also incorporate in various scenarios some of the revenue funding and financing sources described in the following section of the SEHSR study (see "Funding and Financing Alternatives" chapter).
14.1 PUBLIC-PRIVATE PARTNERSHIP GOALS
The following goals were set for the investigation and analysis of public-private partnerships for the SEHSR system:
14.2.1 CURRENT SYSTEM
The North Carolina Railroad Company was incorporated in 1849 in the State of North Carolina. NCRR now owns a rail line spanning approximately 317 miles from Charlotte to Morehead City. 173 miles of the NCRR between Charlotte and Raleigh are part of the SEHSR. Since 1895, NCRR has leased substantially all of its assets, including use of its right-of-way, to Norfolk Southern (NS, formerly known as the Southern Railway Company). The leasing agreements between NCRR and NS expired in 1995, and negotiations on a new agreement are underway. With a new agreement in place for its assets, NCRR would satisfy the requirements for electing Real Estate Investment Trust (REIT) tax status, which would allow NCRR to avoid paying Federal corporate income taxes on the portion of its ordinary income or capital gain that is currently distributed to shareholders.
When establishing the NCRR in 1849, the State of North Carolina acquired 75 percent of the common stock, with 25 percent held by private investors. As of June 1998, the State of North Carolina purchased all outstanding shares of NCRR, and is now sole owner of the railway. Therefore, this study assumes the State will continue to have sole ownership of NCRR for future HSR system scenarios.
The National Rail Passenger Corporation (Amtrak) currently operates two round-trip passenger trains between Raleigh and Charlotte. Amtrak operates the Carolinian beyond Raleigh to New York with equipment owned by Amtrak. The State of North Carolina owns the Piedmont passenger train equipment. This structure does not represent a typical operating contract. Currently, Amtrak collects all operating revenues and receives a contract fee from the State of North Carolina. In return, Amtrak operates the trains and part of its costs is maintenance-of-way fees paid to NS under a separate agreement. This structure is enabled by Section 403(b) of the Rail Passenger Service Act (RPSA), under which passenger rail service is operated by Amtrak, at the request of a State government, which then compensates Amtrak for the costs of operating the train. A third Amtrak train, the Crescent, operates on NCRR right-of-way between Greensboro and Charlotte. The State has no financial responsibility or direct role related to this service, as it is a part of Amtrak's basic system.
14.2.2 FUTURE OF NCRR
Before discussing in detail the potential management structures for SEHSR high speed rail service, the status of NCRR must be considered. Based on NCDOT goals set out for this study, PW followed the assumption that the State will retain control of NCRR. There are nonetheless a variety of potential scenarios for structuring NCRR so as to facilitate the proposed HSR service.
Although NS and NCRR are negotiating a new lease, other possibilities exist for the NCRR, including finding another lessee, or not leasing at all. It is not within the scope of this study to explore the likelihood of any number of possible outcomes. While the specific outcome does not alter the basic discussion of management structures and funding and financing sources presented here, there are a few key issues to bear in mind. These are discussed in the remainder of this section.
14.2.3 SIGNIFICANCE OF A LEASE TO THE SEHSR
First, from the perspective of NCRR as focal point for the implementation of the HSR system, a lease represents an additional source of revenue. If the lease includes fixed payments, this revenue stream could be used by NCRR to finance a portion of its investments in the right-of-way (ROW). On the other hand, a lease payment based, for instance, on a percentage of the lessee's gross revenue may not be predictable enough to back a significant amount of long-term debt. Such payments, however, would be an additional source of income for NCRR. However, the lease income may be dedicated to repay borrowings necessitated by the buyout of outstanding NCRR shares.
Second, responsibility for the operation and maintenance of the railroad will depend on the leasing scenario, and will impact the HSR management structure. If a lease is signed with a freight operator, the agreement must ensure that the HSR service can be operated at the planned speeds and frequencies, that the track will be maintained to the necessary standards, and that there are provisions for future adjustments. Depending on the structure, these issues may already be partially addressed by the existing Rail Passenger Service Act (RPSA) which lays out Amtrak's operating rights over private railroads (assuming the lessee of NCRR is a railroad with which Amtrak must have an agreement for passage of its trains). If the HSR service operator were not to make track maintenance cost payments directly to the lessee, the lease agreement might also include adjustments to the lease payment to account for the costs of maintaining track quality for the HSR service.
14.3 OVERVIEW OF POSSIBLE OPERATING SCENARIOS
14.3.1 LEASE SCENARIOS
There are three basic potential lease scenarios: 22
14.3.2 NON-LEASE SCENARIO
Should a lessee not be secured, NCRR could operate the local freight service itself, under Federal and State common carrier obligations, and given its ostensible public service mandate as a State-owned corporation. Operating its own line would subject NCRR (and thus the State) to a number of risks, including diversion of NS overhead traffic, loss of freight to competing trucking companies, capital improvement costs, maintenance and labor expenses, and a lack of experienced management. Though REIT status would be lost, as a State-owned entity NCRR could be exempted from corporate and property taxation so long as it provided an essential government function that the private sector could not or would not perform.
While its Board of Directors would essentially be State-appointed and thus not totally insulated from the political process, there would be substantial management flexibility. It would have access to the full spectrum of financing techniques available to other corporations. In addition, and depending on future RPSA applicability, NCRR could choose to operate the passenger as well as the freight service.
14.3.3 MULTI-COUNTY PUBLIC AUTHORITY
Another option is that (once State-owned) NCRR itself could be transformed into a public authority. This option could be exercised regardless of whether the property were then leased to a freight operator, and regardless of the management structure chosen for the HSR service. The authority's enabling legislation could be similar to the Regional Public Transportation Authority Act,23 which created the Triangle Transit Authority. This structure would convey a number of significant powers to NCRR, including revenue from taxes, tax-exempt status, and powers of eminent domain. On the other hand, an authority structure would require the agreement and approval of all counties served by the SEHSR. 24
14.4 POSSIBLE SOUTHEAST HIGH SPEED RAIL CORRIDOR STRUCTURES
The management structure selected for the operation of the SEHSR service sets up specific relationships between the State, NCRR, any freight lessee, the passenger service operator, and the users. The structure has implications for the availability of some of the funding and financing sources for capital expenditures, as well as for the incentives and impacts on operating income.
Station development and operation/maintenance is not shown, as it is assumed that these will be local responsibilities (whether public, private or joint) with no net financial impact on the HSR service operation itself. 25
Below is a short description of each possible SEHSR structure, as well as a list of advantages and disadvantages.
14.4.1 DIRECT NCRR (STATE) RESPONSIBILITY
Description: The State/NCRR would operate the SEHSR system, including dispatching along the route, and maintain equipment and ROW.
Advantages: SEHSR system can receive Federal and State revenues directly (taxes); it would also collect all revenue directly.
Disadvantages: NCRR would accrue large start-up costs to begin operations. Moreover, any risk and responsibility and perhaps freight responsibility would rest on NCRR. Common carrier obligations also would apply. Other entities (such as NS, CSX, or Amtrak) are more experienced at operations.
14.4.2 OPERATING CONTRACT
Description: NCRR retains ROW, equipment and facilities; dispatch and maintenance are given to operator while NCRR receives all revenues (farebox, etc.) and pays operator fixed fees.
Advantages: Incentive clauses can be included to ensure proper operations and NCRR is removed from some risks.
Disadvantages: There may be no incentives for operator to make longer-term strategies for efficient operations and there are few entities besides freight railroads and Amtrak with knowledge for operations.
14.4.3 OPERATING CONCESSION
Description: NCRR maintains ownership of ROW while a private operator receives all farebox and other revenues. Concessions usually require long-term contract (20+ years).
Advantages: NCRR is removed from some risks (such as operations, equipment and maintenance) and a long-term commitment from the private sector means incentives for long-term improvements and efficient operations.
Disadvantages: Start-up and infrastructure improvements are still the responsibility of NCRR. There is also a high level of risk on profitability and few entities exist with adequate experience with passenger operations.
14.4.4 FULL CONCESSION
Description: Similar to an operating concession except that a full concession includes ROW operations and maintenance. Start-up costs are shifted to private entity and it may include freight operations as well.
Advantages: Nearly all risk removed from NCRR (including all ROW improvements and start-up costs) while still maintaining ROW ownership.
Disadvantages: NCRR loses control over operations and loses its tax exemption on debt. Also few railroad entities may be eligible for concession.
14.4.5 FULL PRIVATIZATION
Description: All or part of the NCRR is sold.
Advantages: State/NCRR are removed of all risks.
Disadvantages: State/NCRR loses all control and future passenger operations (including HSR) are seriously hampered. In addition, there may be no interested buyers.
14.5 SUMMARY AND RECOMMENDATIONS
The two management structures with the most potential for implementation in the SEHSR are an operating contract and an operating concession. Both represent feasible public-private partnerships in which operations are conferred to a private firm, but in which the significant startup ROW investments remain the responsibility of NCRR. A full concession has some potential, though it would be precluded by any lease established with a freight operator. Lacking such a lease, the option may not provide for sufficient revenue streams to attract a private concessionaire.
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