I’m sometimes asked about the private sector’s role in infrastructure. I’ll cover this more broadly in the future, but for now, let me pour some cold water on the idea that a private actor could build an urban rail system for profit. This is a political and not technical problem: it is possible to build a few (but not many) urban rail lines that, at good but not unheard of construction and operating costs, would generate decent financial returns. However, such lines are extremely vulnerable to confiscation of profits by government at all levels, especially the local level. Moreover, it is not possible for a local government to give any credible guarantee of security of property for a private rail line.
Lines and extensions
There is a great many rail lines in the world where new construction can be profitable. For example, Tokyo subway lines turn a profit, and the government is not building more because it demands a minimum of 3% rate of financial return – and Tokyo has high construction costs. Seoul has low costs, and it’s plausible that if Tokyo could build subways at the cost of Seoul, it would go over the 3% threshold. London is roughly breaking even on the Underground, and I think Berlin is on the U-Bahn, so some of the stronger extensions might be profitable too.
However, in such cases, the profitable additions are mostly extensions of existing lines. These can be profitable, but not to a private operator, only to the agency that controls the existing line. Even new lines often come as part of a broader system designed around transfers; for example, a short line under consideration in Tokyo is designed to connect existing rail lines in Central Tokyo with the growing waterfront area. Usually, these lines work best with free transfers, so an independent operator can’t easily build them – it’s possible Tokyo will build the line as an independent one with extra fares for transfers rather than as a Toei subway, but if so this will be unusual by global standards.
That said, there do exist places where an independent actor could build an entirely new line and not have to worry too much about connections. The example I keep going back to is Geary Boulevard in San Francisco, where a line could connect Downtown San Francisco, say around Transbay Terminal (or even Union Square to save money and avoid tunneling under Market Street), with the Outer Richmond. The bus along this route has 57,000 riders per weekday, and the total including closely parallel routes is 110,000. Bus connections are useful, but a subway on Geary could succeed without them. The same is true of connections to the BART and Muni subways at Market Street – free transfers would be really useful, but the San Francisco central business district is strong enough that a private investor might well take the hit on ridership to avoid being too entangled with public governance.
A few more plausible independent lines include the Downtown Relief Line planned for Toronto, an east-west line between Queens and New Jersey via Midtown Manhattan, and and maybe even the dormant U10 for Berlin; U10 is unlikely to work at all without fare integration, but fortunately the Verkehrsverbund Berlin-Brandenburg provides a local mechanism for revenue sharing without getting too entangled in public governance, though even then I don’t think the returns would be high enough to interest a private investor.
Some technically plausible returns
Let’s focus on Geary in San Francisco. Total ridership on or parallel to the route is 110,000 per weekday, but that’s on slow buses. A rapid transit line would get much more than that – 250,000 is plausible on a very frequent driverless train averaging 35 km/h end-to-end. High frequency would also encourage off-peak ridership, but let’s keep the annual-to-weekday ridership ratio at 300, typical of New York, and not the higher figures seen in London, since passengers would have to pay a separate fare to connect to non-CBD destinations. So this is 75 million riders a year.
What’s the plausible average fare? The Richmond is a middle-class neighborhood, but even there, fares significantly above the current Muni rate are likely to discourage ridership. Muni currently charges $2.50 one-way or $81 for a monthly ($98 with BART, but we’re assuming no free transfers). Assuming New York behavior again, a pass holder averages 46 trips a month; averaging with occasional riders, let’s say this is $2/trip, or $150 million a year.
Against this, what’s the operating cost? If 75 million trips a year average 5 km (half the route length), and there are 30 passengers per car (the New York subway average, and 20% more than the commuter-oriented BART average), this is 12.5 million car-km per year. This is equivalent to 19 5-car trains per hour in each direction 18 hours a day every day. The non-New York first-world range of operating costs is $4-7.5 per car-km as of 2014, but none of the systems studied in the report is all or even mostly driverless, and entirely driverless operations as in Vancouver would reduce costs to the low end of this range. So make it around $50 million a year in operating costs, plus maybe $8 million in depreciation on rolling stock – and let’s even bump it up a bit to $70 million because the maintenance workers are local, even if everything else can be offshored, and San Francisco wages are high. So, $80 million in operating profits per year.
Finally, the construction costs. This is a 10 km line, so at the global median of construction costs this is $2.5 billion. But Scandinavia, Southern Europe, and Korea are all capable of substantially below-median construction – and Nordic working-class wages aren’t necessarily lower than Californian ones. $1.5 billion is plausible, and even $1 billion is ambitious but not outside the realm of possibility if the line only runs to Union Square, not Transbay Terminal.
Profiting $80 million a year on $1.5 billion in investment is thus plausible, giving somewhat better returns than 5%. There’s risk inherent in the figure – costs may escalate, ridership may disappoint, operating costs may be higher than expected. All three happened almost from the dawn of rail technology – they all were rampant in the Railway Mania. The good news is that there is also some upside – office growth in the center of San Francisco could generate more demand, and mass upzoning in the Richmond could happen and was recently a near-miss in the state legislature.
Nonetheless, 5% returns at this level of risk, given decent confidence in one’s cost control, are still reasonable. However…
The government will confiscate profits
Unfortunately for any prospective private investor, the city and state governments have a large toolkit with which to confiscate all profits:
- Impact fees – such a subway would have positive impact on the neighborhood, but the city can still find grounds to levy fees.
- Nuisance suits – groups can invent grounds to sue on and demand bribes (“community benefits”) in exchange for dropping the suit.
- Construction regulations demanding more expensive methods that are (or seem) less disruptive, e.g. a ban on the use of cut-and-cover even for stations.
- Requirements that all workers be unionized and that nothing be outsourced, even things that can be done remotely like the control center.
- Rules calling all new housing construction along the line a benefit to the company, for which the company has to pay a fee.
- Unfunded mandates for fare discounts for seniors, children, the poor, and other groups; the city can pay these discounts out of its own budget, but why not claw into the profits of a private rail operator?
- Hearings at the inevitable objections (someone is always unhappy) in which legislators demand personal favors (“community benefits,” again) in exchange for a yes vote.
The operating requirements, like the unfunded discount mandate, can always be imposed in the future in case the operator profits more than expected. This means that there is not much upside – if profits are higher, there will be more confiscation. The effective profit rate net of the cost of compliance with regulations approaches zero. It may well be negative – the city has every interest in driving a private operator that just spent $1.5 billion of its own money on a subway into liquidation, buy out the infrastructure, and operate service itself.
This in fact happened in New York in the 1920s and 30s. Starting under Mayor John Hylan, the city used regulatory denials to deliberately drive the private streetcar companies out of business. Simultaneously, through the construction of the IND to compete with the private IRT and BMT subways and through denial of a fare hike from 5 cents a ride to 10 cents even after post-WW1 inflation halved the value of the dollar, the city did the same to the private subway operators; the IRT went bankrupt in the Depression, and in 1940 the city bought it and the BMT out.
Obedience, emigration, or the graveyard
The state, or any actor more powerful than you, always offers you this choice. The meaning of obedience is flexible (the political opposition in a democracy is still obedient), and the meaning of the graveyard is usually not literal (“you’ll never work in this town again,” not “you will be killed”). But the choice is still this.
The main way of avoiding the graveyard, emigration, is not available here. Subways are physically fixed infrastructure. If a local government doesn’t like you, you can’t take your capital and move somewhere else. For this reason, owners of tangible property, like small business owners, have had anti-socialist politics going back to the emergence of socialism as a real political force around the Paris Commune, whereas skilled workers didn’t mind socialism as much.
Modifying the meaning of obedience is possible in a place with stronger norms of rule of law. In a capitalist country, earning a profit and paying the normal corporate tax rather than 100% is obedience – the risk is not federal confiscation but state or local confiscation, where the United States never established such norms, relying on the threat of capital flight to lower-tax, lower-regulation states to discipline governments.
I brought up the example of Berlin because I think that here the threat of local confiscation is smaller (but not zero – witness the rent control bill), but even then it’s unlikely to be a 250,000 riders/10 km line – it’s probably a breakeven line or slightly better, ideal for public but not private construction. For the most part, the subway lines that can be profitably built in the EU have already been built; there aren’t huge cities here with unique construction cost problems, except London, where I don’t think there’s an even semi-decent case for any rail line that’s not an extension of existing lines (counting Crossrail as an inward extension of suburban lines).
However, within the US and probably also Canada, even a well-capitalized corporation can’t really modify the meaning of obedience to include profitably constructing urban infrastructure. It can only emigrate, which in this case means knowing not to allocate capital to fixed infrastructure in the first place. Even if apparent returns beat the market, which I don’t think they do, the real returns will be zero so long as state and local governments remain as they are.