Texas Central shouldn’t get a $12 billion taxpayer-backed loan
Photo 57243728 © Nuedesign | Dreamstime.com


Texas Central shouldn’t get a $12 billion taxpayer-backed loan

The Houston-Dallas proposal has long been sold to the public as a privately financed high-speed rail system that doesn't need taxpayers' money.

Last month, the chief executive officer of Texas Central, the company trying to build a high-speed rail system running between the cities of Dallas and Houston, made headlines by implying it needs the bipartisan infrastructure deal to pass Congress in order to secure a federal loan. 

“I think whatever happens with the infrastructure [bill] is key to us. I believe that would be the final element that would bring us together,” said Texas Central CEO Carlos Aguilar in a recent episode of the Y’all-itics podcast.

Texas Central is focusing on one of two federal programs that provide railroad loans. The Transportation Infrastructure Finance and Innovation Act (TIFIA) offers loans to mass transit, rail and highway projects. But TIFIA rules require that those projects receive two investment-grade credit rankings from at least two nationally recognized statistical rating organizations. However, given Texas Central’s lack of capital and the high level of financial risk of the proposed high-speed rail line, it is unlikely the entity could get one, let alone two, investment-grade ratings. 

Thus, Aguilar cited the Railroad Rehabilitation and Improvement Financing (RRIF) Program, which has provided loans to freight and passenger railroads and has very different requirements than TIFIA, as a potential source of financing for Texas Central. Originally conceived as a program to help shortline railroads secure financing, the RRIF program is unpopular with freight carriers due to the time-consuming application process and the credit risk premium payment that is required. Congress hates to see authorized financing go unused, however, so about 20 years ago it opened up the program to passenger rail lines as well. In total, about five out of every six RRIF dollars have been awarded to passenger railroads. 

Thus far, all of the RRIF passenger rail loans have supported Amtrak and local transit providers. Most of the loans have been for less than $1 billion, but Amtrak has an outstanding loan of $2.45 billion. Most of the freight rail loans have been paid back, while Amtrak has used accounting gimmicks (namely other federal grants) to shift money and pay back the loans. A 2010 loan to the Denver Union Station Authority was the only passenger rail loan that has been repaid without relying on those types of accounting tricks.

“Our target has always been loans,” Aguilar said. “It is focused, as I said on the long-term debt that is available through, for example, the RRIF program out of the U.S. Department of Transportation. And that’s what you need to build large infrastructure.”

The RRIF program has about $30 billion in remaining loan authority and, on the podcast, Aguilar stated that Texas Central’s “current estimate” for the size of the loan it needs is about $12 billion, which would be five times larger than the largest RRIF loan ever awarded.

Is it realistic for any project sponsor to receive 43% of the funding available to passenger rail and Class I freight railroads via the RRIF program? Given that President Joe Biden is a major supporter of passenger rail, some Washington insiders think that the administration could be looking to make a major statement on high-speed rail. Providing a $12 billion loan might prevent the department from offering multi-billion dollar loans to Amtrak’s Northeast corridor or the California High-Speed Rail Authority. But the California high-speed rail system has suffered massive cost overages and delays in just building a small section in the state’s Central Valley, so the proposed Dallas-Houston system is arguably the biggest potential high-speed rail line in the country right now and the administration looking to make its infrastructure push could make quite a statement with the loan. 

It would be wise for lawmakers and taxpayers to treat the company’s claims about costs, ridership estimates, and its ability to repay loans, skeptically. Thus far, Texas Central’s public relations machine has been more impressive than its claims and knowledge about railroad financing and operations.

The company still has very few private investors and does not have the resources required to start building the bullet train—even if it could receive a $12 billion loan. The Japan Bank of International Cooperation (JBIC), which has provided the majority of the project’s capital, has reportedly become frustrated that more U.S. investors are not providing support. JBIC is competing with France’s Société Nationale des Chemins de fer Français (SNCF) to export its high-speed rail technology to other countries and the U.S. is one of the largest untapped markets.

Aguilar seems to be trying to increase interest from investors and politicians to generate more funding. But it is worth noting that, contrary to Aguilar’s suggestion, Texas Central does not need the bipartisan infrastructure bill to pass in order to apply for an RRIF loan. The program has plenty of financing authority available today and Texas Central could apply.

The bipartisan infrastructure bill does mandate that the United States Department of Transportation (USDOT) refund borrowers’ credit risk premiums. (The Fixing America’s Surface Transportation (FAST) Act made this optional.)  But the Biden administration would be expected to refund the premiums regardless. Further, the premium is a very small percentage of the total (typically 0-5% of the loan amount, but at most 10%). Does Texas Central not realize the loan program is already available to it or is the company hoping to receive other advantages from the bipartisan $1 trillion infrastructure bill passed by the Senate? 

Either way, federal officials should make sure Texas Central does not receive a taxpayer-backed loan that the company may not be able to pay back. The Houston-Dallas proposal has long been sold to the public as a privately financed high-speed rail system that doesn’t need taxpayers’ money. A $12 billion RRIF loan would risk sticking federal taxpayers with a major financial loss.

Construction hasn’t started, but the Texas Central Houston-Dallas line’s estimated price tag has already grown from around $10 billion to $30 billion. It is taking land from Texas ranchers using eminent domain. The company has seemingly mesmerized government regulators, creating an interline agreement with Amtrak even though it would serve fewer than 100 passengers per day. And the company has befuddled rail experts with a variety of dubious technical decisions. Texas Central has long claimed it would be funded by private investors. There are plenty of legitimate reasons to be skeptical of Texas Central’s claims, so, if the high-speed rail line is going to be built, it should be built with private financing, not taxpayer-backed loans.