How to build a railway for free – you can’t

The Finnish government is again trying to work out how to build 4 new railways lines projects without taking on any new liabilities.

According to the Transport Minister none of the four proposed line projects can be financed by the government because Finland cannot take on any more debt, and, according to the Minister, none of the lines would be feasible based on traditional calculations. The Minister has then concluded that new ways of calculating project feasibility are needed to make them feasible!

In other words the Minister wants to use creative new accounting solutions to make the projects look feasible! If simple traditional methods cannot work then new creative accounting solutions will have no chance in getting private investors on board!

It appears that the Minister is also thinking of creating a company that would raise the funding from the pension companies, the municipalities and the EIB and NIB. The last 2 are banks in which the Finnish government is a part owner, and the pension companies are there for the pensions of taxpayers.

These people will never lend to such a loss making entity without a government guarantee, and they will never accept new creative accounting presenting exciting new solutions as collateral for their investments!

The projects are huge involving many billions of euros with payback periods spread over many decades. There are so many uncertainties surrounding transport solutions – huge car pools for hire, shared or not, driverless cars, electric planes, even autonomous drone taxis…

It is virtually impossible for any government to ask the private sector to build, operate and maintain a railway in big highly-populated countries, let alone an almost empty country like Finland, where deep snow and hard frosts make such infrastructure challenging to run and maintain.

… the only folks that make a great deal of money are the construction companies and municipalities who see the value of their land banks near stations increase dramatically. But it is a foolish wish to see these people investing money in railways. They just want to take advantage of any government policies that push through new lines when nobody else steps forward to finance them. 

There is not a bank or investor in the world that will ever consider investing in such project companies without an unconditional guarantee in one form or the other from a government. You can already see from the high rail project in the UK HS2.

HS2 is being developed by High Speed Two (HS2) Ltd, a company limited by guarantee established by the UK government, and already in the middle of its construction the price has doubled! Cities and others have been asked to contribute – but the public sector (taxpayers) effectively bear all the risks.

In any event, the big accounting firms and the big international banks are all there advising on how great this deal is because they are making nice fees with the taxpayers carrying all the risks.

HS2 is linking huge cities that are connected by motorways that are congested most of the day and still nobody believes that this project will ever be “profitable” except for the bankers and consultants. 

If readers or civil servants do not believe the above to be true then just look at the other big infrastructure project in London called the Thames Tideway Tunnel project, which is now estimated to cost 3 times the original estimate. The present £4.2bn cost is to be funded entirely by Thames Water customers who are all locked into this natural monopoly. Thames Water is a company created by the government that has asked independent investors to finance and deliver the scheme through  a new special-purpose company appointed to take the project forward. The special-purpose company is backed by pension funds and other long-term investors and has been guaranteed a rate of return of 8% and various government guarantees if there are cost overruns.

You do not have to genius to see that this is all smoke and mirrors to make the project appear to be off the government’s balance sheet! The extra costs and risk of these tricks are borne by taxpayers and the company’s customers.

Site Footer