Heading off the rails

In April, a ‘mega-project’ both billed as the future of surface transportation for California as well as maligned as a colossal example of government ineptitude and wasted tax revenue, picked its would-be design-build team. 

Engineering and construction firm Parsons, contractor Tutor Perini, and Zachary Corporation were named ‘apparent best value proposer’ in a public-private partnership (PPP; P3) involving the so-called California High-Speed Rail project, envisioned as an 800-mile rail line that, upon its final rollout, will provide commuter transportation at breakneck speed from state capital Sacramento to San Francisco to Los Angeles and San Diego.

The procurement process itself, begun in 2011, was faultless, if protracted:  the winning team put up $985 million for the P3, a 60-mile section of the project from Merced to Fresno, edging out stiff competition from consortia numbering Ferrovial and Fluor Corporation. On the face of it, the project could now point to measurable progress—a prospective private partner.

But the procedure belied a bigger problem, both for the Golden State and for the market potential for high-speed rail (HSR) in the US in general. The California High Speed Rail project is seen widely as a bad idea with no shortage of pushback from the man-on-the-street as well as the intelligentsia. Meanwhile, and in spite of its importance as a political darling in Washington, D.C., there is a growing claim that HSR has no place in America.

Last, but most damning, of all, high-speed rail, compounded with risk, is proving unappealing to private capital.

“It was way too grandiose to begin with. It has been sold as a dream of the future rather than a practical solution. The project is just not a credible project,” remarks Bob Poole of the Reason Foundation, talking about the California High-Speed Rail project, before seguing into a none-too-favorable assessment of HSR in general.

“I think, for the US, HSR is a false hope,” he said. 

‘POLITICAL CONTEXT’

“There can be incredible risk in a project when a project is developed in a thick political context,” says Poole.

Poole, an engineer who studied at Massachusetts Institute of Technology (MIT), is the founder of the Reason Foundation, a think tank based in Los Angeles aligned with ‘right-libertarianism,’ or the belief in a free market coupled with limited government.

For the Foundation, Poole is dedicated to researching transportation, including road, air and rail. In providing insight on the troubled California High-Speed Rail undertaking, Poole is not inclined to couch his disapproval.

“I think the California High-Speed Rail project is on critical life support,” Poole says.

If his pronouncement is seemingly grim, consider this: before shovels dug into earth, the risk affixed to the California High-Speed Rail project – in the form of legal action – has proved daunting.

Last month, Timeless Investment, Millennium Acquisitions, Horizon Enterprises and Everspring Alliance – which each own real estate along the proposed HSR line from Merced to Fresno – had their lawsuit dismissed. Chowchilla dropped a lawsuit, as did a farm advocacy group representing Chowchilla and Merced.

Each lawsuit, it should be pointed out, alleged the project violated the California Environmental Quality Act. Aside from environmental opposition, the project has managed to rankle big business: both Burlington Northern Santa Fe Railroad and Union Pacific Railroad have spoken out, noting the project would interfere with exiting services.  

Meanwhile, funding the California High-Speed Rail project has been an uphill battle.

“High-speed rail in California? Do it when you have money, not when you do not have money,” says billionaire financier T. Boone Pickens.    

Initial financing came via a $10 billion general obligation (GO) bond issuance. A general obligation bond is a municipal bond paid back with tax revenue. 

“If the project is a loser, then the taxpayer is on the hook,” Poole points out.

But to complete the project, an undetermined combination of federal government funding – not to mention private capital – is going to be needed. While the project has an estimated cost of $65 billion, to date, just $11 billion in state and federal funding has been secured.  

In addition, the California project, approved via referendum in 2008, has undergone substantial change. As one-time proponent Quentin Kopp, a California politician and judge, has pointed out, the project is no longer in line with what passed in a direct vote. 

“What also was promised in the ballot box language when the public approved the $10 billion bond issuance was station-to-station travel time from Los Angeles to San Francisco, for example,” says Poole. “Yet, the design of the HSR system itself has changed and now has lower rail speed, but still, the project is maintaining it can make the voter-approved specified travel time, which is not possible.

“A project has to have a more rigorous job of estimating cost,” he says. “This has been a very sloppy and unrealistic job.”

California lieutenant governor Gavin Newsom has expressed a similar opinion.

“I am questioning it for obvious reasons,” Newsom said recently, referring to the support US President Barack Obama has given the project. “The federal government exuberance and support is clearly not going to be there in a sustainable way. 

“No other high-speed rail is operating without a subsidy. I think we have to be sober about this,” he said.

MEGA-PROJECT RISK

Like any transportation infrastructure mega-project, the California High-Speed Rail project is laden with risk: late completion risk; cost overrun risk; demand risk etc.

“The question is: who will bear the risk? That is important for a potential investor,” Poole says.

Rail risk in general is higher than road project risk. While a road project is easier to measure (a toll road, for example, will usually work out to be self-supporting), high-speed rail has limited context.

Other than the original ‘bullet train,’ the Shinkansen HSR line between Tokyo and Osaka, Japan, as well as the Turbotrain Grande Vitesse (TGV) in France between Paris and Lyon, no existing HSR in the world has covered its capital costs.

“But that [geographic] niche is not in the US,” Poole notes. 

The global potential for HSR is likewise narrow.

Canada is similar to the US in that, other than over a short distance, finding a geographic sweet spot for HSR that cannot be better suited to air travel or automobile is difficult. Developing Latin America might seem to offer hope because of limited automobile ownership, but the city-to-city cluster is often not close enough.

To generate profit, the California High-Speed Rail project, Poole says, would have to take market share from air travel. In the Golden State, home to Los Angeles International Airport, the Bob Hope Airport and John Wayne Airport, that would be a tall order. 

On finding a design-build team for the P3, Poole says, “construction is construction, but that is not the same as finding investment from private capital, and I do not see any serious prospect of that.

“There certainly are people who believe in it, but I frankly find it hard to understand,” Poole says. “With HSR, there is more of a tendency toward optimism bias, a lot of people want to get the project approved and will put a best-case scenario forward even though it is poorly qualified.”