What’s Wrong With This
Project?
Without private capital, a California HSR
system cannot be built. The 2008 bond measure was premised
on a third of the investment in HSR coming from the private
sector. Yet, there are no private investors in the
project--even now, when it is under construction. This
demonstrates that the California High-Speed Rail Authority
(CHSRA) has failed to create a commercially attractive
project. But is California HSR inherently unattractive
commercially?
HSR is a Viable
Business
TRANSDEF knows that California HSR is an attractive
business, if approached with cost-consciousness (CHSRA’s
plans are vastly more expensive than necessary). We know
this because we were present for the dress rehearsal of the
presentation made by the American subsidiary of the French
National Railways, SNCF, to the CHSRA in October 2010.
The SNCF Powerpoint addressed what SNCF saw as the key
weakness of the CHSRA project--its insistence on
building the initial system without private capital and
without the direct involvement of a firm with HSR
operating experience. The presentation suggested that
CHSRA use the structure of a Pre-Development Agreement
to bring an experienced operator on board immediately to
direct the project. SNCF was accompanied by a major U.S.
investment bank that was ready to fund the construction
of the San Francisco to Los Angeles phase of the project
without a ridership guarantee.
A major condition of the SF-LA proposal was SNCF’s
insistence that it select its own route. While part of the
Pre-Development process was to refine a route, SNCF had
tentatively concluded that I-5 would be much a faster route
than the politically distorted route approved by the
Authority--as well as much less expensive and less
disruptive to build. SNCF believed the Authority’s route to
be a money-loser, and would not accept ridership risk for
it. Note that, despite all the talk about the merits and
demerits of an I-5 route, the SNCF proposal was not
premised on a specific route. It was solely a process to
bring in private capital and an experienced operator.
CHSRA did everything possible to discredit
and bury the
LA Times
story on the
SNCF proposal, going so far as to tie the railroad to
the Holocaust. With all the slurs flying around, it is
important to note that SNCF was not asking CHSRA to turn
the project over to it. They were instead asking that CHSRA
establish a Request for Qualifications process, leading
to an open Request for Proposals process, which would
result in the selection of an operator. They were fine
with the possibility that the winning proposer could be
another firm.
CHSRA Chooses the Dark Side
Had the CHSRA been operating in the public interest, it
would have held public hearings on the proposal and on the
desirability of setting aside its favored route. It could
have been under contract now with an international HSR
operator selected through an open bidding process,
proceeding towards a fully funded LA-SF buildout. (A
project like that would probably not have been challenged
by TRANSDEF.) This would have been consistent with the
business model recommendations of the High-Speed Rail Peer
Review Group in their very first letter, which stressed the importance of the
participation of the HSR operator throughout the design
process. Instead, CHSRA kept the proposal secret and
continued pushing its politically driven route, spending
over $500 million to develop plans for it.
Given the overarching
need for private capital, the 2008 Report of the Responses to the Request for
Expressions of Interest is highly significant. It indicated
that no HSR operator was willing to undertake the
ridership risk of investing in the CHSRA’s project.
Operators claimed that ridership guarantees were needed
to reduce the financial risk, but such subsidies were
strictly prohibited by the bond measure. The interest
expressed by SNCF demonstrated, however, that insistence
on ridership guarantees was conditional. The
Authority’s 2012 Business Plan rested on the foundational assumption
(see pg. 4-3) that no private capital would be invested
before the project showed a profit. Because of SNCF,
Authority Directors knew the project was unattractive to
private capital because of their preferred route.
The Business Plan asserted that $31 billion in public funds
(pg. 3-8) needed to be spent to build a segment from Merced
to the Los Angeles Basin before private sector
participation was even possible. That represented roughly
$26 billion in unfunded capital costs, an amount so
completely out of reach as to make the Business Plan
neither a business nor a plan. Instead, it was a faux-plan.
The CHSRA’s priority seems to have been spending federal
grant funds. Building an HSR system appears to be just a
cover story.
Who Does the CHSRA
Serve?
The Authority’s rejection of SNCF’s commonsense proposal to
reduce the risk to the State of California and adoption of
a fantasy faux-plan raises disturbing questions of where
CHSRA’s loyalties lie. The SNCF proposal would have brought
in the expertise needed for critical design decisions,
along with private capital willing to assume ridership
risk. A profit-making SF-LA system would have been under
construction now, at a greatly reduced risk to the State.
CHSRA’s choice to proceed with the faux-plan will, at best,
result in a $6 billion track that can’t be used for HSR,
and no viable pathway forward to a statewide HSR
system.
When the history of California’s HSR project is told, its
failure will be seen to have been caused by the Authority
itself, not its opponents. By rejecting the SNCF proposal,
keeping it secret, and then mounting an all-hands-on-deck
damage control effort to snuff out the story when it
finally became public, CHSRA clearly told the world that
its commitment to its army of consultants outweighed its
commitment to delivering an HSR project to the people of
California.
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