What’s Wrong With The HSR Project?

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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