The 2009 Business Plan Is Out
Submitted one day early, the 2009 California High Speed Rail Business Plan is now available to the public. It is 145 pages long, but there are two basic points that you’re almost certainly going to hear about over the coming hours and days:
1. The estimated cost to build Phase I of the project is $42.6 billion
2. Estimated HSR fares are 83% of airfares
Both of those are higher than before, which will almost certainly lead to a new round of “oh my god high speed rail is a boondoggle we can’t afford, we have to kill it before it bankrupts us!” nonsense from the usual suspects.
But here at the California High Speed Rail Blog, we prefer common sense over misinterpretations. Even at $42 billion, HSR is a bargain given the cost of expanding freeways and airports to meet the same demand, a cost estimated to be anywhere from $80 to $150 billion. It’s also a bargain given that the cost of doing nothing is not zero – unchecked global warming, soaring oil prices, and a lack of green jobs will all cause widespread economic damage, whereas HSR is an investment in our future that will not only pay for itself, but will generate new savings, new income, new jobs, and new economic opportunities for generations to come.
That has to be weighed against the HSR deniers, the defenders of the status quo, who WILL argue that any change in the basic elements of the project, particularly cost, somehow proves the project is flawed, somehow proves the CHSRA is less than honest, somehow proves they were right all along. It does no such thing. So as the usual suspects ready their slings and arrows, let’s be clear on what the new business plan means.
First, the cost.
The 2008 Business Plan assumed a system cost of $33.6 billion. The 2009 Business Plan assumes a system cost of $34.9 billion. So where does the $42.9 billion number come from?
The first two numbers are in 2008 dollars. However, as a condition of receiving federal stimulus money, the CHSRA was told they had to cost it out in “year of expenditure” dollars – the projected cost when the money is actually spent. Assuming inflation, the overall cost rises to $42.9 billion dollars.
In other words, the cost increase is entirely outside the CHSRA’s control. It’s not because they screwed up, it’s not because the system is flawed. It’s because the feds told them to take a guess at inflation over the next 10 years.
And it’s a guess. Inflation could be much higher. Or deflation could continue and the final cost could be much lower.
What we do know is that this cost estimate is a more credible estimate. Assuming key elements of the project don’t change, such as route, there’s no reason to assume the final cost would be higher than $42.9 billion. That is, unless the Peninsula NIMBYs get their way and a tunnel is built from South San Francisco to Mountain View, in which case the cost would soar.
It’s good that we have a more credible estimate now. It produces less chance of sticker shock in the future. It helps us know what the costs are likely to be, and enables us to ensure we can deliver a project on-time and on-budget. And while the HSR deniers will claim that the 2008 estimates were misleading, the fact is that it makes sense to price it out in 2008 dollars, since especially these days, trying to determine future inflation rates is a total crapshoot.
The second issue is the cost of fares. This is linked to ridership, so it’s worth spending some time on the matter.
There is no inexorable force dictating fares. The Authority can basically choose the fares however they please. If they want to have fares set at 50% of airfare, they can do so. If they want to have fares set at 100% of airfare, they can do so. If they want to have fares set at 83% of airfare, as is assumed in the business plan, they can do so.
However, there are costs to doing so. A higher fare could generate more revenue to pay back private investors. But that might come at the expense of ridership.
It is worth quoting the business plan at some length on this topic. From page 67:
High-speed train fares are a key factor in the level of ridership and the revenue forecast. Forecasts for the programmatic EIR/EIS work used fares based on an LA – SF fare at half (50 percent) of the 2005 air fare, and varied proportionally with distance for other trips. This “50 percent” fare level generates relatively large passenger flows without requiring operating subsidy, and creates large public benefits from the public investment, e.g., air quality improvements, energy consumption reductions, and travel time savings. It also ensures that local and regional impacts of the high-speed train on items such as traffic, parking, sensitive lands, and water resources are not understated.
Tests of the sensitivity of riders and revenue to fare levels 33 percent higher and 66 percent higher than the “50 percent” base level showed progressively higher revenue, although lower ridership. The 66 percent higher case (which becomes the “83 percent” of air fare case) appears to be near the level that will generate the highest revenue, and reduces the operating costs and the number of trainsets needed. Because of the importance of increasing the amount of private sector funding in the construction and procurement of the project, the 83 percent fare scenario was adopted for this business plan. The fare is calculated in the same manner as the 50 percent, but is anchored by an LA-SF HST fare at 83 percent of the air fare, or in 2009 dollars a high-speed train fare of $105 vs. a $125 air fare, and a $118 cost to drive. [Emphasis mine]
In other words, the higher fares are there in order to generate more operating revenue to pay back the private investors who helped with the cost of construction. The business plan says that 83% of airfare is not unusual for HSR systems around the world:
The 83 percent level is in the middle of a wide range of experience in similar-length markets outside of California, based on prices examined in 200721. At the top end, weekend Acela fares in the New York to Washington market were higher than air fares, and on the Japanese Shinkansen fares were 108 percent of air fares for Tokyo- Osaka (322 miles) and 114 percent Tokyo-Hakata (722 miles). London – Paris Eurostar HST fares were 80 percent of air fares, both peak and off- peak. Madrid – Sevilla (333 miles) AVE fares were 71 percent of air, and Paris Lyon (244 miles) 71 percent of air. In the Paris Brussels market (191 miles) where HST has 95 percent of the air/rail market, and airlines are primarily connecting to long-distance flights, (similar to Central Valley service to San Francisco or San Diego-Los Angeles flights) air fares are very high, and HST fares were only 39 percent of air fares.
In any event, this discussion should sound somewhat familiar to you. In what was one of the most important posts of the year on HSR, DoDo’s “Puente Ave” article, he examined this very issue of initial fares and ridership, and concluded that initial fares should be kept low in order to generate riders – and that HSR systems should avoid seeking higher initial fares in order to pay back investors:
It happens actually quite often that a major new rail project gets off to a really bad start, generating bad publicity — and then turns into a solid mainstay of the transport system a few years later (with less media coverage). To sum up the reasons:
• an expectation that people will change travel patterns instantly;
• financing (e.g. interest rates and period of maturity) and rosy projections themselves are tailored for short-term expectations on profitability;
• after diverse construction delays, (especially high-speed) lines are often opened half-finished (missing sections, stations, local transit connections, trains, signalling), and thus can’t realise their full potential instantly;
• when the builders become nervous about their ridership projections (be it due to cost overruns or ‘half-finished’ openings as per above), they tend to bet on passengers accepting higher ticket prices — which usually doesn’t work out.
DoDo then explored SNCF’s success on the first TGV line that opened in 1983. Despite cost overruns and their own use of private financing, SNCF refused to hike their fare structure. They had a low fare structure initially, and that generated an instant success on the system, enabling it to quickly become financially viable.
The 2009 Business Plan, ironically enough, suggests that the 83% fare isn’t all that necessary:
Predictably, ridership is better with fares at 50% of airfare. However, revenue isn’t all that much different – it looks like about $300M or $400M per year by 2035.
This would seem to be an argument for following the SNCF model. Of course, that would require more public funds in the project’s construction, and fewer private funds.
That’s a battle worth fighting in the coming years. The HSR deniers will take these numbers and use them to claim the system is flawed, there’s nothing we can do to stop them. But we can, and we must, continue to tell the truth about these numbers, explain why they’re there, why the cost estimate gives us a firmer and more accurate base to work with even while we realize inflation may not be that high going forward.
And more importantly, we need to continue to argue for a major infusion of federal funds in this project, in order to ensure we get high ridership instead of creating a temptation to raise fares to pay back investors.
Because even if it does cost $43 billion when all is said and done, high speed rail in California is still a cheaper option than the cost of doing nothing. Carbon emissions, fossil fuel dependence and the economic cost of such dependence, the cost of expanding roads and airports, and the cost of giving up 150,000 construction jobs we’re unlikely to create any other way.