Previewing the 2011 Business Plan
The latest Business Plan for the California high speed rail project is due to be released in October, and there’s a lot riding on it. Many legislators have declared that the Plan has to show a viable path forward for the project, particularly its financing, or else they might be interested in pulling the plug. Governor Jerry Brown’s recent vote of confidence for the project may lower the stakes somewhat, but he too will want a good business plan in order to build confidence.
So the Business Plan presentation at last week’s California High Speed Rail Authority board meeting takes on particular significance.
The presentation indicates that an “Enhanced Economic Benefit Assessment” will be part of the plan:
• The most comprehensive and well vetted economic benefit analysis to-date of California’s HSR system being developed
• Results will reflect peer reviewed and approved travel demand model, updated inputs, and best practices from federal and state review agencies
• Statewide workshops were conducted in Bay Area, Central Valley, and Bay Area with leading academics, representatives of MPOs, COGs, economic development agencies, and other policy and planning groups, to present our economic impact methodologies and receive feedback
• Benefit-cost ratio. Discounted public benefits over the extended life of the investment are expected to be well above the discounted costs
• Public benefits include travel time and reliability savings both for train users and highway and air travelers; also includes environmental and safety benefits, energy savings, and other factors
• Full costs include both initial capital construction, yearly operations and maintenance and periodic rehabilitation and replacement of equipment and systems.
This is really good stuff, implying that the Authority fully understands what HSR critics vehemently refuse to acknowledge: that any Business Plan, any cost assessment, has to include the entire picture, including the enormous economic benefits of the system and the costs of doing nothing.
But the meat of the Business Plan will involve how the system is to be funded, constructed, and operated. In November 2010 the Peer Review Group said that one of the most important things the Authority needed was to determine its business model. Last week’s update suggests there has been progress down this path:
Under all business model options government plays lead organizational role
Options for private involvement to meet two objectives
• Contain costs and mitigate risk
• Generate more funds
Private investment opportunity driven by HSR ridership
• Early phases require public investments to construct
• Later phases can leverage ridership revenues and public investment to attract private investment
This is sensible. The private sector won’t just build tracks, they are interested in profiting off of ridership. And let’s be clear, most private investors are not worried about the lack of riders. Private sector interest in HSR is strong, and they offered to pay cost overruns in Florida because they knew the system would have generated surpluses. A UBS study in 2010 found that the main risks to HSR investment were political, and not that there was a risk of low ridership.
On the other hand, we need to be wary of private investment in the high speed rail system. Yonah Freemark at The Transport Politic has been raising that concern for several years now, and his recent post Doing Right by the Public: PPPs in High-Speed Rail is worth considering here:
With a promise to the state’s citizens that another demand for California-wide funds will be avoided, few local dollars to contribute, and an utter inability to rely on Washington for practically anything, that means the system will have to find private investors to join in. Whatever the relative merits of allowing private companies to invest in what is fundamentally public infrastructure, California has no other place to turn for the successful completion of its system.
Hard to argue with this statement. Freemark then takes a look at two French HSR PPP models and a recent USDOT report to draw some important conclusions about the impact of PPP on HSR:
It would be a mistake to conclude from these examples that private-sector involvement will save any significant money over the long-term. Fundamentally, the creation of PPPs to fund projects such as California High-Speed Rail does not mean that the public at large will end up being responsible for a smaller percentage of overall costs. Indeed, the U.S. Department of Transportation’s Office of Inspector General released an under-recognized report last month that expounded on this fact significantly.
By considering a series of PPP highway projects in the U.S. and abroad, the study noted that they “have a higher cost of capital than traditional public financing… [and] involve equity investors who own stakes in the projects, share in the profits, and expect to earn higher rates of return for the risk they undertake,” in addition to having to pay taxes public projects do not have to pay. Even if PPPs have lower design and construction costs, may be able to more effectively increase tolls, decrease percentage of evading users, and take more advantage of concessions*, they are usually not able to offset the higher costs resulting from the formerly noted issues….
In other words, while the taxpayer may appear to be getting a discount now by having a business group pay for infrastructure, users of that same infrastructure will inevitably have to face the costs of future tolls. In the case of high-speed rail, replacing public sector investment during the construction phase with privately financiers using loans means higher ticket prices in the future to pay back a portion of the costs of construction. There is no free lunch.
Freemark is pointing out that if California has to turn to a larger portion of private financing in order to get HSR up and running, it will likely require higher fares once the system is open. That won’t mean nobody will ride the trains, but it may mean that not as many people will be able to ride as there ought to be.
He goes on to lay out the two sides of the case for and against funding HSR out of user fees:
The question is whether benefits of a transportation investment advantage the entire public or whether they are reserved to the specific people who take direct use of it. Transportation economists are convinced of the value of user fees, which assume that it is inefficient to carry out redistribution through indirect means, and for them, it makes perfect sense to charge users the full cost of not only the operation but also the construction of the infrastructure they are using. (Many economists would also argue that high-speed rail projects have significant positive externalities like pollution reduction and land use prioritization attached to them that demand direct grants from the government to cover some costs.) This user-fee approach is the method being used in the financing systems of the PPPs discussed here.
Others, however, would argue that the benefits of infrastructure like high-speed rail are economy-wide and that they should be paid for not only by users but by all members of the population through taxes. If we take this side of the argument, it becomes less clear that the best value for the society is to divert most costs to users. A grant-based system assumes that benefits of a transportation investment are felt by people throughout a country (such as through economic growth) and therefore just charging the riders for the costs of capital investments would be inappropriate.
Aside from being a good explanation of why I am deeply skeptical of “transportation economists,” Freemark does a good job here of explaining the stakes. HSR’s benefits are indeed economy-wide, and it makes the most sense for everyone to help build it. After the experience with the transcontinental railroads, where farmers, industries, and even entire political systems were held in thrall by the railroad barons, American politicians in the 1950s insisted that the Interstate Highway System be funded by everyone through gas taxes, whether or not a purchaser of gas ever drove on an interstate freeway. Californians subsidized the construction and operation interstates in the middle of North Dakota and vice-versa, and the American economy grew as a result. Any “transportation economist” who discounts these benefits is no “economist” but just a shill for right-wing ideology.
HSR would be best off if it followed the model used by France in the 1970s to build the TGV, as explained by DoDo in his Puente AVE article from 2009. The French government prioritized ridership, and generated a lot of it by subsidizing ticket prices:
This commitment to “democratizing” high speed rail was reinforced by the Socialist government of the early 1980s. Indeed, under the Mitterrand presidency, the SNCF introduced a remarkable publicity slogan to promote the TGV: “Progress means nothing unless it is shared by all” (Le progrès ne vaut que s’il est partagé par tous”).
Unfortunately, California HSR is stuck with a provision forbidding subsidization of operations. This was inserted by right-wing State Senator Roy Ashburn as a price of support for putting Prop 1A on the ballot in 2008. It’s a stupid and pointless provision – every other form of transportation in the state is subsidized, and there’s nothing wrong with that. HSR can operate without subsidies, but it will happen at the cost of ensuring that, paraphrasing Mitterrand, progress won’t be shared by all.
In any event, the CHSRA’s Business Plan preview makes clear that private funding “will require ridership from Central Valley connection to Northern and/or Southern California,” which should be good news for those who are still convinced that the Central Valley segment is a “train to nowhere.” What this means is that private funding might well materialize to link the Central Valley segment to San José, or to fulfill Paul Dyson’s dream of finally closing the missing link from Bakersfield to LA.
The preview also indicates that the project will “Need approx. $3-$4 billion/year for 15+ years” to get built. Where will that come from? That’s the all-important question:
• G.O. Bonds ($9 B total capacity; $2.8 B to be allocated for ICS)
• Other potential new state revenues to “leverage” for financing (e.g., GHG reduction credits, etc.)
• Initial $3.3 B secured
• Existing appropriation and grant programs – can leverage but are not enough
• Need new committed programs within approx. 4 years that could support full funding grant agreement (e.g., trust fund/reauthorization); tax credit bonds (leveraging state bonds); commuter rail programs in urban corridors)
• Locally funded station development (e.g., SF, Anaheim, LA)
• Transit‐oriented development and station‐area retail has minor role
• Locally approved sales tax for matching funds could be explored for later phases
• Limited appetite for “greenfield” ridership risk transfer
• Revenue‐backed financing
• Other project‐generated revenues (e.g., advertising etc.)
Of these, the most important are probably the “new committed programs” that will be needed from the federal government within 4 years, and the “revenue-backed financing” from the private sector. Some may point out that Congress is currently in no mood to provide those programs, to which I would point out the polls that show Republican control of Congress may end in January 2013.
Ultimately, this isn’t a technical question or a financial question, but a political question. If the political will to help lead California into the 21st century and deal with our economy, energy and environmental crises is there, then we will find a way to pay for high speed rail. It’s cheaper than the alternatives, and in a state and country as wealthy as California and the United States, getting the money is easy so long as the desire is there to do it.
If the political will isn’t there, then HSR won’t be built in the near future. That’s no surprise and no different from anything this blog has been saying since it launched in March 2008. We know that the public has the political will. We know that Governor Brown and the Assembly have the political will. We know that President Obama and the US Senate have the political will.
At this point I’d say the crucial institution is the California State Senate. If they too are willing to help build a better future for California, then we will figure out how to make HSR work. But if they’d rather follow Senator Alan Lowenthal and refuse to build for the future, preferring to let a failed status quo continue, then we will have to wait a while for HSR to get under way.