Investors may not be willing to back the state’s bullet train project until after it begins operating, the California High-Speed Rail Authority said in a letter to key legislators, an acknowledgment that again raises serious questions about how the $43-billion construction cost will be paid over the next decade.

The letter gives a preview of the authority’s upcoming business plan, a critical document that is supposed to address long-standing concerns that it lacks a credible blueprint for building and operating the system. Even supporters of the Southern California-to-San Francisco system have said the previous business plans were unrealistic in their estimates of construction costs and ridership numbers, among other things….

Although it is not impossible to find some private money, the letter said “the authority is planning for a more likely market scenario in which private capital is attracted based on the revenues of the project once revenues are proven.” The failure to attract private investors earlier is seen by many critics as evidence that the state’s plan is excessively risky.

The problem here is that “private money” is not really very well defined. Is it private investment in the system’s operation? In its construction? Or is it something more substantial, like a private builder-operator bringing some of their own money to the table up front, leveraging state and federal dollars to essentially build and run a system for their own profit?

The other question is what is meant by “private.” Is it institutional or individual investors? Or is it a national rail company like Japan or China, both of which have indicated interest in funding and building California high speed rail as well as HSR systems in other countries?

There is plenty of evidence to suggest no matter how you define “private money” the interest in HSR is there. A UBS study showed that HSR was a good investment, with the main risks being political. In Florida private investors had confidence that the system would be profitable – so much confidence that they pledged to cover cost overruns.

What would make California any different? Hard to say. The key seems to be connecting the Central Valley to either the Bay Area, LA, or both. And that requires expensive tunneling under the coastal ranges. More public money is going to be required to make that happen, which is fine – those links are obviously essential to HSR meeting the state’s travel needs.

Yet federal funding for HSR is stalled thanks to the temporary ascendance of extremists in the House who are ideologically opposed to passenger rail, whether or not it’s a good investment. There’s just enough federal funding to get started but not quite enough to get finished. The project is stuck in this odd limbo, imposed by the Republicans.

As we’ve pointed out, that situation is likely to be temporary. If Democrats take back the House in 2012 and maintain control of the Senate and the White House – all of which are quite possible – then HSR funding will again flow. If not, then other options will have to be explored.

HSR critics like Elizabeth Alexis, who is quoted in the LA Times article as calling the project “wishful thinking,” have never believed that passenger rail needs to be part of this country’s future. They’re happy to see the project die, since they believe despite all the available evidence that California can continue to afford dependence on oil and on driving everywhere. We know it can’t, we know the recession and ongoing economic crisis is in large part due to oil dependence, and we know that people are shifting away from driving anyway.

HSR is going to be built. The question is only whether it happens sooner or later. If sooner, it will be less expensive and save more money. If later, the costs go up and the savings are delayed. Let’s hope the federal funding situation improves soon, so that these benefits and savings can be delivered now. We don’t really have the luxury of waiting.

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:

State:
• 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.)

Federal:
• 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)

Local:
• 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

Private:
• 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.

Today I had that experience reading Stanford professor Richard White’s shocking and misleading attack on the California high speed rail project in today’s New York Times. To call White a respected historian would be to put it mildly. He is one of the leading historians in his field, the study of the American West, and his scholarship is second to none.

I first came to know of him at the University of Washington, when I began my graduate program in history there in 2001. White had just left for Stanford three years earlier, but his legacy was still strong. Several of my colleagues had worked with him and spoke highly of his teaching, his writing, and his attention to detail. I met him briefly at a conference at Stanford in the summer of 2006 when I delivered a paper on neighborhood political organizing in San Francisco in the 1960s. He was friendly and approachable, and very smart.

One of White’s most prominent books is The Organic Machine. Written in the mid-1990s while still at the University of Washington, the book examines the roots of the salmon crisis and in particular the dams along the Columbia River. I wrote about this in 2009 in the context of HSR tracks along the Los Angeles River, in a post titled Building an Organic Machine Along the LA River. Here’s how I put it at the time:

White’s argument was simple: in modern societies, there is no easy separation of the “natural” and the “man-made”. A single key sentence explains White’s thesis: “We might want to look for the natural in the dams and the unnatural in the salmon.” The Columbia River dams became part of nature, and created new ecosystems. The dams brought changes, some of which were positive, some of which were negative. White’s goal isn’t to praise or damn the dams (heh) but to instead show that for humans to think about saving salmon or managing the Columbia River, they have to accept that there can be no such thing as “purely natural” – instead the river is an “organic machine” whose consequences have to be weighed before they are acted upon.

High speed rail will function as an “organic machine” in California. It will change the surrounding environment, whether that environment is a Peninsula city, a Central Valley grassland, or the banks of the Los Angeles River. And it won’t have been the first – compared to the urbanization of California, the agriculturalization of the Central Valley, the building of the first railroads and freeways, high speed rail is really just an upgrade of the existing machine to make it more environmentally friendly and more effective.

And it can serve as an “organic machine” along the Los Angeles River. It can reconnect neighborhoods to the river depending on how the tracks are built. It can help produce a cleaner river, a cleaner sky, and a more sustainable use of the river’s watershed. Lizare and Reyes want to see HSR as some kind of invader. It’s not. It’s instead a way to reconnect human uses of land, just as it is in Palo Alto.

At the time, I didn’t necessarily say that White would have supported HSR, only that he might have understood the nature of the dilemma along the LA River. The history of the American West is one of intensive human uses – and changes – of the land. White’s book was in part a call for historians to focus on the interplay of man-made and natural forces, to see how they came together to shape western history, to reject the easy and often misleading dichotomy between the two.

And I certainly never imagined White, a careful and reputable scholar, would lend his name to an attack on the HSR project that was so deeply rooted in flawed evidence. In White’s NYT op-ed, he compares the HSR project to the 19th century transcontinental railroads, arguing that HSR is merely government subsidy of private enterprise that will cause “dumb growth” and impoverish everyone else. White’s argument is not new – we hear it all the time from Peninsula NIMBYs – but what is shocking and tragic to me is how he roots that analysis in a complete misreading of the project and the evidence. In the end, White is making just another uninformed attack on the project – and has tossed away his credibility by doing so.

Let’s take a look:

IT is hard for liberals like me to find good news in the latest agreement to cut the federal budget, but there is at least one silver lining: subsidies for high-speed rail have been sharply reduced. Why is this good news?

In his State of the Union address, President Obama compared high-speed rail to the 19th-century transcontinental railroads as parallel examples of American innovation. I fear he may be right.

For the country as a whole, the Pacific Railway Act of 1864 and subsequent legislation subsidizing the transcontinental railroads — the lines that crossed the continent from the 98th meridian to the Pacific Coast — were the worst laws money could buy. By encouraging dumb growth, those laws sacrificed public good for private gain, and Americans came to regret it.

Look at what White is doing here. In allying with oil companies and the Koch Brothers, who were behind the defunding of HSR, White tries to inoculate criticism by saying “I’m a liberal.” At the end, he’ll return to this theme of HSR opposition being a liberal position – but keep in mind what is missing. Nowhere in this op-ed will we hear of high gas prices, climate change, or the economic impact of those phenomena. Instead White will place himself squarely with the Peninsula NIMBYs – people who see themselves as “liberals” but who are behaving like conservatives.

Still, White’s point is potentially compelling. He’s absolutely right that the way the transcontinental railroads were built was simply ruinous. By giving away massive amounts of public land and other public subsidies to private corporations that had an unregulated monopoly, American democracy and prosperity were significantly undermined. He is quite right to suggest that we never make that mistake again.

White’s mistake, however, is to make a series of factual errors and from them, conclude that HSR is exactly the same as the Central Pacific that the founder of his current university, Leland Stanford, got rich building. (This irony is nowhere acknowledged in the op-ed, although I don’t think that’s White’s fault.)

The first error is White’s description of the California HSR project:

It is not that either transcontinental railroads or high-speed railroads are always bad ideas. A compelling case can be made for high-speed rail between Boston and Washington, for example, but the administration proposes building high-speed lines in places where there is no demonstrated demand. In California, construction of the new high-speed rail line from San Francisco to San Diego will begin with a line from Borden to Corcoran in California’s Central Valley. It is already being derided as the train to nowhere. The reduction of federal subsidies has not stopped the project, which now threatens to become a forlorn monument to hubris.

White is wrong here, as people familiar with the HSR project know. He is ignoring the enormous benefits of HSR from San Francisco to San Diego and repeating the lie that the project is from “Borden to Corcoran.” That’s merely where the first shovels will dig; and that segment is now being expanded to connect downtown Merced to downtown Bakersfield. Even those endpoints are merely temporary. The California High Speed Rail Authority has made it crystal-clear that the first line is from San Francisco to Los Angeles. The first dirt has to be turned somewhere, and all construction projects have a phase. The fact that the project is starting where construction is the cheapest and easiest doesn’t mean the whole thing has no value.

White then goes on to correctly describe the many ways that the private operators of the transcontinental railroads drew huge subsidies from state and federal governments, most of which the governments never were able to recover. He talks about the Gilded Age reaction against giveaways to large corporations, which was a necessary corrective to these kind of reckless practices.

But then White starts arguing that HSR is the same thing. And as above, he does so on the basis of flawed evidence.

Yet here we are again. The Obama administration proposed a substantial subsidy, $53 billion over six years, to induce investors to take on risk that they are otherwise unwilling to assume. Such subsidies create what the economist Robert Fogel has called “hothouse capitalism”: government assumes much of the risk, while private contractors and financiers take the profit.

The key to White’s argument is “risk” – that government is shouldering a huge risk by building HSR, and that the private sector alone will see the gains. He develops that argument further:

And, as it did in the 1860s, California has sweetened the pot with subsidies of its own: a $9 billion bond issue. State law stipulates that the California High-Speed Rail Authority, which is planning, contracting for, and, eventually operating the system, will not get operational subsidies. It, not taxpayers, will pay its operating costs and its debts.

Correct. And as we know from global experience, the train will cover its own operating costs out of fare revenues. The question of its debts is a bigger one, which we’ll get to in a moment. But on this crucial question of covering its own operating costs, White makes his biggest factual errors:

Those assurances are based on rosy and widely ridiculed ridership projections. Critics, the most trenchant of whom are part of the Community Coalition on High-Speed Rail, say that only two high-speed rail routes run without operating subsidies: Paris to Lyon and Osaka to Tokyo.

White really made a big error here, one that undermines his credibility significantly. By assuming that Peninsula NIMBYs are right when they say only two HSR routes do not have operating subsidies, he makes a big error that most of us historians know to NEVER make – he takes someone else’s statement of fact for granted.

Good historians do not do that. We look at the evidence for ourselves. The evidence is crystal clear that virtually all HSR systems cover their operating costs. The Acela, operated by Amtrak, covers its own operating costs out of fares. So does Spain’s AVE. So too does HSR in Russia and Taiwan. The CC-HSR group is simply lying. And now White has repeated the lie in the pages of the New York Times. That’s devastating to his credibility here.

White’s playing the game of claiming that California HSR is a risk because nobody in California rides trains. We know this is not true. Amtrak California continues to see huge increases in ridership, especially as gas prices rise again. Near Stanford, Caltrain continues to have high ridership, leading to an all-out effort to save Caltrain funding – and yes, that train, which Stanford depends on, is heavily subsidized. But intercity trains like Amtrak California have big ridership and indicate that the market is there.

So too do the ridership studies. CC-HSR, a anti-rail group with the same objectives as the oil companies, is claiming that the ridership studies are “rosy” and unreliable. But there’s no evidence at all to defend that statement. CC-HSR, White, and others are willfully misreading the Berkeley ITS report. That report was deeply flawed, as I pointed out, but even its main conclusion was that their view of proper modeling indicates that the ridership numbers might or might not be right. But Cambridge Systematics, a highly respected firm that did the ridership study, has their own view on this, backed up by other observers and econometrists, who say the numbers are valid. This is not a case of someone disproving something, it’s a case of different views on how modeling should be done.

I don’t see how it helps White’s credibility to come into the middle of this debate, which I doubt he even knows about, and decide that the ridership studies are flawed when even the Berkeley ITS report was careful to stay away from that conclusion.

While there *is* risk that the ridership numbers won’t cover operating costs, all the evidence shows that risk to be very, very small. The Acela is a good example – it pays its own costs. As the New York Times itself explained last year, high ridership materialized quickly on Spain’s new AVE line between Madrid and Barcelona:

Two years ago, nearly 90 percent of the six million people traveling between Madrid and Barcelona went by air. But early this year the number of train travelers on the route surpassed fliers. The trajectory is ever upward.

And we know from the data that Spain and California are very similar. The weight of the global evidence is clear; California HSR will very likely cover its operating costs. The risk it won’t is minimal.

The true risks are the ones White never discusses. The risk to California’s economy and households of ever-rising gas prices. White never once mentions those. Nor does he mention the 12 billion pounds of CO2 that HSR will save, and the risks of unchecked climate change are never discussed at all by White. Finally, White ignores the cost of doing nothing – which isn’t zero, and could actually be in the hundreds of billions just to deal with the transportation needs that HSR would serve at a much cheaper price.

White makes it sound like HSR would be a burden to Californians, rather than an asset:

Without bond guarantees, private investors, which so far seem more prone to due diligence than the California High-Speed Rail Authority, have yet to put up money. The most astonishing thing is that even as financial problems force California to dismantle its social safety net, eviscerate its educational system, and watch its roads crumble, it has agreed on a plan for high-speed rail that demands substantial local subsidies and certainly will involve further concessions by the state to attract private investment.

White is wrong here – California isn’t being “forced” to dismantle those things at all. It’s doing so because its political leaders would rather do it than raise taxes on the rich, which would avoid those problems. And HSR does help solve the underlying problem, which is one of a severe and prolonged recession caused by dependence on oil. As a western historian, White knows very well the role of resources in economies. White’s argument, that HSR “certainly” will require subsidies and concessions, is simply not backed by the evidence, and the evidence he did give is flawed or outright wrong.

It is as if a family, with one spouse out of work, unable to meet mortgage payments or school tuition, eagerly takes out a loan to buy an electric car after an uncle offers to share the cost. The catch is that there is no upper limit on the price, and the neighbors have to chip in. Nineteenth-century Americans would have grasped the analogy.

But it’s a flawed analogy. Private investors haven’t put up the money yet because they haven’t yet been asked. Yet it has been made crystal clear that they will if interested – Richard Branson and Virgin, Siemens, as well as the governments of China and Japan – which said it would put up “half the money” – are just some of the investors who have shown strong interest in helping fund the system. UBS believes the biggest risks to HSR investment are political. Investors know HSR will make money – their concern is instead that Washington DC doesn’t have the political will to get it built.

White would have been on much stronger ground had he been raising questions, not making conclusions. He is absolutely right that the private sector role in major infrastructure projects can be a bad deal for the public if the details aren’t gotten right, if that role is too large. In fact, one of the very first posts on this blog made the same point. And this blog has been consistent in its warning that using too much private debt can be a problem. This post from a year ago made the point clearly. Yonah Freemark at The Transport Politic and DoDo at the European Tribune have made the point too.

But their points are very specific. They both showed that HSR has high ridership. They both showed HSR covers its operating costs. What they also showed is that too much private funding can cause problems if you expect fare revenues to cover both operating costs AND pay back high-interest loans immediately. If the capital loans are to be paid back over a long period of time at a low rate, then it could be workable. Still, HSR advocates, myself included, have been consistent in saying that to be safe, we should fund HSR construction out of tax revenues as much as possible, to limit any private involvement to a small and manageable level.

What White is praising – the federal government’s elimination of HSR funding – actually makes his nightmare scenario more and not less likely. He should lead the charge for public funding, not lead the charge against it.

And of course, nowhere is White offering a balance sheet that shows the benefits from HSR – jobs created, companies founded, tax revenues from economic activity generated, money saved from not having to buy oil, carbon emissions reduced from not having to burn oil.

Had he merely said “let’s hope HSR doesn’t follow that path and fund this with general taxes like we did the Interstate Highway System” I’d be praising his op-ed. He’d have offered a fair and reasonable warning about how we build HSR. Instead he seems to be saying we should not build HSR at all – that HSR is following the flawed path and therefore it sucks. White’s conclusion does not match the evidence, and he himself repeats flawed and false claims instead of having done the diligence and research himself, as he has in his own excellent historical scholarship. And that’s a big problem.

And that’s why I’m so depressed today. It really sucks when people use their name and their reputation like this.

More than 1,100 expressions of interest flooded into the California High-Speed Rail Authority’s offices in Sacramento prior to a Wednesday deadline – from businesses ranging from self-employed entrepreneurs and small businesses to multinational corporations and large construction firms. The submissions were in response to a “Request for Expressions of Interest” issued by the Authority in February, asking that the private sector put in writing their desire to help develop California’s high-speed rail project.

In the responses, companies addressed the design, construction, operation and funding aspects of both the initial construction segment in California’s Central Valley and the overall first phase of the statewide project stretching from the Los Angeles basin to the Bay Area. The responses will help guide the next stages of the formal procurement process and the packaging of future bids.

Here we have very clear evidence of private sector interest in this project. It’s not just businesses looking for contracts, but funders looking for an opportunity to partner with the Authority to help build the system – because they know it will generate a lot of riders and a lot of revenues.

The Authority’s press release included some quotes from the private sector and other partners:

“We look forward to being a participant in and working with the California High-Speed Rail Authority in making this project the first very high-speed success story in the US.”

-Guillaume Mehlman, President, ALSTOM Transportation Inc.

“We are prepared to immediately partner with the Authority in developing an implementation approach that builds on current passenger rail transportation successes such as the Capital Corridor and San Joaquin services, just to name a few.”

-Albrecht P. Engel, Amtrak

“This prospect is tremendously exciting in that it links the major cities of California in a visionary and market changing way. This is an opportunity to which VRG is prepared to commit substantial resources to, in order to assist the Authority in achieving its objectives. We believe that California is a market very well suited to High Speed Rail.”

-Virgin Rail Group

“We are excited for the opportunity to participate on such a monumental project.”

-Bill Trombley, Director of Preconstruction Services, Skanska USA Civil West California District

Some of those quotes are more specific than others, obviously, but I thought the comments from Virgin Rail Group were particularly interesting. They are saying, quite clearly, that they can bring money to the table. That’s not new – Richard Branson expressed interest in our project over two years ago and reiterated that commitment in 2010.

Certainly the details matter – and we don’t really have those yet. But that will get fleshed out in time. What this response shows is that the private sector is very interested in – and confident in – the HSR project here in California. That won’t stop right-wingers from attacking the project, just as it didn’t stop Florida Governor Rick Scott from killing their HSR project even though the private sector was willing to help fund the project and pay any cost overruns. But it should remind us of the truth, that HSR is popular in the private sector, just as it is with the voters of California.

High-speed rail projects from California to Florida have attracted the interest of investors from the Bank of Japan to Goldman Sachs, according to multiple sources.

“There really isn’t a day in our office that we’re not approached by a supplier or a provider,” said Rachel Wall of the California High Speed Rail Association.

This isn’t anything new – we’ve known for nearly three years now that there is extensive private sector interest in our HSR project, giving the lie to the claims of project opponents that it’s some sort of boondoggle.

In fact, we know that the Florida HSR system would have generated surpluses, showing why the private sector was so willing to pay cost overruns and help fund the project – they knew it would be a money-maker.

So it’s no wonder Florida Republican Rep. John Mica knows this too:

“Don’t tell me you cannot make money moving passengers by rail,” said Rep. John Mica, who chairs the committee. “We will drag Congress and whoever else kicking and screaming into the 21st century with passenger rail service with private sector participation, one way or another.”

That was the same conclusion reached by UBS last summer in a study that found the only threats to HSR were regulatory and political, expressing no doubts at all that HSR systems would generate ridership – as long as they were the right length, as California’s is.

I’m sure that HSR opponents will find some way to attack this as well, they always do, but the truth is clear: HSR has broad support from the private sector. And they’re as risk-averse as anyone. Just goes to show that opposition to HSR is usually based out of selfishness or ideology – or in some cases, a mixture of the two.

To those not as familiar with the HSR project, Bill Lockyer’s comments last month that Wall Street wasn’t sold on the HSR project might have seemed like another in the onslaught of attacks on the project. So E.J. Schultz, one of the best reporters in California politics, decided to look further. Some of it he gets right, and some of it he doesn’t:

But the government’s gamble won’t pay off unless private investors jump on board the $40-plus billion project — and so far no one has pledged a dime.

If the money doesn’t come, the state and federal governments risk sinking billions of dollars into a rail line that never gets finished.

This isn’t correct. The government isn’t gambling on anything. If private funding never shows up, then the whole system isn’t finished. But because of the “independent utility” rules attached to HSR funding, which have been the subject of extensive discussion in the comments to Saturday’s post as a result of this memo, there’s no danger at all of the “government” building a half-finished project.

Schultz is incorrect to call this a “gamble.” There’s no risk at all. If funding doesn’t materialize to build the whole plan, the whole plan doesn’t get built. If another dime never materialized for HSR in California, the San Joaquins might get a new track between Fresno and Bakersfield, or the Surfliners would get sped up between LA and Anaheim, and that’s it. Those would be useful projects, and that’d be that.

Too often, people approach HSR as if it’s some kind of start-up business, when in fact it’s no different than a freeway widening proposal or a bridge plan. The plan may be great, but if you can never get full funding, the plan sits on a shelf.

Of course, Alan Lowenthal’s always there to remind Californians of the doom and gloom:

“This could be the greatest thing that ever happens to the state, or a real disaster,” said state Sen. Alan Lowenthal, D-Long Beach, who has taken a lead oversight role.

He doesn’t actually explain how it would be a real disaster. Given the safeguards listed above, it’s not really possible for it to be a disaster. It would be nice of Lowenthal would adopt a more constructive approach.

Schultz goes on to cite Bill Lockyer’s comments to the San Diego Union-Tribune that set off the questions about private financing. Significantly, Schultz reports that Lockyer is backing off those comments to an extent:

In an interview with The Bee, he softened those comments some, saying investors are “skeptical,” but that “these are just preliminary comments” made before anyone has spent time “making a disciplined investment decision.”

Schultz also quotes California High Speed Rail Authority Deputy Director Jeff Barker, who explains how the timeline for private funding would work:

The authority expects it might even have to start construction on some of the segments before investors step up. The estimated phase-one completion date is in the 2019-20 fiscal year.

“We’ve said all along that the private investment in the project is going to come toward the end,” said Jeff Barker, a rail authority spokesman. “Before the private sector is going to put private money into this, they’re going to want to see that it’s real.”

In one potential scenario, construction companies, rail-car makers, train operators and financial institutions could form a consortium. In return for an investment, they would get a cut on profits during a 30-year lease, plus control of the system — including the power to set fares, Barker said.

To longtime readers of this blog, that’s something you’ve known for a while. At the June 2008 CHSRA Board Meeting, a presentation was given explaining what it would take to get private funding:

There was a fascinating presentation from the Infrastructure Management Group and Lehman Bros. They were hired as consultants by the Authority for the issue of bringing private equity investment into HSR. Their presentation to the board was based on the responses they received to their Request for Expression of Interest (RFEI), sort of like a pre-RFQ (request for qualifications). Diverse operators and contractors, including SNCF (the French National Railway), Britain’s Angel Trains, and giants like Alstom, Parsons, and Goldman Sachs responded.

Long story short, there’s lots of interest in it but it would require at least 60% public financing. Probably at least 75%. The good news is that if we get both the bond money and a matching federal amount under veto proof legislation (S.294 and HR 6003) pending in the Congress we are there. $20 billion S.F. to L.A. and beyond to Sacto and San Diego.

In other words, as reported to the board, the private sector isn’t going to step up until they see a considerable federal contribution. It’s not that they have no faith in the California project. It’s that they’re not yet sure Congress is going to properly fund its share. Assuming that the federal government does authorize the $15 to $17 billion that we need from them, then there is every reason to believe the private sector will step up.

For example, as I posted just a few days after reporting on Bill Lockyer’s comments, one of the world’s leading investment banks, UBS, actually sees HSR as a sensible investment. Once they see the federal government stepping up, private funders will too – but not until Congress has made its move.

To his credit, Schultz reported on the expressions of interest from private funders that were listed at the June 2008 board meeting. Since then, we’ve seen interest from others as well, including China. Schultz then goes on to mention the litany of critical reports put out about the HSR project – the flawed LAO study, the flawed State Auditor’s report, the deeply flawed Berkeley ITS ridership report. Unfortunately, Schultz presents these reports as objective criticisms, and not as the flawed documents they really are, but the overall effect is to make it appear like there are warning signs that are causing Wall Street to hold back.

That’s not what’s really happening. In reality, HSR critics are using these flawed studies to try and convince Congress to not fund California HSR, so as to strangle in the crib a project they hate. Without Congressional funding, there is no private funding. That’s the key point here, and I’m very glad Schultz let Barker make it – that elevates his article well above the much more flawed items we have a depressing tendency to see when it comes to HSR reporting.

In short, the ball is still in Congress’s court. When they finally do fully fund HSR (and I do believe it is a matter of “when” and not “if”), then we’ll see the private funders step up and make their contributions.

This whole situation reveals the deeper flaws in treating infrastructure like a business proposition. Nobody demanded to see a business plan before the Interstate Highway System was built – Americans declared it was necessary, and funded its construction through tax revenues, with private funding not playing any role at all. Here in the 2010s, we have a strong need for a new kind of transportation infrastructure. It would be nice if Congress had the guts to simply find a new revenue source and fund the construction of that infrastructure, to create jobs and economic growth now and for decades to come.

But they don’t, and with a California governor who has always been in love with public-private partnerships, we play the hand we’re dealt. Private funding will indeed come for HSR – as long as we get Congress to step up and do its part.

China has expressed great enthusiasm for being part of the project, with offers of technology, expertise and money. Where better could some of those resources be employed than, say, at the Nummi plant?

“It’s entirely possible,” said David Crane, Gov. Arnold Schwarzenegger’s special adviser for jobs and economic growth. “For example, it’s highly likely the railcars will be built in California,” he said, noting that General Electric Co. and China’s Ministry of Railways have a joint railcar venture aimed at the U.S. high-speed rail market.

But China is not the only game in town. Six other countries in addition to China have signed memorandums of understanding with California to explore the full range of opportunities. No matter who provides them, “we want manufacturing, services and capital brought to California,” said Crane, including the $12 billion in outside financing the California High Speed Rail Authority is looking for.

He didn’t have to say which of those seven countries is the most flush with cash these days.

Crane is also a member of the CHSRA board, so his words do carry extra weight. And this is perhaps the clearest statement that not only is China planning to bring some money to the table, but that other countries are as well. In fact, the “private financing” may no longer be the accurate term to describe the third source of money (in addition to state and federal contributions) – the term “outside funding” is appearing and would be more fitting if other countries are looking at directly contributing funds to the project.

In one sense, it’s sort of ridiculous that we’re even looking to other countries for funding. The US is still the wealthiest nation on earth and can easily afford the $40 billion plus cost of the California HSR system. But we’re not willing to go get that money because policymakers in Sacramento and Washington, DC are more afraid of anti-tax sentiment than they are interested in developing a domestic HSR network and industry.

So we’re left to look for funding from other countries, who can hopefully help fund part of the capital cost in exchange for some unspecified revenues. That doesn’t mean the private sector is out, far from it – I expect that private funding will still be a part of whatever “outside funding” model is eventually selected.

But the use of funds from foreign countries does open a very interesting possibility. Although a revenue guarantee isn’t necessary for private investors, and although it seems pretty clearly ruled out by Prop 1A, there remain arguments that a revenue guarantee is still necessary. If a foreign country is going to help provide some funding, then it would seem that the federal government has an interest in making sure the investment isn’t lost. The feds, then, could provide the revenue guarantee, ensuring the provisions of Prop 1A are upheld (no state funds would be going to the guarantee) as well as any possible needs of a private investor.

To be clear, I’m not saying that would be a good idea, or even that it would be necessary. But it’s one possible option for dealing with this.

Ultimately the significance here is that while there is some doubt out there about whether HSR is going to happen, indications remain that both the needed federal funding and the “outside” funding will materialize.

Note: I’m writing this from Seattle, where I’ll be spending the next few days catching up with old friends. That shouldn’t impact the posting frequency, but if there’s a day without a post, now you know why.

Instead, working off a limited knowledge base of passenger rail operations that too often rests on the assumption that it is unprofitable and unpopular, and trained to be skeptical of government officials and government programs, too many California journalists find themselves willing to believe just about whatever they’re told by an HSR denier who has the sense to frame their denialism in moderate-sounding language. The result is that journalists get used as transmitters for anti-HSR talking points that are full of inaccuracies and distortions, because the journalist in question is either too unfamiliar with HSR to know any better, or too lazy to fact-check what these people are telling them.

We’ve seen a lot of these stories over the last two years, and unfortunately we’ll see many more. But it’s especially sad when a new news venture launches with a flawed story full of misleading HSR denialism as one of their feature stories.

That’s what’s happened with the Voice of Orange County, a new online news operation put together by veterans of the Orange County Register and the LA Times. As an Orange County native, I’m very excited to see such a journalistic effort be launched – and therefore am very disappointed to see their efforts sullied by a deeply, deeply flawed attack on HSR by Tracy Wood.

Wood is no journalistic slouch. According to her bio on the site:

Tracy Wood is a former foreign correspondent in Asia and a California investigative reporter and editor. As a reporter for United Press International, she was one of the few women assigned as a combat correspondent during the Vietnam War.

She joined the Los Angeles Times in California where she was an investigative reporter for 17 years, covering political and government corruption. Later she became the Orange County Register’s Investigations Editor, leading the paper’s investigations team when it broke the story of former Orange County Sheriff Michael S. Carona’s ties to Nationwide Auction Systems founder and former Assistant Sheriff Donald G. Haidl.

As anyone familiar with OC politics knows, that story was particularly explosive. Sheriff Carona was seen at the time as “America’s Sheriff,” an up-and-coming media star and politically untouchable. But when the media broke the story of Carona’s misdeeds with his associate Haidl, it eventually led to the destruction of Carona’s career.

Unfortunately, instead of using those skills to provide a well-researched and informative look at the HSR project, Wood appears to have instead accepted without question the arguments of HSR deniers, in an article headlined “High Speed Rail Veers Off Track”:

California’s proposed $42 billion high-speed rail line, which is supposed to whip millions of passengers up and down the state at up to 220-miles-an hour, is so poorly thought-out at this point that even supporters say the plans might have to be completely overhauled.

“The (ridership and construction cost) numbers keep changing,” complained Sen. Alan Lowenthal, chair of the state Senate’s Transportation and Housing Committee. “I want to see real numbers.”

I am personally unconvinced Senator Lowenthal is an HSR supporter. He claims to be one, but in practice he has had nothing but criticism for the project, much of it unfair. Here he is embracing HSR denier terms. The ridership numbers haven’t changed since 2007, and the cost numbers haven’t really changed either – what did change was the year in which the costs are being priced. The 2008 cost estimate was in 2008 dollars. The 2009 estimate was in year of expenditure dollars, as mandated by the federal government. The “increase” was merely a shift in estimate based on anticipated inflation over the next 10 years. It’s not a sign that project costs have soared.

The Long Beach democrat, a supporter of high-speed rail, is among an increasing number of policymakers and experts who are worried that voters who approved the 2008 high-speed rail ballot initiative are becoming victims of a classic bait and switch.

“If history is any guide, rail projects have drastically over-estimated the ridership and drastically underestimated the cost,” said Eric Morris, a doctoral researcher in urban planning at UCLA and a supporter of passenger rail transit.

This is simply false, but has also gone almost totally unchallenged by Wood. The Metro Gold Line East Extension opened on-time and under budget. The Phoenix light rail line exceeded ridership projections by 33% – and that’s in America’s sprawl capital. The Seattle light rail line was also built on-budget.

As to ridership, this is where, once again, California journalists fail to consider global HSR success. For some reason, they never ask “do other HSR systems meet ridership goals?” The answer is unfailingly yes, even if it typically takes about 5 years or so for the ridership goals to be met. Sometimes it happens sooner.

But you’d know none of this from reading Wood’s article. She merely quotes so-called “experts” as if they are speaking truth, instead of fact-checking what she has been told.

Among the things that make Lowenthal and others uneasy is a current business plan that estimates almost one-third of the expected 41 million annual riders will stay within the Los Angeles basin or in the San Francisco Bay area. And one that appears to compete with existing lines for fares.

In short, this indicates that 1/3 of the riders will be commuters of some sort. Is that such a crazy expectation? If service between San Francisco and San Jose takes just 30 minutes, or service between LA and Anaheim takes just 20 minutes, that would beat all other transportation options. It stands to reason that people would indeed choose the fastest option for intraregional travel.

As to “competing with existing lines,” that seems a fundamental misreading of the situation. If one’s travel plan is downtown LA to ARTIC, then sure, you’d take HSR over a Metrolink or Amtrak train that makes more intermediate stops. But if your travel plan is downtown LA to Fullerton, or downtown LA to San Clemente, or Santa Ana to San Bernardino, or Van Nuys to San Gabriel, well, you wouldn’t take HSR. HSR would handle certain point-to-point service, but would enable Metrolink, Caltrain, and Amtrak to beef up service for other routes and other destinations. Plus, as Wood doesn’t mention at all, HSR investment helps those other rail lines get improved infrastructure to enable their own faster speeds, boosting their ridership and farebox recovery.

They also must deal with the rail line’s impact on local communities (like Buena Park), the accuracy of financial estimates and the need for a professional staff accountable to state taxpayers rather than teams of temporary consultants.

There are also questions about the rail authority’s qualifications to oversee the high-speed train system. One alternate proposal would replace the current rail authority with a state agency to oversee and coordinate all passenger rail issues.

It’s true that the CHSRA has to deal with these things. But that doesn’t mean, as Wood clearly implies, that all these charges are valid. The CHSRA does need to have more staff, but that also means they need more reliable funding – something Senator Lowenthal has not supported.

Wood continues her bias toward quoting HSR deniers:

And GOP Assemblywoman Diane Harkey of Dana Point has introduced a bill that would stop the train altogether.

“While high speed rail may benefit certain areas of the state, the lack of specifics as to cost, subsidies, financing, and ridership, added to the state of the state’s finances, should cause the Legislature to reconsider its overall value to the people of the state of California,” said her staff summary of her bill blocking construction of the rail system. “Public resources might be better spent on a steady supply of water, roads, prisons and schools.”

What is never mentioned anywhere in Wood’s article, however, is that all HSR projects cover their operating costs through fares. None needs an ongoing operating subsidy, including Amtrak’s Acela. Readers don’t know that based on Wood’s article, however, and Asm. Harkey’s claims stand unchallenged.

Also unchallenged are the vague and unsourced claims of passenger rail critics:

Experts like UCLA’s Morris talk like they’re watching the first act of a play they’ve seen over and over. Overblown ridership estimates, he said, sometimes were intentional ploys. But in other instances, they were the result of an “optimism bias…an honest misreading of things because you’re excited about things and you think it might work.”

Prof. Eric Heikkila of USC’s School of Policy, Planning and Development, another passenger rail supporter, sounds a similar warning. “It seems that for rail projects around the country before the fact,” he said, projections “have been, in many cases, wildly optimistic.”

This is where a Wikipedia citation needed tag would be useful. Where is Morris’s evidence that the California HSR project’s estimates are flawed or deliberately overstated? As Wood should know, you don’t just report claims like that which lack supporting evidence. She wouldn’t have let Sheriff Carona get away with it, but she lets this doctoral researcher do it because it suits her overall argument? Other questions and assertions are left unchallenged – which rail projects were wildly optimistic? As I showed, in Phoenix (just one example of many) the ridership estimates weren’t accurate because they were too low.

Lacking knowledge and expertise in HSR – and unwilling to seek out such knowledge to judge what she reads – Wood winds up totally misinterpreting the Taiwan HSR experience:

A Senate Transportation Committee staff analysis noted Taiwan financed and constructed a $19 billion, 208-mile high-speed rail line using private resources.

The private company was supposed to operate the rail line for 35 years and then turn it over to the government. Service began in 2007, according to the staff report, and by 2009 had only 87,000 riders a day when ridership forecasts had predicted 280,000.

In the end, the government had to bail it out financially, exactly what voters were promised won’t happen in California.

The Taiwan experience, the Senate staff report said, “suggests that an overly optimistic original forecast was made.”

Wood regurgitates a State Senate staff report without challenging it or its assumptions. The truth about the Taiwan HSR project is that a series of flawed decisions made during the design and construction phase, largely to please politically connected friends of the government, led to cost overruns that in turn forced the system to open without full buildout. Although the trains were showing steady ridership growth year over year and had grabbed a majority market share away from planes and buses, the underlying finances of the system fell apart.

But not because HSR is inherently flawed. Instead the problem was that the specific way the Taiwan HSR project was funded was flawed. Yonah Freemark explained it well at the Transport Politic last September:

The Taiwanese system, which cost more than $15 billion, was the first in the world built entirely with private funds — 80% of which were secured through bank loans at high interest rates. Though the line’s fare revenues, lower than projected, make up for operations, maintenance, and even most interest payments on the initial capital costs, elevated depreciation charges put the railroad into its misery. The recession, which decreased interest in travel, put the final stake in the company’s heart.

The problem in Taiwan was that the project was overleveraged and overindebted, and when ridership was not high enough to meet the staggering debt service levels, a bailout was forced. What the Taiwan experience suggests is not that HSR is doomed to fail, or even that private funding of HSR to some extent is always a bad idea. Instead what it shows that that too much private funding is massively risky, but public funding such as that used in Spain or France seems pretty damn reasonable.

Significantly, those successful HSR experiences are never discussed in Wood’s article.

Wood continues with the fear, uncertainty, and doubt-laced article:

But once construction is completed in 2035, planners haven’t figured out how high-speed rail will pay for itself. So far, according to the rail authority’s most recent business plan, the most profitable system appears to rely on about 12 million of the expected 41 million annual riders staying inside the boundaries of the Los Angeles basin or traveling among stops in the San Francisco Bay area.

Again, as mentioned above, this is not implausible. That would still leave well over half the ridership revenue coming from travelers going across the state, between north and south.

Perhaps one reason Wood’s article is so biased toward HSR deniers is that’s almost all she interviews. Wood does not talk to a single HSR supporter that’s not affiliated with state government – I would have happily spoken with her had I been contacted. The only pro-HSR statements come from Curt Pringle (Sen. Lowenthal does have a quote that’s favorable to HSR, but he is not a project supporter). Instead Wood sets up a storyline of “flawed, overpriced, misleading government vs. a few brave critics.” It’s a familiar trope for investigative journalists, and sometimes is true. But in this case, it’s not. Yet you wouldn’t know it from Wood’s article, since she did not take the time to speak to independent project supporters or fact-check the quotes she was given from her sources.

This article isn’t going to make or break HSR. But it is yet another example of why it’s important to combat HSR deniers, since their misinformation tends to find its way into media stories on HSR, written by journalists who don’t understand passenger rail, who won’t look around the world at successful HSR projects, and who apparently can’t be bothered to do those things.

Orange County residents and Californians deserve better. It’s not impossible to get HSR journalism right – but you wouldn’t know it by reading the Voice of OC. And that’s a shame.

Because private funding will play an as-yet undetermined role in California’s HSR project, it’s important to get beyond the false assumptions peddled by the media. The reality is that there’s a high demand from the private sector to participate in HSR funding, but that private funding is inherently risky and should be dealt with very, very cautiously.

There’s no doubt that right-wing HSR denialism has a proven track record of getting their talking points into the media, even when the evidence contradicts their assertions. A good example is Liam Julian’s op-ed in the SF Chronicle last week. Julian is a fellow at the right-wing Hoover Institution, based at Stanford University, and like his fellow right-wing think tank fellows at the Cato Institute and the Reason Foundation, Julian is a strident opponent of HSR:

First, no one knows how much it will cost. New numbers put the price of the Anaheim-to-San Francisco segment alone at $42.6 billion. California expects to receive about $18 billion from the federal government; so far, Washington has donated $2.3 billion. The state also expects to receive $12 billion from private investors, but the rail authority has provided scant evidence that it can raise that amount.

Aside from the the self-contradictory nature of this quote (if the CHSRA has an estimate, then it’s not accurate to say “no one knows how much it will cost” is it?!), Julian is just plain wrong to imply that private funding isn’t going to materialize. RFF, the French track owner, recently awarded a build-operate-maintain contract to VINCI, a private company that will contribute €3.6 billion euro (roughly $5 billion) in capital to complete the LGV Sud Europe Atlantique, with the French government picking up the other half of the cost.

Julian’s argument was further undermined in the same newspaper by Oliver Hauck, president of Siemens’ USA division:

Private companies, including rail technology suppliers like my own, are willing to accept some of the risk inherent in financing this major upgrade to the American transportation system.

Given the current economic realities, is there an appetite out there to fund high-speed rail? We think there is.

So what is the best format to minimize risk for all concerned and guarantee that projects are delivered on-time and on-budget?

We believe the government should seriously consider public-private-partnerships), typically a concession agreement of 30 to 35 years whereby the government partners with the private sector and allows them to supply infrastructure assets and services traditionally provided by the government.

Nowhere in Hauck’s op-ed is there any mention of a revenue or ridership guarantee. Hauck implies that one isn’t necessary to attract private investment, and in fact states that one of the benefits is that “private companies are willing to accept some of the risk.”

The SF Chronicle also ran an op-ed by CHSRA Chairman Curt Pringle, which did not break new ground but elicited a frothing-at-the-mouth reaction by yet another wingnut, the San Diego Union-Tribune’s Chris Reed, who denounced Pringle on the issue of private funding:

No, Mr. Mayor, these aren’t the two main elements of the “discussion” now going on. Instead, the “discussion” is focusing on the fact the California High-Speed Rail Authority has an illegal business plan that would require future taxpayer subsidies.

Yo, Curt! Can’t you ever address that forthrightly? Please?…

After Pringle downplayed this problem in an e-mail to me, I went directly to Legislative Analyst Mac Taylor, who said the revenue guarantee “did seem to be in direct violation” of the no-subsidy promise. Taylor was also highly skeptical of the idea that a ridership guarantee could be substituted for a revenue guarantee.

I’ve never been a fan of the ridership guarantee notion, and think it has no place in the business plan. But what Reed is implying is that without such guarantees, no private backer would be interested in funding the project. Yet Siemens, in the form of Hauck’s op-ed, is actually saying “we will take on the risk” and made no mention of any ridership guarantee. If they don’t feel it’s important enough to mention in the op-ed, then it is safe to conclude from that and from their willingness to assume risk that no revenue guarantee is needed for at least Siemens to get involved in funding the project.

Put that together with the RFF/VINCI contract and it seems pretty damn obvious that the “private funding won’t materialize” argument is baseless speculation. But what happens when the funding does show up?

As Yonah Freemark points out at The Transport Politic, private funding brings considerable risks to the public:

In both Taiwan and the United Kingdom, private infrastructure firms managing the construction of new high-speed lines have gone broke because of their reliance on loans taken out at high rates, leaving the taxpayer to foot the bill on both line construction and loan back-payments. All the “creativity” in the world bulging from the minds of entrepreneurs didn’t save the people of either of those countries any money compared to what they would have gotten from a fully public operation. In each of those cases, the “risk” supposedly assumed by private corporations was dumped back onto the public sector because you don’t put billions of dollars in a high-speed rail program and then simply throw it away when private funds evaporate.

At least you shouldn’t.

It could be argued that governmental entities can manage infrastructure funding more effectively because they’re able to take out loans at much lower interest rates. This power could be expanded if the U.S. Congress establishes a national infrastructure bank, as has been recently suggested. A fully public operation would allow taxpayers to get some of their investment back through operational revenues; by contracting out a PPP, those profits will all go into the hands of corporations and their shareholders.

It’s worth going into some more detail on the Taiwanese example, since that unfolded in the last year or two. Taiwan’s HSR system met its ridership projections, though it took a year or two to get there. In his seminal Puente AVE article, DoDo explained why Taiwan’s successful HSR system did not translate into a successful PPP project:

For the THSR, cost overruns were largely the consequence of a switch to Japanese suppliers after planning based on European high-speed technology was already well-advanced. The decision was widely rumoured to have been political (and led to an epic political, media and court battle ending in damage payments to Eurotrain), and the overseeing company THSRC did not go with the actual Japanese offer, but stuck to its guns on specifications. Thus f.e. a German maker had to be contracted to supply fixed-track high-speed switches (no need for those on Shinkansen lines with their strictly single-direction tracks).

Likewise, both lines were opened half-finished: one-third of the Seoul-Busan KTX line was delayed (until 2011, now thanks to those sleepers maybe even further), THSRC started with a reduced schedule, both started with some stations unfinished (for the THSR, including both downtown terminuses!) or without urban transit connections. Also, both lines started with hefty ticket prices that had to be reduced later.

And yet Taiwan HSR had begun to overcome these problems:

The failure to meet expectations after the start was widely discussed as a national scandal in both countries. However, you can also see on the graphs that there was steady growth thereafter. And that at the expense of other modes of transport.

The modal shift was particularly spectacular in Taiwan. In just 20 months, all but one single daily flight between the cities served by THSRC was eliminated (last December, THSRC’s share of the air/rail market was 99.95%…), leaving the highway as only competition. Total domestic air passenger transport fell almost by half(!). The steady uninterrupted annual growth of highway traffic was not only stopped but turned back.

In short, Taiwan HSR is a successful project in terms of ridership and achieving many of its goals of shifting transportation modes. The problem with Taiwan HSR is largely with the method used to finance it – heavy private sector borrowing. The 80% private funding method left Taiwan HSR financially vulnerable to poor construction decisions, cost overruns, and the global recession.

Back at The Transport Politic, Freemark argues that private funding could work out for California HSR, but only if it avoids these pitfalls and uses private funding in sensible ways that don’t turn out to be a giveaway of public sector resources to private interests:

But prioritizing profits has many negative side-effects apart from the loss of generalized mobility made possible with low fares: those twenty million potential riders unwilling to pay big money to ride the system will choose air and road alternatives instead of the train and produce increasing congestion and air pollution. Is that an acceptable trade-off?

Nevertheless, if managed correctly, a public-private partnership on the scale of what California is suggesting could be implemented without many negative consequences, especially if the role of the for-profit side of the equation is limited as much as possible. Facing enormous debt trouble, California has little maneuvering room to increase its bonding capacity beyond the $10 billion already committed to the project; meanwhile, the corridor is competing with projects across the country for very limited federal funds.

Getting the PPP process right, though, is vitally important.

A potential compromise would be to focus private involvement on the real estate side of the equation. The residents of California are wealthy, and the state could make billions by selling off development rights for land surrounding stations. Limited private investment in the line itself could mean a diversion of some, but not all, profit away from the public sector, leaving room to fulfill non-profit-oriented goals.

This makes a great deal of sense. The primary purpose of California HSR must be to provide affordable, fast intercity passenger rail service – not to put money into the pockets of corporations and investors. If the latter can be achieved as a side effect of a successful mass transit system, fine, but it ought not be the primary objective.

Typically, HSR deniers aren’t focused on this part of the discussion at all. They’re too busy trying to convince people that HSR is a bad idea by ignoring or cherry-picking the global evidence and not zeroing in on the more useful debate about how to build HSR effectively. Tomorrow, we’ll take a look at what happens when these misleading HSR denier ideas get spun by a credulous and inexperienced reporter.

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.