While the Draft 2012 Business Plan of the California HighSpeed Rail Authority is more realistic than its 2008/09 predecessors, among other sobering changes the November Draft Plan states are:
- The project will not attract private investment for the first decade and until the public has taken the risk to put more than $30 billion into building the Initial Operating Section (IOS);
- The project offers only a superficial view of what the Central Valley’s Initial Construction Section (ICS) or the subsequent IOS would be good for if the rest of the system is not completed;
- While the Authority predicts that CHSR can run profitably after a decade of building, that’s predicated on the assumption that the project does not need to pay any of the construction cost); and
- The plan now presents justifications for the project based on “jobs” to be created and the “cost” of creating alternative modes of travel. However, both of those justifications are based on deeply flawed analyses. Lawmakers at the federal and state levels are now confronted with a policy choice of whether to keep investing billions.
Such money spent in California will be at the expense of other projects. It is especially important that lawmakers use the tools that investors use when assessing where to put precious capital. To repeat the point above, this is doubly important in the case of the CHSR project, since the 2012 Draft Plan makes it clear that there will be no private investors to share the risk until the public has spent at least $30 billion to build the Initial Operating Section (IOS). At present there are no identified or committed federal funds beyond the currently-obligated $3.3 billion.
While more rigorous and honest than the weak and superficial 2008 or 2009 CHSRA business plans, the 2012 plan remains non-investment grade in the opinion of our group of former CEOs, investors, bankers and businessmen.
- It continues to deploy a widely criticized ridership model which likely skews revenue upwards (see Chapter 3 of the plan).
- Its capital plan is wholly inadequate, with needs neither met nor plausibly forecasted in terms of supplying the projected construction cost funding of at least $100 billion (see Chapter 1 of plan).
- The plan continues to deploy a flawed financial profit-and-loss model that proposes prices at 50 percent of Europe’s revenue-permile on the income side but sets operating cost-per-mile at 25 percent of our projected European operating costs, with no adequate explanation as to why both should be true (see Chapter 2 of plan).
- It does not detail its operational cost modeling for stress testing by outsiders (see Chapter 2).
- It identifies no operating partner that might give confidence in the management team (see Chapter 4 of plan).
- Its “downside” case is just a baseline case and it presents no alternatives analysis in the event that the first operating segment is not actually profitable.
- It cites benefits versus traditional infrastructure that are mathematically and statistically incorrect, and wildly overblown (see Chapter 6 of plan).
Also a blunder
Almost certainly, it is also a blunder to commence HSR in an uncongested, lightly populated part of California, unless there is a 100 percent assurance that funding for subsequent segments is in place.
Californians will need to devote substantial tax revenue to this project, perhaps in perpetuity, unless the federal government provides $65 billion to $90 billion in grants over the next 20 years (see Chapter 5 of plan).
The simple truth is that even if the CHSR Authority produces all the net operating profit (margin) the plan forecasts over the next 40 years, it will be insufficient to repay the costs of construction.
Californians need to choose between high-speed rail or, for example, repairing levees, improving roads and commuter rail, rebuilding bridges or the California university system, or other public priorities. Based on the weakness of the current financial plan, we do not believe an investment in CHSR will generate a strong return on investment (ROI) for California or the United States, especially when compared to other potential investments of public dollars.
Finally, there are no more federal grants on the medium-term horizon; and, for reasons explained in depth, we believe there is substantial risk that costs will rise even higher, construction capital will not be present, and operating profits will not exist.
For legislators, betting that the private sector will come in to build the rest of the system 10 years from now is, we believe, a very risky, if not foolhardy, position. For state budgeters, making allowance for perpetual operating subsidies by California seems a plausible but unpalatable scenario, since they are illegal under the authorizing legislation.
We also assess the draft plan’s business model against the core promises that were made to California voters at the time of the Prop 1A Bond approval and that are contained within AB3034 (see Appendix A of plan). This report complements and is complemented by another of our reports: “Twelve Misleading Statements On Finance And Economic Issues In The CHSRA’s 2012 Draft Business Plan.” Our publications on the California high-speed rail project are found on the website of the Community Coalition on High-Speed Rail at www.cc-hsr.org. They exist in the public domain and require no authorization to copy or distribute.
For further information, contact the authors:
William Warren (650-321-8638)
Michael Brownrigg (415-987-3230)
Alan Bushell (650-327-0324)
Alain Enthoven (650-723-0641)
William Grindley (650- 324-1069)