California High Speed Rail - A Business Plan to Fail

At the recent Peninsula Cities Coalition (PCC) meeting, a brilliant and frightening analysis of the California High Speed Rail Authority (CHSRA) Business Plan was presented by Elizabeth Alexis.  This week I had a conversation with Elizabeth to be sure I have my facts straight before publishing this post.  In the process I found out that she is a big fan of high speed rail and would love to be one of its business travelers.  For me, this provided even greater credibility to the findings - knowing that the analyst is a believer of the concept, but has not drunk the Kool-Aid of the flawed CHSRA business plan.

 

The $33.6 Billion in funding detailed in the business plan is divided into four buckets: State, Federal, Local and Private:

· State - $9B Bond measure passed in November 2008

· Federal - $12-$16B in Federal Stimulus Funds

· Local - $2-3B

· Public-Private Partnerships - $6.5B-$7.5B

 

Is this realistic?

· State – The $9B Bond money is in 2008 dollars, not “year of expenditure dollars,” which will result in a shortfall of up to $2B in actual spending power.  For more bond funds, 2/3 of the state legislature must approve, and then a public vote.  The current bond carries many restrictions, such as forbidding state operating subsidies.

· Federal – The application for this money was due today.  If the funding is granted,  "we get what we get."  In other words, the Feds have become very strict about cost overruns, and make States take a blood-oath that projects exceeding their budget will be the responsibility of the State.  No coming back to the Federal well.

· Local – We already know there is no money here!

· Public-Private Partnerships – Considered a “Greenfields” project and not “tried and true,” this is a tough one to sell to investors.  We all saw what happened in the dot-bomb days of 2000, which thankfully, brought greater business scrutiny back to the venture capital community.

 

The CHSRA plans for $1B in annual revenue but does not factor in debt service of $70=$120M for every Billion in funding.  Additionally, Alexis provided a business model for a successful Greenfields product, using the the iPod & iPhone.  As one of the most successful consumer product innovations of our time, Apple will not see profit from these hot commodities for several years into their life cycle.  Though I am an optimist, I cannot imagine that California HSR will be more financially successful than the iPod & iPhone.

 

Did you know that no one owns this project?  Not the Federal Government.  Not the State Government.  While the initial bond money came from the state, the legislature has made it very clear that this is not a California Government owned project. 

 

All of this adds up to substantial completion risks yet this project moves forward on the stake in the ground theory – once started, someone will end up holding the bag for completion.  This mega-project remains woefully underfunded, reinforcing my belief that if it moves forward as planned, we will get what is cheapest and fastest to build.

 

With each component of the business plan built on the hopes of CHSRA's best-case scenario being realized, I am reminded of the wise words of a respected business associate, "Hope is not a Strategy."

 

 

 

 

Comments

[Divided we fall]

The scary part about all of this is that some of us here in Burlingame and in many parts of the peninsula have been screaming about issues regarding HSR for at least a year, if not more.

In today's SF Examiner there is an article that makes it clear that many of our elected officials are lining up behind this project despite the knowledge that it can not work from any perspective.

Read the article here: http://www.sfexaminer.com/local/Stimulus-to-keep-rail-plan-moving-63220357.html

This report is probably the best way I have seen, to date, illustrating the problem without any emotional hysterics that are so often associated with big public works projects.

Thanks bjm for posting this and thanks Elizabeth for doing the heavy lifting.

Maybe the Gov. will read the Burlingame Voice and see the light.

[Steve K]

I think the only thing that is going to derail this colossal mistake is the further collapse of the economy. As you mention many of our elected officials think a slick train system that we don't have to pay for is a fine idea.

But the state can't print money out of thin air like Washington thinks it can (and one day they will be proved wrong) so we have to borrow it. I really don't understand who is going to buy the bonds that California intends to sell for this? It's becoming very obvious to investors how poorly this state has been governed, which reflects very poorly on the quality of the people living here. We have the lowest bond rating of all 50 states. How far we fell.

Yes, there are going to be a lot of disruptions in Burlingame as this fiasco plays out but I think the chance that we are going to be hearing trains wizzing by at 125mph in the next twenty years is pretty low. I think we'll be lucky to hear Caltrain.