Taiwan HSR: Harbinger of Doom or Flawed Comparison?

We haven't yet seen this story appear as a talking point that widely in California or even among our HSR deniers in the comments, but we will soon. The Taiwanese government is going to have to bail out the private operator of the Taiwan HSR project. They have missed ridership projections and as a result the private consortium that designed, built, and is operating the system cannot meet its debt obligations.

Already our old friend Wendell Cox is is using the Taiwan HSR bailout to claim that California HSR will suffer the same fate. Cox, whose work is partly funded by bus and highway companies, is going to continue pushing this simplistic argument until the news media picks it up, which should happen any day now.

The problem is that the comparison is almost totally flawed and without merit. What happened to Taiwan HSR is unlikely to happen here. The true lesson of Taiwan HSR is that HSR runs into financial problems when you ask the private sector to fund most of its construction and operations, and therefore leave you unable to weather the 5-year long ramp-up period in ridership.

Yonah Freemark, who has established himself as one of the premier transportation writers in the country, gives us some further insight on the problem over at the Transport Politic:

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.

This financing system left Taiwan HSR facing massive up-front loan repayment costs. And that in turn left them stuck when the recession hit. To those who would say that if HSR needs a bailout to weather economic downturns then it's not worth doing, I would ask their opinion on the $15 billion airline bailout the US Congress enacted in the wake of September 11 and the 2001 recession.

Freemark points out that California HSR is funded through a fundamentally different process, minimizing the need to devote ridership revenue to paying banks and private investors:

Of course, California’s plans are different. While both the Taiwanese and British projects relied on bank loans that accounted for 80% of construction costs, the U.S. project will only be dependent on a 20% private investment....

The two experiences cited above indicate that a fully private project is very risky, and that makes sense; making up a huge initial capital cost like that of a rail line through loan back payments requires enormous revenues and limited operating needs. California’s estimates demonstrate annual fare revenues ($2.3-2.5 billion) that are about double operations costs ($1.1-1.3 billion); Taiwan’s system has similar financials, but paying back the bank has bankrupted the company.

Is a 20% private share acceptable? A $7 billion private investment would require roughly $560 million a year in payments at 5% interest over a short 20 year-period (totaling about $4.2 billion in interest). California’s system would provide a generous profit of $500 million for the operating company if revenues and operating costs are as expected; in bad years, or if ridership estimates are too high, the system could sustain revenues 20% lower than projected without going into the red. This seems reasonable. California’s interest in a limited private involvement, then, avoids the risk inherent in a fully private project like that in Taiwan.

In other words, because California is looking at only a 20% private investment share, we will avoid the crippling problems Taiwan HSR has experienced. This is especially important when we recall DoDo's Puente AVE article, which is required reading on the topic of HSR ridership and financing.

DoDo's point was that there is a five year curve for HSR routes - it takes about 5 years for ridership to achieve its full potential. What that means is in those first 5 years, HSR operators have to be careful to not panic and raise fares to cover costs at the expense of driving away riders. He looked at France, which under the direction of Socialist president François Mitterand maintained its fare structure, enticed people to the trains, and by the mid-1980s had runaway success with the TGV. And he took a look at Taiwan HSR, showing that bad decisions, made under political influence, led to cost overruns and a service whose quality was compromised from the start:

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 started 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.

California not only can avoid all this - we are in a very good position to avoid it. As Bob Doty repeatedly emphasizes, the way you deliver an on-time and on-budget project is by getting all the planning and engineering details agreed to at the outset, and then rigorously sticking to that plan, resisting pressure to meddle and change the details midway through construction.

Freemark ended his article lamenting the political push for private involvement in infrastructure projects. That has been a particular hobby horse of mine ever since I started this blog. With regard to California HSR, the push for private involvement comes from Governor Arnold Schwarzenegger, who along with his investment banker advisor (and CHSRA board member) David Crane are deeply enamored with public-private partnerships. They put the CHSRA on a starvation budget in 2007 in order to break resistance to greater private involvement in funding the train's operations. And it stems from their desire to use government to enrich the wealthy at the expense of everyone else.

California is going to elect a new governor next year. We will need to pay close attention to how the candidates talk about HSR, public-private partnerships, and what their plans are for HSR. The next governor could serve until 2018 if elected to two terms, making it particularly important for us to get that choice right.

When I wrote about DoDo's article in March I laid out my thoughts on how to avoid a Taiwan-style meltdown in CA. They are as applicable today as they were then, so I'm going to repost them here:

First, we cannot expect ridership goals to be met immediately. DoDo's analysis shows they will be met but not until around five years have passed. This will produce hackles from the usual HSR deniers (who will still be with us in ten years' time) - the Wendell Coxes and Martin Engels who will say that "omg you haven't met ridership - the HSR train is a boondoggle! kill all remaining extension plans!" We must resist them patiently but firmly and let the project steadily attract riders.

Second, we need to oversee the financing process to ensure that the project's finances are not going to be imperiled by expectations of high ridership out the gate. This is a long-term project; its financing should be long-term as well. This is one reason I am skeptical of some of the more broad public-private proposals for how to fund the train. Government has the luxury of waiting for the system to mature and work properly; the private sector instead demands immediate profits at the expense of long-term planning (and we see how well THAT worked out).

Third, construction delays. I have always said that we are likely to see both delays and cost overruns, but that we can and should work to ensure the are minimal. Sometimes the two are linked - Peninsula NIMBYs are inherently arguing that it is OK to both make the HSR project more delayed and more expensive to suit their demands. We may well see similar problems on other sections of the route. We cannot let these delays compromise the overall system. The route has always been intended to be opened in stages, as was BART, but the finances, operation, and political support for the project cannot be made dependent on that staging. Further, the stages should be opened for practical reasons, and not in an effort to cut corners or costs. Again the long-term vision for the system must be kept in mind at all times.

Fourth, fares. Whether the $55 fare from SF-LA is possible even in 2018 dollars is an open question. But the system cannot raise ticket prices to try and cover financial shortfalls or cost overruns if they are to build a long-term ridership base.

It is entirely possible that ten years from now the short-sighted short-term political and economic worldview that helped create the present economic mess will have been replaced with a renewed emphasis on long-term planning and infrastructure, and that Californians will be willing to wait a few years for HSR ridership to rise to expectations.

But I wouldn't bet on it. Instead we are going to have to continue to fight to ensure that HSR is built the right way, the proper way, without compromising for people who put all sorts of petty and small concerns above the HSR project itself.