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.

CHSRA Project Workshop Presentation Now Available Online

At last week's California High Speed Rail Authority board meeting a project workshop was held to lay out the CHSRA's current approach to project planning, and to lay out what some of the next key steps are. The powerpoint presentation used at the workshop is now available online (PPT file, 91 slides, 6.1MB). The primary purpose is to demonstrate the status of the project planning at the section level, and there is a TON of information on that that I've only now begun to look over.

There is a lot of other interesting stuff, including a mockup of what a morning southbound timetable might look like (slide 14; don't get too attached to it as it's clearly to demonstrate the concept, but may be interesting fodder for discussion in the comments of what an ideal schedule might be); a discussion of the various options for public-private partnerships (slides 69-71); and an in-depth discussion of the construction needs on the LAUS-ARTIC segment as an example of the overall design and planning work that will have to be done on other system segments (slides 76-89), including discussion of the need to move 18 high-tension powerlines, build 49 grade separations, including constructing a 5.1 mile long viaduct over the BNSF Hobart Yard and a big rebuild of the Slauson Ave/I-605 interchange, and discussion of contract requirements.

Should be plenty of conversation starters here. Have fun!

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Note from Rafael: documents from the August 2009 CHSRA board meeting are now available here, including clean PDF versions of the slides from the phasing workshop. These download a little faster and are not subject to the vagaries of whatever application you use to read PPT files, what fonts you have installed etc. Enjoy!

Arnold Schwarzenegger on HSR; and an Unusual Poll

So, I don't quite know what to make of this poll, but I'll pass it along anyway. The San Francisco Examiner is reporting on a poll done by BW Research Partners. The poll is about HSR, but takes what I would consider something of an odd tack - asking if Californians would support HSR even if it meant limiting air travel to do so:

Would you support limiting flights to cities in California and having passengers use a high-speed-rail system to get to destinations in Central and Southern California?

Support: 56%
Oppose: 17%
Not Sure: 26%
No answer: 1%

Would you still support limiting flights if you knew that the high-speed rail would cost about the same as air travel, but would take 2½ hours to get to Southern California?

Yes: 79%
No: 8%
Not sure: 12%
No answer: 1%

The survey by BW Research Partnership, a public-opinion research firm, asked as many as 2,000 registered voters questions about how they would envision the future of the major airports in San Francisco, Oakland and San Jose.

Umm...OK. I'm not quite sure that the issue is "limiting flights", since the experience of HSR on major corridors (Madrid-Barcelona, or London-Paris) is that the travel market shifts and flights decline as a response to changing ridership patterns and not to legislative mandates. I'm not aware of any efforts to officially limit flights in order to help build HSR, so I really don't know what generated this poll. Nor do I know who paid for it.

It is worth noting that HSR will be integrated with air travel in California - at SFO, SJC, potentially PMD (Palmdale) ONT and SAN. SFO's administrators welcome high speed trains, and we're seeing similar support emerge among San Diego airport planners.

Still, the poll does show that at least in the SF Bay Area, Californians strongly support HSR even if it were to be framed as undermining air travel.

Public support as shown in this poll (for whatever it's worth) is bolstered by support from leading American politicians, including Governor Arnold Schwarzenegger, as expressed on Meet the Press yesterday morning:

Schwarzenegger was joined on the Sunday morning show by New York City Mayor Michael Bloomberg and Pennsylvania Gov. Edward G. Rendell, who are part of a bipartisan coalition of elected officials pushing for increased infrastructure investment.

"Look, everyone gets stuck in traffic. There is no reason why we should get stuck in traffic," Schwarzenegger said on the show.

More than once during the interview, the three elected officials spoke of high-speed rail.

"This country desperately needs to build a high-speed rail passenger system," Rendell said, adding that other infrastructure projects also were of vital importance.

You can see some of Arnold's remarks on this, including his desire to use public-private partnerships to fund this (but also willing to consider a higher gas tax), here:



Of course, Arnold tends to play a governor on TV but not off screen. He is notorious for playing up his leadership when the cameras roll, but for not being willing to assert leadership within government for important projects or bills. If Arnold wants HSR to be built, he could for example ensure that the CHSRA gets the $29.1 million it needs to continue operations, or help produce a solution to the Transbay Terminal mess, or help resolve the dispute on the Peninsula. That's more valuable at this point for the HSR project than going on Meet the Press yet again to show how awesome he us.

Virgin California?

The Times is reporting Richard Branson wants a piece of California HSR:

Virgin Trains, which operates the West Coast Main Line in Britain, is bidding for a slice of President Obama's multibillion-dollar upgrade of the American rail network, The Times has learnt.

Virgin is understood to be the only British company involved in the President's plan to build high-speed rail links between key cities on the East and West coasts of the United States. Virgin has been asked to submit a proposal for developing this infrastructure and has held meetings with the new Administration in Washington.

They may be overstating this case dramatically - Obama doesn't really have a "plan" to build HSR, at least not in any great detail. It would be interesting to know what they mean by "has held meetings with the new Administration" - it could be a basic "get to know you" fact-finding meeting or something more. But our own LA-SF route features in whatever it is Virgin is planning:

Virgin and other high-speed operators, such as SNCF, of France, are expected to work with the US Department of Transportation to develop its rail plans and then bid to operate individual services.

Virgin is keen on the Los Angeles to San Francisco route and also the East Coast line linking Boston, New York, Philadelphia and Washington. There are 30 return airline flights a day between Los Angeles and San Francisco and a high-speed train service could replace many of those, cutting carbon emissions. The journey would take less than three hours and voters in California have already agreed to raise $10 billion to start work on a line that would run from Sacramento, the state capital, to San Francisco, Los Angeles and San Diego.

I've always figured that SNCF and Virgin would be among the companies showing interest in operating our HSR line, so this is an expected development. That being said, I'm not sure that private operators are either necessary or desirable and have expressed my skepticism on this point ever since the first few posts on this blog. Public operators in France and Spain have done a good job running the system, as has Amtrak here in the US, and I'd prefer that any "profits" be given to expansion of the system and not to Richard Branson's wallet.

California as HSR Model?

While we are debating the role of passenger rail in the economic stimulus, our neighbors to the north (Canada, not Oregon) are looking to us in California for direction on their high speed rail concepts. An article in Monday's Globe and Mail explores what we have to offer, and concludes the key point is private partnerships:

The success of Proposition 1a should come as welcome news to Canadian high-speed rail advocates, who have long dreamed of such service between Windsor and Quebec City, and connecting Calgary, Red Deer and Edmonton...

The implications for Canada are clear: If we want to drag Canadian passenger rail service out of the 1960s, Ottawa must include private partners, a development that could mean selling the moribund Via Rail to a transportation consortium that understands the technology, the market opportunities and is willing to invest.

I am not convinced VIA Rail's problems stem from any innate "moribund" problems but from a persistent lack of support from both Liberal and Conservative governments, but the author seems to believe that the great lesson of California is that private partnerships are necessary to building HSR.

I don't think that's entirely accurate. Private investment has been seen as a way to round out the final financing numbers and in particular a way to earn the backing of Governor Arnold Schwarzenegger. The key to California HSR's success is public support - from Proposition 1A to the all-important federal contribution. I have always argued private investors will be interested in participating, but that their role should be limited. John Lorinc, author of the Globe and Mail article, doesn't agree and seems to bring an agenda primarily driven by free market ideology and not evidence:

What's clear is that pure private plays don't work, while publicly owned passenger service tends to suffer from a lack of investment. (An exception is Spain, where the state has moved aggressively to build high-speed rail since 1994.)

Earlier attempts to privately develop such networks in Texas and Florida failed because of inadequate financing.

Publicly owned passenger service has not suffered from a lack of investment in China, France, Germany, or Italy (I'm sure there are other examples out there; those are just the first four that come to mind). And of course HSR in Texas and Florida wasn't failed by financing problems but was killed by the Bush brothers.

Not surprisingly, it is Alberta where talk of privately operated HSR has been centered:

In Alberta, meanwhile, a consortium led by retired banker Bill Cruickshank [no relation] has lobbied Alberta to consider a privately operated high-speed rail link between Edmonton and Calgary, to be financed through a proposed partnership between the consortium and public backers. Alberta Premier Ed Stelmach made positive noises about the plan, but has refused to release the results of a market assessment conducted in 2007. As Mr. Cruickshank notes, "If the government said it wouldn't work, I'm sure they would have told us."

High-speed rail, as Mr. Cruickshank argues, is tailor-made for public-private partnerships. Such train networks are extremely capital intensive and therefore depend on public financing to get going. But as a transportation service that competes vigorously with airlines, private operators will bring the necessary marketing savvy, as well as the ability of amortizing capital costs over a long period.

I can't disagree that HSR and PPP are a good match - given the logic of PPP. Whether that logic is the best possible method of building and operating HSR is another matter entirely. I am pleased that Bill Cruickshank understands the transportation and environmental benefits of HSR and has been a strong advocate for passenger trains in Alberta. And, given the political realities in that province, PPP is probably the only way an Alberta HSR will ever become real.

But that would be a conclusion Alberta draws on its own. That is not the California lesson. No, what California shows is that if you give voters the choice, they WILL commit public funds to high speed rail, and that private investment may have a place but is neither necessary nor sufficient to HSR success. HSR deniers spilled a lot of ink arguing that Prop 1A was a stealth tax increase on Californians but voters approved it anyway - and approved outright tax increases for trains in San José, Marin-Sonoma, and Los Angeles. The Canadian Liberal Party's Green Shift may have been ill-conceived and poorly sold by the inept Stéphane Dion, but given the choice, it is likely that Canadians too would vote to spend public money on high speed rail, even if it cost them more in taxes.

What California shows is that the key is generating public support for high speed rail as a concept. The specific mechanism of funding, from the role of private financing to the generation of public monies, are important but not determinative. Canadian HSR supporters, whether they are in Alberta or the Windsor-Québec City corridor, should focus their efforts on making the case for HSR to the public and in the halls of Parliament and provincial assemblies. Public funding can either bring private supplements or, if the groundswell is strong enough, be itself sufficient for HSR projects.

Now to convince DC Democrats of that fact...

Tuesday Open Thread

I'm headed to Arizona for the holidays and will be back on December 29. So in the meantime we'll have a few open threads every other day to tide us over.

I wish I had more time to write about this, but Yonah has an excellent post on HSR privatization over at The Transport Politic. He looks over the two kinds of privatization - of infrastructure and of management - and concludes, rightly, that both are unworkable and unnecessary. With John Mica aggressively pushing privatization it is worth taking a close look at this and pushing back against ideologically-driven efforts to fix something that isn't broken. Public entities have had great success operating HSR around the world and the US should emulate that model.

One of the very first posts on this blog reached similar conclusions about HSR privatization. Worth a look.

The View from Washington, DC

While Robert is out of town (Congratulations to you and your fiancee!), it's an honor to help fill the big shoes he leaves behind for the time being. I represent the National Association of Railroad Passengers, the only national, membership-based organization that works for better intercity passenger train service in the country.

As consumer advocates representing the traveling public, we understand the tremendous benefits that HSR will provide to Californians. The Executive Committee of our Board of Directors formally endorsed the project last week. As a Los Angeles native, I grew up to become painfully aware of the differences between the California we have now, and the greener, more dynamic California we will have once HSR is up and running. I greatly look forward to working in the coming months with state rail advocacy groups such as RailPAC, our allies with environmental and other public interest concerns, student organizers, and other citizen proponents of Proposition 1.

From Washington, DC, the outlook for intercity passenger trains in general is brighter than it has been for a long time. The bipartisan, blue-ribbon National Surface Transportation Policy and Revenue Commission submitted its report to Congress this year to provide a framework to reauthorize surface transportation programs for the next five years.

What's significant is that the report recommends that the Congress allocate $9 billion annually in dedicated funding for passenger rail, currently the only mode of surface transportation that does not have a dedicated funding source. (Until this year, states like California could not leverage a federal match for its investments in new trains or tracks. We now have a $30 million federal pilot program for the current fiscal year. It's paltry, but it's a start.)

Amtrak and passenger rail programs received $1.362 billion in the current year, against an estimated need of $1.8 billion just to keep pace (and after years of even worse starvation diets). As the appropriations process moves forward for 2009, we may see a slight increase, but until we get the kind of federal commitment called for by the NSTPRC, it's just tinkering around the edges.

NSTPRC also provided a framework of ten major programs around which Congress should base future investments. The only one that was mode-specific is Intercity Passenger Rail, reflecting the short shrift that trains have gotten in a distorted market over the past several decades (examples of other programs include Metropolitan Mobility, Federal Lands, and Research & Development).

Proposition 1 will be a major shot of adrenaline to HSR in America, giving Congress greater policy and political incentives to heed the Commission report and emboldening other states to follow California's lead. As California-style innovation goes, so goes the nation. NARP's resolution notes, "California's initiative in high-speed rail will likely be replicated elsewhere in our country, placing California, once again, in a transportation leadership role."

As for the private sector, we are seeing more examples every day of investors coming to understand HSR operations as a good risk. Italy, notoriously stereotyped for its bureaucracies, will see its first private HSR service in 2011:

The new rail operator, NTV, is a $1.4 billion project that will link Rome, Milan, Turin, Venice, Florence, Bologna, Naples, as well as Bari and Salerno in the south, officials said. It will make a total of 54 journeys a day.

...

The service, which will run on Italy's existing rail network, will use 25 11-car AGV trains by French engineering company Alstom SA, which will be delivered in three years.

Alstom said NTV will be the first operator worldwide to use its AGV very high-speed train. The trains will be equipped with specially designed seats, Internet connections and on-demand TV, traveling at a cruising speed of around 190 mph on existing Italian high-speed rails, the company said.

California may end up looking to Italy as a model, one in which passengers will enjoy a range of options for fast, safe travel along publicly-owned, well-maintained trackage.

But none of that can happen here until we have the kind of glistening, new infrastructure that only the public sector can provide, to unleash the potential of public-private partnerships.

There's no question that the federal government can end modal discrimination and make it a national priority to assist states like California that want to end their dependence on oil-based mobility, enliven their economies, and improve their environment and quality of life. But it takes political commitment, and we and our members will do everything in our power to make it happen. But we'll need your help on the grassroots level, too.

Prop 1 will be a great start, but not the end of the heavy lifting. Stay tuned.

Fresno Bee Slams Union Pacific

In their Saturday editions the Fresno Bee ran an editorial criticizing Union Pacific's efforts to block high speed rail. They didn't pull any punches:

There are several possible explanations for the railroad's move:

Union Pacific is positioning itself for negotiations on any future sale of right of way to the California High Speed Rail Authority.

Union Pacific, in the historically civic-minded nature of railroads in California, is genuinely concerned about the safety of rail passengers.

Union Pacific doesn't know what it's talking about.

The high-speed rail authority has never considered buying existing Union Pacific right of way. Instead, the proposed route would carry trains near the existing tracks in some areas -- not on them. High-speed rail requires dedicated tracks, with grade separations and barriers that keep the trains away from all other trains, as well as other vehicles and pedestrians.

Ouch. Personally I doubt the UP is being civic-minded - it's not really in their nature - but I understand where the Bee is going with this formulation. The editorial also makes a crucial point - we're not talking about putting HSR right next to freight trains, at least not on the sections UP owns.

Union Pacific is correct to preserve its ability to expand. Increased rail freight capacity is as important to California and the nation as building high-speed passenger lines. With the cost of diesel fuel soaring even higher than gasoline, and considering the tremendous pollution that diesel engines cause, we're all better off when freight moves by rail rather than by truck.

But Union Pacific's "safety concerns" might be more usefully focused on the dangers its trains and tracks pose in the neighborhoods they travel through, here in Fresno and elsewhere.

The Bee is right to point to freight rail's importance to our economy. I agree that UP ought to be able to expand - and the Bee is right that HSR doesn't impede that ability.

I also think we should keep in mind the relationship of the UP and the public. They were the original public-private partnership - we gave them huge land grant subsidies in exchange for building the transcontinental rail infrastructure that we realized was needed for the economic growth of the West Coast. Since then government has given them numerous subsidies and perks, such as protection from certain kind of state regulation, their own police force, deregulation of labor rules in recent years, and massive publicly-funded construction projects like the Alameda Corridor.

We need to keep in mind that UP isn't any random private company, but a company created specifically to serve the public interest. There is nothing wrong with insisting they not impede the public, and reminding them of that obligation is a good idea right about now. Political leadership, especially from our Congressional delegation, would help UP understand this - and that if they want to expand their freight operations, they should help us expand our passenger rail services.

High Speed Rail isn't a Toy

A growing phenomenon in media commentary on high speed rail seems to be an embrace of the necessity and value of the system, but an unwillingness to part with 20th century dogma on taxes and government spending in figuring out how to pay for it. We saw that with Bruce Reed's HSR op-ed last week, and we see it today with Thomas Elias' op-ed in the Long Beach Press-Telegram. Elias opens by recounting fast, efficient, and comfortable trips in France on the TGV, and then examines the California plan:

The question: In a day when the state may run a $15 billion deficit or more and when Gov. Arnold Schwarzenegger has tried for across-the-board 10 percent budget cuts, how can we afford a massive new toy? Many equate the high-speed train idea to a family that wants to buy a new Ferrari when it can only afford macaroni and cheese for dinner.

But high speed trains may be more than a mere luxury. They can make business travel between urban centers easier and more comfortable, without many of the restrictions and complications terror fears have brought to air travel. They can also restore California's aura of leading the way toward a better lifestyle for all Americans. The trains would be instant tourist attractions, with reservations booked months in advance.

Elias would be a stronger advocate of HSR if he more strongly discounted the "HSR is an expensive toy" claim - in fact, the price of gas is turning ALL cars into Ferraris, at least in terms of cost, and HSR is the affordable mac-and-cheese alternative. Yes, HSR is more comfortable, but it won't be just for tourists and businessmen - it will be the most affordable way for average Californians to visit mom and dad at Christmas, to go to their child's graduation in June, to get to work in the morning. All HSR advocates need to internalize this thinking - our cause is MUCH stronger if we show people that HSR is the affordable workaday transportation solution for the 21st century, instead of taking a "gee whiz" attitude that was outdated even in the 1970s.

That quibble aside, Elias' op-ed is primarily concerned with funding:

These realities suggest the financing plan now proposed, with a conventional bond to be paid off by all state taxpayers, might not be the best way to finance a massive project like high speed rail.

Why should all taxpayers pay for a toy that will be used only by a few? Why should taxes from people in Redding or Chico be used for a rail system that will never approach those cities, even as it serves the likes of Bakersfield, Fresno, Madera and Stockton?

The plain answer is that residents there should not be taxed for this. Nor should poor Californians in Los Angeles, the San Joaquin Valley or the San Francisco Bay area who will rarely if ever ride these trains. For it is reality that - just as in Europe or Japan - fares on high-speed trains would be considerably higher than on conventional ones.

So unlike dams or highways or public hospitals or sewers, high speed rail should be built neither with general obligation bonds, as now proposed, nor with general fund revenues on a pay-as-you-go basis.

Rather, revenue bonds are the answer. Many an American stadium, toll road, bridge, airport terminal and short-cut tunnel has been built this way, with borrowed money that is eventually paid back by users of the project.

In short, since high-speed rail is not as essential as freeways or ordinary passenger and freight trains, why finance it the same way? Just as air fares are now taxed to pay for increased airport security, high speed rail tickets could be priced to meet bond payments. Just as hotel guests are often taxed to pay for improvements and services intended for tourist use, why not make high speed train riders pay in full for the service they are enjoying?

The framing here is absolutely atrocious. HSR isn't as essential as freeways? Or ordinary passenger trains?! Most Californians will never use it?! While I welcome Elias' support of HSR his assumptions are completely wrong. Freeways are the true luxury - they are an astronomical cost in subsidies, pollution, global warming, congestion, and fuel. Elias wants us to believe that this is "reality" but instead it's a 1970s worldview passed off as fact. Ordinary Californians, including those in the working-classes, use intrastate air travel rather frequently, and will also use HSR frequently - especially as they won't be able to afford air travel or long-distance road travel for much longer.

The reality is that HSR is exactly like a dam, a highway, a public hospital, or a sewer. It will be an essential piece of public infrastructure without which society will have a hard time functioning. Just as the State Water Project in the 1950s enabled the state's economic prosperity of the late 20th century, so too will HSR enable growth and prosperity in the 21st century. Without it the state will be dependent on oil-based transportation that the rest of the world is already abandoning - leaving California uncompetitive and making it difficult to get around the state.

Elias' awful framing aside, I'm not opposed in theory to using a revenue bond to pay for HSR. I have no doubt that HSR will attract enough riders to pay back the bonds. One advantage of a general obligation bond, however, is that it makes it more likely to attract the private investment that state politicians are demanding before they sign off on HSR. Investors see a general obligation bond as a safer risk than a revenue bond, which is especially important against the backdrop of a global credit crunch.

And despite my criticisms of the way Elias is selling HSR, as with Bruce Reed's op-ed I am again pleased that we seem to be moving away from a debate over whether HSR is necessary to one of how we should pay for it. It's a sign of real progress.

SF Chronicle Kinda, Sorta Gets it on HSR

The San Francisco Chronicle weighs in today on the HSR proposal with an editorial that makes some very good points as well as some real headscratchers. Given how important this project is to San Francisco, the Chronicle's support is welcome, but it would be nice if they showed a better grasp of the project.

Legislators were waiting for the perfect storm of budget solvency and economic growth, thinking that this might help the bond pass. Apparently they've realized that California's budget woes aren't going to get better before gas prices and global warming get worse: The bond measure should finally be on the ballot this November.

It's good that the Chronicle agrees the bond measure should be on the ballot, but let's be clear why it wasn't on the ballot in 2004 or 2006 - Arnold Schwarzenegger didn't want it there, as it would have competed with his other bond priorities. If the governor had shown better leadership perhaps HSR bonds could have been enfolded within the 2006 infrastructure bonds - few seem to have batted an eye at $42 billion in bonds then, so what's another $10 billion going to hurt?

Our skepticism about the rail measure remains. It's going to be an extraordinarily expensive project, with costs projected to be at least $40 billion. If it's not done right, it could be both environmentally degrading (it will pass through ecologically sensitive areas) and financially crippling (cost overruns seem inevitable) for the state of California. There have been successful examples of government-run high-speed rail projects (France), but there have been unsuccessful examples too (Japan).

Unfortunately the Chronicle editorial doesn't note the far larger expense of doing nothing. $80 billion in airport and freeway expansion to handle the expected demand isn't exactly a better use of money than a $10 billion bond. The environmental damage from HSR construction is likely overstated (especially if the ROW hews close to Highway 152 in the Los Banos region, by far the most tricky part of the line). And while the Japanese Shinkansen system has gone through some reorganizations, it has been successfully operating HSR for over 40 years. Moreover, there are MANY more government-run HSR success stories - Spain, Germany, and Taiwan all have extremely successful government-run systems.

The high stakes probably account for a great deal of the legislators' hesitation: No one wants to be responsible for a boondoggle. Still, with a troubled national airline system, $4-a-gallon gas, and even President Bush offering goals to combat climate change, the rail system is a risk we can't afford to not take.

All of this is dead-on. While I do not believe HSR is nearly as risky as the Chronicle editors do, they are absolutely right that we cannot afford to not build this system. They do understand that rising gas prices are calling into question our state's reliance on freeways and airlines for intrastate travel - and the airlines are becoming more and more troubled (they're now skimping on fuel). And the Chronicle, unlike nearly every other media outlet that has recently assessed HSR, mentions climate change as a reason to build HSR. I have begun to wonder if HSR's critics even believe in global warming, so it's welcome to see one of the state's leading newspapers making the obvious link between HSR and action on the climate.

The editorial goes on to discuss Cathleen Galgani's bill that would enable more public-private partnerships, something the editorial authors believe is necessary to mitigate high costs:

Forty billion dollars would be a lot to ask from California taxpayers in good times; in a recession it doesn't seem politically feasible.

Except that nobody is asking California taxpayers for $40 billion. Instead the bond plan is for $10 billion, and most of the remaining balance will likely be coming from the federal government, with private investors helping to finish out the overall project cost. Cost overruns are inevitable, especially in this era of rampant inflation and a collapsing dollar - but California voters are only being asked to pony up a quarter of the overall cost. Seems like a good deal to me.

The editorial closes on this excellent note:

And California has already spent enough time hesitating over the rail system - we urge the governor to work with the Legislature to make the current proposal the best that it can be for the environment, the taxpayers, and those who will ride the rail in the future.

I could not agree more strongly. The more we delay, the higher the cost will become, and the longer our state will be shackled to an obsolete and economically ruinous oil-based transportation system.

Looks Like Jim Battin Needs Our Help Too

It looks like high speed rail in California is starting to get more attention - especially from conservative op-ed writers. Last week I examined why Dan Walters' HSR ideas were so flawed. And now Republican legislators are getting in on the HSR-doubter act. Jim Battin is a Republican State Senator representing the 37th district (Riverside County), and last week published an op-ed in The Desert Sun titled "High-speed rail plan off-track". As Sen. Battin just returned from the Japan HSR trip, it's a more interesting piece than Walters', but it also repeats many of the same basic flaws - particularly a myopia about the continued availability of cheap oil-based travel. Below I deconstruct Sen. Battin's flawed arguments.

I know The Desert Sun disapproves, but I recently spent a week in Japan leading a bipartisan delegation that met government officials and studied the country's high-speed rail system. In November, Californians will be asked to approve our own high-speed rail project. From what I saw, firsthand, taxpayers need to approach the idea with great caution.
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High-speed rail works in Japan because of the country's geographical uniqueness and the smart government policy decisions. The country is roughly the size of California, but has four times the number of people, 80 percent of whom are located in major urban centers.

And according to the latest figures some 97.7% of Californians live in an urban setting. Not all of them live in the state's "major urban centers" but well above 50% do, living in close proximity to the proposed HSR line.

Japan's geography is not all that different from California. The two main differences are that Japan is an island nation, and does not have anything like our massive Central Valley. But like Japan, most California urban areas are located along coastal plains and valleys, hemmed in on several sides by mountain ranges. This actually creates fairly natural corridors for HSR.

In the 1980s, Japan National Railways was a public sector failure, running a yearly operating deficit, with a huge debt, declining ridership, high fares, and poor service. Japan broke up the public sector monopoly and created private, passenger-rail companies to serve different areas of the country and compete for the consumer's yen.

The three companies serving the most urban areas operate with no government assistance. One way they do this is by owning the key real estate around train stations, allowing the rail companies to operate retail centers that offset the cost of service.

This should be balanced out by noting that SNCF and RENFE, the French and Spanish public sector railways respectively, are both public sector successes. Ridership continues to climb on both countries' HSR systems. And they DO provide "competition" - not with each other, but with the airlines that serve the same corridors. In both countries they are competing with a great deal of success.

As to owning the real estate around the stations and building transit-oriented development (TOD), that appears to be a central part of the California HSR plan.

From my own experience, it is clear the Japanese "Shinkansen," or bullet train, model has been a success. Private-sector efficiencies reduced costs, while rail fares remained stable. The trains, operating at up to 186 mph, are clean, safe and service is readily available. Consumers responded by increasing ridership more than 20 percent.

Still, the service is not cheap. The line fare from Tokyo to Osaka, which at 251 miles is a little shorter then from Los Angeles to San Francisco, costs 13,200 yen, or about $130 one way. In contrast, Californians can find a flight from LAX to SFO on Southwest Airlines as low as $39 one way, and Southwest gets a traveler there in half the time.

It is good that he recognizes the success of Japanese HSR, but he then goes on to make probably the greatest possible error one can make while assessing HSR - assuming that present travel conditions will continue indefinitely into the future. They won't.

Does Sen. Battin really want us to believe that Southwest will be able to offer $39 flights for much longer? As one of our commenters explained, those super-cheap fares are not the usual price a traveler pays for a one-way trip. And even the more accurate $65 figure is not long for this world. As oil prices continue to soar and peak oil puts the squeeze on fuel supplies, airlines will have no other choice but to raise fares. Last week rising fuel costs put three airlines out of business - Aloha, ATA, and Skybus. And the remaining carriers are feeling pinched too, as they increase fares, fees, and fuel surcharges while passenger numbers continue to decline.

We cannot use "cheap, fast Southwest airlines" as a reason to not build HSR because there is a very good chance that neither they nor any other carrier will be able to offer cheap fares for much longer. And it only takes "half the time" to fly as opposed to take HSR if you don't count the actual travel time involved with flying, including travel time to the airport, check-in, security, etc. When all that is factored in, HSR is about even with flying.

The plan itself has been a boondoggle even before voters have their say. The Legislature initially placed the bond on the 2004 ballot, but then moved it from one election to the other trying to "time" when both the state budget and economy were healthy. While waiting for that electoral magic, taxpayers have spent millions to fund a California High Speed Rail Authority that has had no rail to build.

That isn't a "boondoggle." The CHSRA has had very modest funding, which they have used to develop a solid plan that voters will evaluate this fall. The only person responsible for the two delays of the HSR vote has been Arnold, who didn't want it on the ballot in 2004 or in 2006, when his other infrastructure bonds were facing voters. To call this a "boondoggle" is to misuse the term.

The $9 billion bond gets the rail line started, but the authority estimates the total capital cost for the project at a staggering $25 billion, a figure definitely lowballed. To put this in perspective, each Californian will spend about $715 dollars, almost $3,000 per family of four, to subsidize high-speed rail. That's before they even get a chance to buy a ticket.

And the 9/11 airline bailout was $15 billion alone, which doesn't include over $5 billion in other annual subsidies to the US airline industry. Yet Sen. Battin never discusses those kind of subsidies, nor the tens of billions in annual road subsidies spent here in California. For Sen. Battin, like most conservatives, somehow only passenger trains are seen as getting subsidies; all other forms of transportation somehow magically prosper all on their own.

The fact is that transportation has always been subsidized in America, ever since New York spent $25 million to dig the Erie Canal in 1825. Given the size of this country it cannot be any other way. Instead of unfairly and unrealistically attacking the existence of subsidies, Sen. Battin should be asking whether these subsidies will reap value for Californians. In the case of HSR, they will.

Of course there is no guarantee the rail service will be profitable. The proposal anticipates one-way fares set at only $55 in the year 2018 - a ridiculous presumption by a bureaucrat trying to "sell" the bond. Given Amtrak's sorry pattern of taxpayer bailouts, and Japan's own history with high-speed rail, government is bad at operating rail lines best run by the private sector.

This $3,000 subsidy will be the beginning of what California families will pay and pay and pay.

Of course, Sen. Battin gives us no reason why the $55 fare is "ridiculous." Nor does he explain the rather important point that the "$3,000 subsidy" wouldn't come all at once, but would instead be spread out over many decades. And there's no guarantee any of us would have to pay it. European HSR systems - which he routinely ignores - repeatedly turn an operating surplus, which can be used to pay off the bonds.

Nor does Sen. Battin provide this with any context. Even if every Californian would have to pay a $3,000 subsidy for HSR over 30 years, that pales in comparison to what Californians would have to pay over that time in plane fares, gallons of gas, airport expansion costs, and freeway widening and maintenance costs. Sen. Battin makes one of the common errors of HSR critics - assuming the project exists outside of any real-world context.

Of course, only government subsidies kept the major carriers in business the last 7 years, which suggests a rather major flaw in Sen. Battin's anti-public sector subsidy argument. Amtrak is routinely made to do much more with much less than their airline counterparts get - and still they've taken nearly half the market share from the airlines on the Northeast Corridor.

Battin closes his article claiming to welcome the greater use of public-private partnerships (P3) in HSR but says that isn't enough to back the plan: "Right now, this proposal is not a rail we should be riding."

But since his own arguments are so full of holes, flaws, and inconsistencies, I don't think Californians should feel any hesitation about HSR based on Sen. Battin's ideas. It's a shame more California Republicans don't grasp the actual issues and realities of HSR. But as the polls continue to suggest, neither are California voters buying what the Republicans are selling on HSR.

HSR and P3: A Shotgun Wedding?

As those of you who have been reading me at Calitics for the last year know, I love high speed rail. And you'd also know that I am deeply skeptical - to put it mildly - of public private partnerships (P3). So what am I to do when they are joined together in a shotgun wedding? From a press release put out by the California High Speed Rail Authority:

California High-Speed Rail Authority Executive Director Mehdi Morshed, joined Governor Schwarzenegger Tuesday in participating in a roundtable discussion at the State Capitol regarding the importance of investing in California's infrastructure and maintaining the state's economic growth through public private partnerships.

Mr. Morshed noted the California proposed system of high-speed trains offers a unique opportunity to develop a new model for “P3” or public private partnership financing....

Mr. Morshed noted that high-speed trains are attractive to private investors because California’s proposed system will bring a $1 billion annual profit or surplus, once built.

Now it's not as if this is totally new. The 2002 Implementation Plan always envisioned that private financing would play some sort of role in the HSR project, although at the time it was expected to be limited to the bonds.

But what exactly is meant by "private financing" - and how bad might this really be for HSR?

The Authority’s finance team anticipates public-private partnership opportunities will include project debt financing, vendor financing, system operations and private ownership.

I can live with private involvement in debt and vendor financing, even though government can always borrow more cheaply. System operations is iffy at best - government runs the French, Spanish, German, and Japanese lines quite well, and when system operations were privatized in Britain, the results were deadly. Private ownership, however, is a line we must not cross - public ownership of infrastructure is key to an effective, safe, and affordable transportation system for Californians. High speed rail is an economic catalyst and an environmental and sustainablity necessity. It needs to be held in public hands for public uses, and not hollowed out for private profit.

And that $1 billion is a very, very enticing figure, especially for private companies and investors, who likely see in public infrastructure the kind of profit opportunities that they are now being denied in real estate and financial speculation. But that $1 billion would also be incredibly useful in building out the full HSR network envisioned in the 2002 Implementation Plan - or extending the service beyond its current routing (building an Altamont Pass alignment, for example).

In Europe, those operating surpluses are regularly plowed back into expansion of the HSR network. Spain's first HSR line, the AVE train from Madrid to Córdoba and Sevilla, proved so profitable that RENFE (Spain's government-owned rail network) was able to plow that money into recent extensions to Malaga, Valladolid, and Barcelona. France's state-owned rail network, SNCF has been able to do the same with expansion of its TGV lines as well. The operating surplus alone does not pay for these projects, but it helps reduce the added bond or tax monies needed to construct the new lines. Or, the surplus could be used to pay the bonds off ahead of schedule.

So there is a strong incentive to use those operating surpluses for HSR upgrades and extensions or bond repayment, instead of handing it over to private investors. But it seems clear that P3 is the price of obtaining Governor Arnold Schwarzenegger's support for the plan. From the press release:

The bond measure, which is within the Schwarzenegger Administration’s current debt capacity guidelines, will also provide nearly $1 billion for improvements to local and regional passenger trains projects that complement and connect with the high-speed train system. The bond is also a significant component of the Governor’s Strategic Growth Plan as described in his proposed 2008-09 budget.

That section, especially the language about "debt capacity guidelines," seems a very clear signal to me that Arnold is going to throw his weight behind the November HSR bond - but only because it promotes his goal of P3 for public works.

It's a shotgun wedding, and the question is, how should we react? Is HSR worth the price of P3? Already we're having to accept a lot of tough things to get this project moving. The Pacheco Pass alignment seems less ideal from a ridership and environmental perspective. And the plan floated by Fiona Ma and Cathleen Galgani to drop the insistence that LA-SF be the first line to open risks building a system that contains a missing link.

But neither are these poison pills. As I noted above, the Implementation Plan always called for private investment, to leverage the state, local, and federal funding. What seems more worrisome here is that Arnold is using HSR to advance a privatization agenda that is already being implemented in our state. HSR is too important a project to force into a shotgun wedding with Arnold's privatization push.