Wednesday, March 12, 2008

HSR and P3: A Shotgun Wedding?

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

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.


Brandon in California said...

I am also a big supporter of HSR.

I have heard, but not completely tuned in, of the efforts to amend the current legislation to open up bond funding to additional HSR segments other than SF to LA; I mean, beyond the minor portion intended for Caltrain improvements that are to be consistent with HSR up the SF peninsula.

I think it's a good idea (opening of funding) if it means it'll gain additional voter support, but it shouldn't come at the expense of LA-SF; and what could be the missing link.

I was actually satisfied with how things were arranged... LA-SF as a 1st phase. And a 2nd phase, including 2nd round of bonding if needed, was a 2-prong approach for San Diego and Sacramento extensions. I say that as a San Diego resident... not having parachial opinion.

Ideally, I'd like to see more funding of transportation; rail, not highways and airports. I think additional funding for rail projects complimentary to HSR would be great; such as feeder lines or improvements to current lines.

Robert Cruickshank said...

What I liked about the original plan - LA-SF - was that it gave the Central Valley something concrete. Bakersfield and Fresno were definitely going to be in on that and even with the Pacheco alignment, Stockton and Sacramento had reason to believe they would be included in the next expansion phase.

I agree with wu ming's comments down on the first post, that Central Valley votes are crucial to the passage of the HSR bonds. So the opening of funding move may jeopardize those votes while not necessarily replacing them.

HSR is an inherently political project, there's no way around that. And I understand why the HSR board is making some of the choices they're making, especially in order to win Arnold's support. But they seem to be endangering the vote this fall - gambling that Arnold's support will outweigh what they are giving up. We'll see if it works.