Saturday, July 12, 2008

HSR Is An Attractive Investment

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

In the comments on the previous post there is an interesting discussion about private investment in high speed rail, including some understandable concerns about whether that money will materialize given the worsening credit crunch facing the global economy.

California HSR is actually very well positioned to benefit from this, and there is every reason to expect that private investors will line up around the block to be a part of it. To understand that point we must first look to France where SNCF has turned a profit by emphasizing high speed rail. (H/T to The Overhead Wire)

Guillaume Pepy, SNCF chairman and chief executive (PDG) since February, says that, unlike his predecessors who had to manage a railway recession, he is presiding over an accelerating boom. The state-owned SNCF delivered a net €1.1bn (£875m) profit last year and first-half figures, due next week, are said to be sparkling. Pepy envisages up to 80m extra passenger trips this year or an increase of around 8%.

"This change will speed up because we are facing a twin energy and environment crisis," he says, pointing to surging fuel costs and growing personal worries about carbon footprints. "People want sustainable mobility and, in France, more trains and more SNCF."

Rail travel is booming around the world as well as here in California, as the latest numbers prove. Given that oil prices are going to remain high for the foreseeable future, we can reasonably expect train ridership to continue rising.

In other words, ridership will grow. And what do private investors look for? Growth opportunities. Don't be fooled by the weakening economy - there remains an enormous amount of capital sloshing around global markets, looking for a good rate of return. Currently a lot of that capital is in oil, creating speculation that is partly responsible for the high level of oil prices (but only partly - the underlying fundamentals of insufficient supply to meet demand remain likely to keep prices high for a long time to come).

But even though oil prices are on a long-term upward trajectory, they are also volatile. Over the last week prices fell by $10/bbl before rising again. Private capital would prefer a much more stable and reliable investment. Something fixed, that won't be ephemeral, and something that offers the prospect of long-term growth.

Meaning infrastructure. It's no accident that the largest funds are looking to own physical things instead of worthless mortgage tranches or the declining dollar. Abu Dhabi's purchase of the iconic Chrysler building is but one example of the trend. More relevant is Argentina's high speed rail example, financed by a French bank.

High speed rail would be an extremely attractive investment even in a bad economy and during a credit crunch. It offers returns with very little risk. Every high speed rail system in the world has strong ridership levels and most generate operating surpluses. SNCF relied on it to return to profitability. Here in California the long-term airline crisis and oil crisis, as well as global warming rules, will help sustain high levels of demand.

The key is public funding. A presentation at the June 2008 CHSRA meeting explained the results of a survey of private investors who might be interested in our project. Many were supportive, but said that they needed a minimum of 60% public funding to be willing to invest, and would be most comfortable with 75%. In other words, the state of California needs to provide the first stake, and then the federal government.

Given that HSR is such an undisputed global success, it should not be difficult to attract private investment. Proposition 1 is the necessary first step to bringing that about. If we vote for it, we will build it - and they will come.


Brandon in California said...

"It offers returns with very little risk." This shold be underscored.

I did not speak to it in the below posts; however, in times of financial turmoil, like what we're probably entering deeper intthe myst, investing in government lead projects are stable, more safe, and the smart decision.

When everything else seems to be collapsing... parking money in a safe place is a wise move.

Anonymous said...

Dream on Robert.

Very little risk, brandon?

We will see won't we?

Anonymous said...

Yes, because this HSR project will die just like every other HSR project in the world right?

Pantograph Trolleypole said...

The trolls have been out in force lately. I think they are getting scared.

There was a writeup somewhere that all of the California Amtrak services are half the ridership of the northeast corridor. Thats not bad. Think about what would happen if the service was real and more frequent.

Anonymous said...

The SNCF example given is very misleading.

France's rail infrastructure operator is RFF, not SNCF. SNCF is only paid to operate the trains. Further, all of SNCF's bad debts and investments were offloaded to RFF. Needless to say, RFF will never turn a profit.

All of SNCF bad debts and investments were offloaded to a separate infrastructure company ("RFF"). These days, SNCF is only a rail OPERATOR.

crzwdjk said...

I wonder how much of SNCF's revenue comes from government subsidy, like various regional governments paying money to operate commuter services. If you count it that way, even Amtrak might turn a "profit" sometime soon: just wait until the Acela is above 100% cost recovery, and then charge the states and commuter lines a bit more to operate their trains, to make up for any losses on the long distance trains. Of course, you'd still end up with lots of corridor trains which only make back 50% of operating costs, but since the states cover the difference, it's breaking even from Amtrak's point of view.

Robert Cruickshank said...

The RailPAC link in this post contains the stat that shows Amtrak California's routes have 50% of the ridership that the NEC has. It's a significant stat that along with the dramatic and sustained ridership growth makes a mockery of the frankly ignorant claims that there's any serious risk HSR won't have the riders.

The trolls are out in stronger force, which to me is a recognition of how much support there is out there for rail. The deniers are on the defensive across America as the public is set to vote for numerous rail expansion projects.

Rob Dawg said...

Bikerider beat me to it. SNCF not only offloaded all its debt to RFF but it is actually paid to administer that bad debt. If that weren't enough SNCF is actually paid to "rent" the tracks "owned" by RFF. SNCF has a similar arrangement for its management of the Chunnel.

Anonymous said...

The RailPAC link in this post contains the stat that shows Amtrak California's routes have 50% of the ridership that the NEC has.

This figure is a misleading comparison because it only looks at Amtrak service. The main beneficiary of NEC corridor is all the commuter and transit services (NJ Transit, Metro North, MARC, etc). In fact, monthly ridership on all of Amtrak California barely matches daily NEC ridership.

This is why the EIR for the Pacheco selection was so flawed, because it completely discounted the huge commuter and local transit trip possibilities.

Robert Cruickshank said...

As to those complaining about SNCF, what their example shows is that running an HSR system is not a detriment to a national rail system. Instead it is highly likely to provide financial stability.

The deeper point that needs to be taken away from this - which the usual crew of HSR deniers is tellingly ignoring - is that HSR's ridership is high on every system that exists and passenger rail ridership is growing rapidly here in the US. In that environment it seems ludicrous to assert there is significant fiscal risk with HSR.

Finally, the core points - that private capital will seek a safe port in a storm, and that an electrified passenger rail system in a state with a dire need for it IS that safe port - are also being ignored. Unsurprising, really.

Brandon in California said...

I'd like to add, that the SNCF example of building the track and stations and such, and then selling them off and leasing/renting back the rights to operate trains over them... is not new.

Leasing or renting the rights to operate on them goes into the operating cost. Granted, it's slightly higher... but it's a way to convert the huge upfront capital costs into the operating program.

Plus, the private investors benefit too. They pay the upfront cost to buy the infrastructure... earn tax credits and earn a small revenue. In the long run it works out very well for them.

The Japanese Shinkansen is set up very similarly.

Think... public-private partnership.

Anonymous said...

I think this is a great way to get the corporations to ally with the HSR project. Corporate America carries a lot of wait in America, and if any of the big-shots don't want something then it doesn't happen. By doing this, they allow themselves to befriend allies within Corporate America.

So basically, you're not just leaving your eggs in one basket. You're not completely dependent on the government and you can not be tagged as wasteful government spending or as a socialist program (as some far right republicans like to call them) since they incorporate a business aspect into them.

Maybe Schwarzenegger was just trying to protect his ass from his own party, but I think it'll really work out in HSR's favor instead of being some political aristocratic dealing with no real value.

Unknown said...

High speed rail(HSR) has the advantage over automobiles in that it can move passengers at speeds far faster than those possible by car. The lower limit for HSR (200 km/h, 125 mph) is substantially faster than the highest road speed limit in any country. Ignoring the few countries without a general speed limit, the speed limit is rarely higher than 130 km/h (80 mph). For journeys that connect city center to city center, HSR's advantage is increased due to the lower speed limits within most urban areas. Generally, the longer the journey, the better the time advantage of rail over road if going to the same destination.