Monday, January 12, 2009

The Bear Market Republic

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

With the credit crunch on in full force and the California state budget still in limbo as usual, there's a distinct possibility that CHSRA will be shut down for an indeterminate number of weeks Real Soon Now(tm). This raises a simple question: can HSR supporters do anything to keep the Authority's lights on in 2009? Perhaps there is.

CHSRA has always looked to the private sector for a slice of the total investment in the HSR project, it's a key aspect of the 2008 Business Plan. Given the scale involved, they naturally looked to institutional investors as well as vendors for that money. Given the economic environment, they have put efforts to secure private investment on the back burner to focus narrowly on federal dollars.

So far, CHSRA appears not to have gone through the simple legal process of setting up a California C Corporation called say, FlyCalifornia, with say, one billion shares gathering dust in the virtual closet. Doing so would enable the authority to sell equity in the project. But who would buy any of that equity in this economy?

Well, actually, how about YOU? After all, it was you, the people of the Golden State, who voted for the HSR project in the midst of a recession. Why not give you an early opportunity to make a personal investment in it as well?

Let's say CHSRA decided to seek an initial round of financing involving say, 10 million shares at a nominal unit price of say, $30. That would represent just 1% of the total number in the closet. However, the corporate equity would relate to all of the infrastructure to be created by CHSRA, i.e. the starter line plus the phase II spurs plus trainsets etc. There's risk in investing early, but also reward: the total dollar value of the complete project is estimated at $45 billion (in 2008 dollars) and may well rise. In that sense, a price point of $30 a share right now would represent a fairly sweet deal.

Every household in the state would receive a regular investment prospectus in the mail - with additional ones available at city halls, post offices, libraries and on the internet (print-it-yourself) - that would give the residents a chance to purchase a number of shares. The prospectus would spell out the risks and rewards as usual for share offerings. To keep things simple, the purchase options would be 1, 2, 5, 10, 20, 50, 100, 200, 500 or 1000 shares per application. The larger bundles would come with volume discounts, so a bundle of 1000 shares might only cost say, $24,000. Individuals could file multiple applications, as long as the second and subsequent ones were for 10 or more shares. Individuals or businesses interested in purchasing more than 1,000 shares would be asked to contact CHSRA directly, either during or after the initial offer period.

In addition, applicants could decide to purchase ticket vouchers between any two HSR stations on the starter line at the price advertised on the CHSRA web site at the time of the offering (and itemized in the mail drop). Vouchers would be redeemable within the first 24 months of operation of the segment in question, whenever that turns out to be. Alternatively, holders could use them as a regular gift card for general merchandise from the company at any time prior to expiration.

All vouchers requested in a given application would have to be for the same origin and destination and, their total face value could not exceed the amount invested in shares in that same application. In addition, an upper limit of $1,000 worth of vouchers per person would apply, irrespective of the number of applications filed. An offer of inflation-proof advance ticket vouchers would complicate processing but also blunt opponents' argument that fares will end up being much more expensive than currently advertised.

If someone decided they wanted to submit an application, all they'd need to do is check the box next to the number desired, select the number and type of vouchers desired (if any), sign the document to approve all the inevitable legalese and, attach a valid check from a California bank (or US mail money order) for the full amount due. Purchases in excess of $10,000 should be accompanied by a bank check rather than a personal one. Credit cards would not be accepted. The signed application, check and a self-addressed envelope (included in the mail drop, marked postage paid) would be packaged up in an envelope (also included, marked apply postage due) and sent off to CHSRA.

The applications would be processed in the order received, provided they are postmarked no later than a given day, e.g. 30 days after the mail drop goes out. In the event demand exceeds supply, only applications postmarked no later than the day of the last regularly processed one would be retained. In this scenario, more than the originally intended number of shares would be sold. All other applications would be declined and returned with the checks voided.

Otherwise, purchase certificates would be printed (one for shares and one for tickets, if any) and mailed out as soon as the check clears. Bouncing checks would be handled as usual. Bulk purchases worth $1,000 or more would be sent via US mail, courier service or made available for ID verified pick-up in Sacramento, as requested by the applicant.

If CHSRA could not sell all 10 million shares, that might still be fine. After all, it doesn't need on the order of $300 million in 2009, even half that much would see it through the year. Admittedly, processing an application for just a single share might well cost $30. However, it would at least create some temporary jobs and more importantly, a mailing list. It would also give California residents a chance to own a small, tangible piece of the HSR dream many years before it becomes reality.

Shares would initially be traded privately by joint notification of a brokerage to whom CHSRA has subcontracted the relevant accounting, i.e. industry-standard processing fees would apply. By contrast, ticket vouchers would be gifted or traded directly between private partners. Anonymous trading on an established exchange floor would not be possible until a regular IPO much later in the project's gestation. This is consistent with how angel investors buy stakes in start-up companies, though they usually don't have to wait nearly as long for their payday.

Any takers?


Gamecoug said...

Awesome idea. Maybe make it so the minimum purchase is 10 shares and you don't have to worry about wasting all your time on small time transactions.

I'd go for somewhere between 10 and 50 shares...

It would be a great gauge of public interest in the HSR as well.

Rafael said...

@ Gamecoug -

I agree that applications for just a few shares aren't going to put a lot of money into the kitty, net of transaction overheads.

However, I think it would useful to offer small bundles to make sure that even K12 kids and starving students could participate (for minors, via their parents). They were among the most enthusiastic supporters of the projects and, even owning just one share would have a psychological impact.

Also, the state legislature and Congress may evaluate the project in a different light if CHSRA could point to millions of investors as opposed to just a handful. The currency of politics is votes, and every citizen has one of those, whatever his or her bank balance. It's important to keep project visibility high because there are so many competing needs on severely stressed public budgets.

Note that the state of California has already invested around $60 million, which could be reflected in a number of shares. Similarly, any bonds sold under the authority granted by prop 1A would be used to buy shares. In other words, CHSRA would transition from working as a public planning body to working as a regular corporation, with the state of California a major shareholder.

Anonymous said...

Is this something that you're suggesting or something that's already in place? Either way, its a great idea.

Rafael said...

@ nikko pigman -

if CHSRA already has any plans along these lines, I'm not aware of them. So, it's just a suggestion of mine at this point. Robert Cruickshank told me someone at CHSRA occasionally reads this blog.

Gary said...

I'd buy some shares in HSR. I want to see rails in the ground asap.

Bureaucromancer said...

I'd go for between 20 and 50 if it were possible for non California residents to get them.

Anonymous said...

I don't understand what you're buying a share in. Normally you are buying a share of the company that entitles you to an equivalent share of the profits. But in this case the total expected profits are not high enough to justify the share price (if I read your proposal correctly). The "deniers" were wrong about a lot of things, but that's one claim that's actually true (not that many supporters denied it - we just pointed out that that's true of virtually all public infrastructure projects). That is why any private entity that invests will expect to get a share of profits that us disproportionate to it's investment, either explicitly (if they use equity) or implicitly (if they use debt). But it doesn't appear that you are proposing that here - it sounds more like a donation than an investment. Maybe I'm misunderstanding the plan.

Anonymous said...

I doubt it will be build one day. The country is not ready yet. With our miles, feet and pound we are ridiculous. The world is making fun of us.

Robert Cruickshank said...

This is a fascinating concept, Rafael. I'm not much of a finance person, but I'd line up to buy several shares. Dunno how many.

It should be noted that Obama could, if he wanted to, use the remaining $350 billion of TARP funds he wants released to the Treasury to buy up Prop 1A bonds and other state debt. Controller John Chiang has been advocating for the Treasury to do either that or provide some form of federal guarantee of state bond debt.

It would be an indirect but valuable stimulus - far more useful than giving it all to Goldman Sachs.

jojo said...

I've been waiting for months to hear about a way to pitch in money into shares, bonds, donations, towards HSR.

I hope the people in CHSRA seriously consider it.

Anonymous said...

Cash crunch slows high-speed rail project

Michael Cabanatuan, Chronicle Staff Writer

Friday, January 9, 2009

(01-09) 04:00 PST Sacramento -- Just months after Californians voted to invest nearly $10 billion in a statewide high-speed rail system, the agency charged with getting it built is running out of money.

The California High Speed Rail Authority's budget for the current fiscal year, which ends in June, included $29 million from the sales of high-speed rail bonds authorized by voters in November. But because of the state budget crisis, the credit crisis and the poor market for bonds, the state treasurer has not sold any of the rail bonds.

That's left the rail authority without cash at a time when Californians are eager to see the 800-mile fast train system built. At an authority meeting Thursday, officials said they had halted payments on engineering and design contracts in progress and are holding off on awarding new contracts.

"Unfortunately, I have quite a backlog of bills that need to be paid, but no money to pay them," said Carrie Pourvahidi, deputy director for the authority.

So far, consultants under contract with the authority are continuing to work despite the outstanding bills. On Jan. 16, the authority will appeal to the state's Pooled Money Investment Board - the state controller, the treasurer and the head of the finance department - for a $29 million loan so it can complete the work it plans to finish this year.

But in case that doesn't happen, the authority directed its staff to come up with a list of contracts that can be put on hold without significantly slowing progress on the project. Other issues, including the small size of the authority staff - six people - and an issue involving compensation of the executive director, Mehdi Morshed, a state retiree whose compensation is limited by state pension laws, are also hampering the authority, officials said.

On the other hand, the governor's early state budget proposal for the 2009-10 fiscal year includes $123.8 million for high-speed rail, just a half million dollars short of the agency's request.

Quentin Kopp, authority chairman, urged the agency to continue moving as fast as it can, contending that the state budget crisis will eventually be resolved, the credit crisis eased and federal funding available.

"Hurry up," he said in a good-natured exhortation to a consultant doing engineering and design work.

E-mail Michael Cabanatuan at

Clem said...

You could pay the original investors annual dividends, funded by the later investors. This technique is easily scalable to $50 billion, as recently demonstrated. ;-)

Spokker said...

Enough with this nonsense. Fund the goddamn thing in a massive federal stimulus package for transit and fuck the capital costs.

Jesus Christ this is important infrastructure we are talking about here not a flat screen plasma TV.

Stop building freeways, hell, stop designing new freeways, and start laying rail. I'm sick of this already.

Spokker said...

Gahhh! I'm angry! Passenger rail advocate smash!

Anonymous said...

@ mike- You couldn't structure it like an equity share where you get profits. You would need to make it more like debt where you get a relatively fixed return for your capital. Obviously the California taxpayer will have to fund some of the interest payments, but California private citizens could still provide financing to get the project started.

CHSRA could just auction off bonds, but the thing is that there isn't really a market for them now. It would be hard to run an auction for small investors, so you might just try and estimate the interest rate on bonds that would be offered in normal times (or what you think people that really believe in HSR would be willing to accept, which may be lower) and then offer that interest rate on shares in small denominations.

It's not as crazy as it seems, but somewhat out of the ordinary.

Anonymous said...

Off topic. Since Robert likes the Spanish system so much: Spain's high-speed trains win over fed-up flyers

Anonymous said...

Securities registration laws make this a sloooow process and one dependent on workers with particular expertise in finance and related law....

a class of workers who are admittedly losing their jobs by the millions. So maybe some could be gotten cheaply or freely.

eel said...

The advantage of single shares at $30 is that you could buy a share as holiday gifts for each of your relatives.

I would buy a share for my daughter at least.