Wednesday, February 9, 2011

What does the CHSRA want, private investors or construction contractors?

Even before the 2008 elections and before Proposition 1A was voted on, the CHSRA held conferences seeking private investors.  At one time, they retained Lehman Brothers to handle this, but we know how that turned out.

They've done this several times since.  And here's what they're getting.  The people who sign up for "participation" are companies in the HSR manufacturing business, mostly from overseas who make railroad products.  That makes the word "participation" highly ambiguous.

One would presume that private investors are just that; people who lend money for a return of interest on those loans.  In other words, presumably the CHSRA wants to borrow funds to build the train, and then pay them back, with interest, when they trains run and make money.  Several major problems with that.

First of all, the private investors, if they do any due diligence, will know that there isn't any money to be made. All HSR operations world-wide are massively subsidized by their respective governments. This California one will be no exception.  There will be no ROI, return on investment; that is, unless it's government guaranteed.  And that's illegal under AB3034.

When you read this article, it becomes very unclear just what, exactly, the rail authority is looking for.  The headline says, "private partners."  What does that mean?  Is their lead contractor, Parsons Brinckerhoff, a 'private partner?'  They certainly aren't private investors. Since when is someone to whom you outsource a process, a partner?  If my company outsources our cleaning services, they are not our partners. 

When Van Ark is quoted in the article, he's also ambiguous.  He says that, "With Proposition 1A, Californians did their part with state funding, and the federal government has stepped up with a pledge for a long-term commitment to high-speed rail. We are now eager to hear from the private sector."   Does he mean private investor or private contractor? 

Proposition 1A is a state bond issue loan to the rail authority. It should go without saying that the rail authority can never and will never pay this $9 billion back.  Indeed, they won't even be able to pay back the interest, much less the principal.   

What Van Ark states here is that in addition to Prop. 1A is state-sourced funding, he is also receiving a "long-term funding commitment" from the federal government with the ARRA stimulus dollar pledge.  (Actually, that's not true; it's not a long-term commitment of any kind.)  

But, be that as it may, he is now "eager to hear from the private sector."  What, exactly is he so eager to hear? We would assume he means investment. But the companies that are stepping forward are contractors seeking bids and who will presumably expect to be paid for their services and products.

Are you confused yet?  We are told that companies have until March 16th to respond. What then?  Will Van Ark no longer accept loan offers from anyone?  And, then there's that list of "core systems" that will be necessary to build the train, like electrification and signaling.  So?  Did Van Ark hope to get that for free, out of the goodness of these manufacturers' hearts?

The article mentions RFEI (Requests for Expression of Interest). These are somewhat like RFPs, (requests for proposals). Do those apply to lenders, such as private investment companies, or to contractors who perform the work essential to a project such as this?  These RFEI responses are submitted prior to actual bidding on the work, are they not? It has nothing to do with investment loans.  

Which is to say, I'm more confused than ever.  Even the opening sentence of the article addresses these RFEIs as contract-seeking for construction. Interesting that they set a deadline of March 16 on this, since they have only the sketchiest of plans in hand for the Central Valley. As we all know, the less detailed and precise the RFEI is, the more ambiguous are the responses. 

Look, let's stop playing word games.  The CHSRA has one source of funding from Prop. 1A GO bond funds.  General obligation bonds have a direct tap on the state treasury.  The rail authority also has access to the $3+ billion from the federal ARRA stimulus funds.  And, that's all.  And that is less than 20% of the costs of the entire project. Indeed, I anticipate that it will be less than 10% by the time the bids come in. 

There are no private investments on the horizon.  There have been exploratory inquiries from the Chinese and Japanese who have talked vaguely about loans.  What that deal would mean we don't know.  But, it should be absolutely clear that without further government funding, this project isn't going anywhere.

California high-speed rail seeks private partners
Silicon Valley / San Jose Business Journal
Date: Wednesday, February 9, 2011, 2:08pm PST

The California High-Speed Rail Authority on Wednesday issued a "request for expressions of interest" as a first step in its process to award construction contracts.

The first contracts to be signed involve $5.5 billion for construction; from there bids will be sought for the design and construction of the entire system and its operations and maintenance.

"Every day, we hear from the private sector that companies are eagerly looking forward to helping develop California’s high-speed train system. This request for expressions of interest is the chance for companies large and small -- from the self-employed business person in the Central Valley to multinational corporations -- to tell us exactly what roles they hope to play in making high-speed rail travel a reality in California,” said Roelof van Ark, chief executive of the California High-Speed Rail Authority. "With Proposition 1A, Californians did their part with state funding, and the federal government has stepped up with a pledge for a long-term commitment to high-speed rail. We are now eager to hear from the private sector."

Companies have until March 16 to respond. The RFEI [Request for Expression of Interest] applies to either the initial construction segment -- about 120 miles through California’s Central Valley -- as well as any future phase of the project, including its financing, core systems such as trains, electrification, signaling, etc.; and its operations and maintenance.

"The RFEI is not a required, binding part of the procurement process, but it is an opportunity for the private sector to formally weigh in on the largest infrastructure project in the nation by outlining their interest in the project. It also gives the California High-Speed Rail Authority a tool to shape the procurement process going forward," the agency said in a prepared statement.

Earlier the Obama administration unveiled plans to spend about $53 billion to help build a national high-speed rail network.

Posted by Elizabeth Kim. Contact her at 408.299.1835 or

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