Monday, February 21, 2011

Who pays and who plays with HSR in Florida?

Here is today's editorial from the New York Times, attacking Gov. Rick Scott for his rejection of the federal dollars for HSR.  We've talked about this a number of times already.  This issue doesn't seem to be going away.   I'm sorry that the authors of this editorial hadn't taken the time to do some in-depth analysis of what they were talking about.  Their critique sounds like knee-jerk ideological cantankerousness.  They say, "There is no sound economic justification for the decision by Gov. Rick Scott of Florida to reject $2.4 billion in federal financing for the vital Tampa-to-Orlando high-speed rail project." 

They go on to call Scott's decision "political pandering to his Tea Party supporters. . ."   I'm sorry, New York Times editors, but what Scott learned that you apparently haven't is that all the numbers being offered as justification for HSR along with federal and open-ended state investment, either in Florida or elsewhere, are totally in error. Just do some homework by reading Bent Flyvbjerg's research to understand the predictability of huge cost over-runs and gross overestimation of ridership.

We've talked about private investors before in this blog.  They are always just around the corner with their generous offers.  This editorial identifies them, for Florida, as "eight business consortiums from 11 countries."  Excuse me?   And, my guess is that they include Alstom, Siemens, and other European, Japanese and Chinese manufacturers.  Eight businesses; eleven countries?  Hmmm.  Why, do you suppose that these HSR contract-seeking companies would be so interested in offering financial participation with HSR "loans?" 

To help understand the situation in Florida from a better informed perspective than that of the NYT, below their editorial is Wendell Cox's financial analysis and what could be done to rectify the problem. However, don't hold your breath.
The New York Times

February 20, 2011

Keeping Up With the Christies

There is no sound economic justification for the decision by Gov. Rick Scott of Florida to reject $2.4 billion in federal financing for the vital Tampa-to-Orlando high-speed rail project. Political pandering to his Tea Party supporters is the only explanation we can come up with.

Over a decade in the planning, the 84-mile corridor was on the verge of construction, with guarantees from private entrepreneurs that they would absorb any cost overruns and operating deficits for the state. They anticipated 24,000 new jobs and a cornucopia of business growth for recession-mired Florida.

High-speed trains are booming as basic necessities for the nation’s global competitors in Europe and China.

The 90 percent federal share was nevertheless rejected by Mr. Scott, whose deliberations included a 30-minute meeting with Tea Party opponents of the project. Instead of waiting for a state study, as he had promised, Mr. Scott offered his own pound-foolish bromides, as he insisted that Florida would not chip in $280 million.

He contended that state taxpayers could ultimately be on the hook for the whole project — but had no evidence to support that claim. “I don’t see any way anyone is going to get a return,” he insisted, ignoring the fact that sponsors included eight business consortiums from 11 countries. They saw opportunities rolling from the Orlando airport to downtown Tampa, Orange County, Walt Disney World and Lakeland.

Mr. Scott isn’t the only Republican governor who has decided to play politics with his state’s economic future. New Jersey’s Chris Christie killed off a much-needed mass-transit tunnel under the Hudson River, and lost $3 billion in pledged federal funds. Wisconsin’s Scott Walker and Ohio’s John Kasich made a show of rebuffing a total of $1.2 billion in federal high-speed rail help.

The Obama administration laced its disappointment with notice that Florida’s financing — and economic benefits — will be shifted to other states where the demand is high. California and New York are lining up.

Meanwhile, Mr. Scott’s fellow Florida Republican, John Mica, chairman of the House transportation committee and a prime supporter of high-speed rail, called the governor’s decision “a huge setback.” Senator Bill Nelson, a Florida Democrat, aptly summarized the governor’s fiasco: “This is eating our seed corn.”

by Wendell Cox  -  2.21.11

There is discussion of resurrecting the Tampa to Orlando high speed rail line, on the assumption that this can be accomplished without creating any liability for taxpayers. As this note makes clear, there are substantial hurdles that make achieving this goal nearly impossible.   

The starting point must be a guarantee that neither state nor local taxpayers will have any liability, under any circumstances,for increases in capital costs, for operating subsidies or to pay back the federal grant, regardless of whether such circumstances are or could have been foreseen.

This could prove to be difficult, if not impossible, and the minimum requirements of such a guarantee are described below.

(1) Capital cost increases: These will ultimately be the responsibility of taxpayers. It is claimed that the project will cost $2.7 billion. Based upon the international experience, this is a fantasy and cost increases could raise the cost to as much as $5.7 billion (a $3.0 billion increase). There are claims that the private builder/operator would pay any such cost increases. However, no private consortium will have the financial capacity to pay for any such cost increase, nor has any in the past.

(2) Promoters claim that the project will pay for its operating expenses. Few rail systems in the world accomplish this and operating subsidies are likely. Operating subsidies will ultimately be the responsibility of taxpayers. Proponents claim that the private sector will pay any operating subsidies. However, the operating subsidies could become too large for the private consortium to pay.

(3) Any Florida government (state or local) accepting the federal funding would have to guarantee a certain level of service for at least 20 years and would have to pay back the federal government if that level of service is not maintained. This is no idle threat. Florida is already paying millions in subsidies annually for higher service levels on Tri-Rail (Miami) area to avoid a demand to repay one-quarter billion dollars to the federal government.

It is inconceivable for the private company (a company created by other companies, and having limited liability) to have sufficient resources to pay the potential extent of these obligations (at least under normal operating procedures). The private consortium could become insolvent, leaving taxpayers of the government entity accepting the federal grant with the obligations.

The Problem with Private Company Assumption of Liabilities: Under normal circumstances, the companies "partnering" in a consortium have no liability beyond their investment. A consortium could become insolvent and the parent companies would not be required to meet the obligations, leaving taxpayers with substantial obligations.

Protecting the Taxpayers: Thus, the private consortium accepting the liability must take the following actions to protect the taxpayers.

1. Performance Bond: The private companies forming the consortium must post a performance bond in the amount of the highest likely capital cost increase ($3 billion) as well as potential operating subsidies (an amount to be determined) for the period of obligation under the federal grant. This would, in effect, be an insurance policy to guarantee payment by a financially strong third party institution in the event that the private consortium does not pay for all cost increases.

2. Unlimited Corporate Guarantees: The private companies forming the consortium must provide their unlimited corporate financial guarantees for the obligations of the private consortium, including cost overruns, operating subsidies and any eventual requirement to pay back the federal grant.

In view of the confidence of promoters that there will be no cost overruns, these requirements should be no barrier to the project.
Wendell Cox
Demographia | Wendell Cox Consultancy - St. Louis Missouri-Illinois metropolitan region
Visiting Professor, Conservatoire National des Arts et Metiers, Paris
+1.618 632 8507