Tuesday, March 15, 2011

Experts missing the boat (or train) on high-speed rail

You would think that a former Governor from Pennsylvania and a high ranking financial operative would have a penetrating understanding of financing large government infrastructure projects.  But that seems not to be the case in this article, written by Governor Rendell and Mr. Peter Peyser, Jr.  

What were they thinking?  Didn't they do any due diligence about passenger rail in the US and abroad first?  Didn't they look at high-speed rail and its consequences in the rest of the world?  Did they believe all that Democratic promotional rhetoric and marketing jive about how wonderful high-speed rail will be in the US; how many jobs it will create and how much profit it will make? 

Didn't they read Bent Flyvbjerg's research?

My comments are interspersed in the text of the article:

March 15, 2011, 7:04 p.m. EDT
A Northeast-Corridor Bullet Train

By Edward G. Rendell And Peter A. Peyser Jr.

President Obama was right to emphasize high-speed rail development in his January State of the Union address. Investing in our passenger rail infrastructure will create construction jobs, keep our steel factories busy, and make our economy more competitive. Unfortunately, even with a commitment from the president, the current fiscal situation in Washington does not allow for a large and sustained investment of federal money.

**"Unfortunately, even with a commitment from the president, the current fiscal situation in Washington does not allow for a large and sustained investment of federal money." In that case, why are we even having this discussion?  Like all passenger rail, it's a deficit operation.  Who else is going to pay for it?

How will it keep our "steel industries" busy?  As former Governor of Pennsylvania, you better than anyone can tell us how Pittsburgh, the once upon a time steel capital of the US, declined as that industry went overseas, primarily to Japan, Germany and more recently to China. Why do you suppose they call the northern mid-west, from Pittsburgh to Gary, Indiana, the "rust belt?" To all intents and purposes, the US now has a minimal steel industry.  It's not coming back, and building a high-speed rail certainly won't bring it back.  The new Bay Bridge steel and concrete components were built in China and shipped here, like everything else.  

I don't understand how building a high-speed train for passengers in the US will make our economy more competitive. With whom are we competing?  China?  They are the ones who are going to build, and perhaps operate, our high-speed train.  How is that competitive?

But there is a way to fund high-speed rail in a place where leaders in both parties support it—the Northeast Corridor from Boston through New York and Philadelphia to Washington, D.C. How? By creating a partnership among the federal government, state governments and the private sector.

The market for high-speed rail along the Northeast Corridor is already established, the dedicated right-of-way already assembled, and the economy there already reliant on passenger rail service. But today's Amtrak service—under the Acela brand name—is by international standards a joke. It takes two hours and 45 minutes to make a 225 mile journey from New York to Washington. The train rarely gets above 100 miles per hour. Even so, the Acela captures about as many passengers as the air shuttles in the same corridor.

Imagine if the service were upgraded to 200 mph or faster so the same trip could be completed in under two hours. That service would lessen the need for air shuttles between New York and Washington and free up precious take-off and landing slots at Reagan and LaGuardia airports for higher value flights to destinations that can't be served by rail. It would also significantly reduce tarmac waiting time at Newark, Philadelphia and Baltimore-Washington.

A September 2010 study by Amtrak showed that a railroad operating at 220 mph in the Northeast Corridor would generate a $900 million annual operating profit. Undoubtedly, improving the service will be costly. It will require constructing a dedicated track that won't be used by freight or commuter lines. Can such sums be raised to create a world-class railroad in the United States? We think so.

**The study shows how Amtrak “would generate a $900 million operating profit.”  How, after more than a decade, does Acela generate anything other than an operating deficit?  Amtrak, lives on $2 billion subsidies a year and is a model of how not to run a railroad. 

Amtrak now has it's own high-speed rail division and is hungry for a piece of that action. They are not operating profitably anywhere.  I would not give much credence to a study conducted by Amtrak that projects profits for a rail system they are so eager to acquire.  

These "operating profits" are the same BS we are hearing from our CHSRA in California.  They have to project profitability or there would be no private investors.  I challenge Amtrak to show an "investment grade" ridership projection, rather than a PR document. 

And, by the way, the CHSRA is projecting $3 billion in operating profits a year.  OK, Amtrak, can you beat that? Even if you have several times as many potential riders in the NEC than California? Oh, wait.  How can that be?  Amtrak projects only $900 million and the CHSRA projects $3 billion? What's wrong with this picture?  But, I digress. 

Expensive?  They have no idea.  As they say in this article, it will require dedicated track.  That means, especially for 220 mph, they can't use existing rail corridors that are now shared with Amtrak and freight.  Guess how much that will cost.  Remember, from Wash. D.C. to Boston may be the most expensive real estate in the US.

I find the lack of realism in these discussions amazing.

The first step is for the federal government, which ultimately controls Amtrak, to break off the Northeast Corridor into a separate company. It could then package the railroad for transfer out of federal control.

Did you forget that passenger rail was out of federal control, in the hands of private rail operators, until passenger rail became a money loser? Finally, passenger rail fell under federal control and became heavily subsidized since its existence.  It's called Amtrak.

The new railroad should be a public-private partnership. Fifty-one percent of this new company would be owned by a multistate compact among the nine states along the corridor and the District of Columbia. The remaining 49% would be owned by a private consortium that would likely include an investment bank/private-equity group, a railroad operating company, railroad unions and equipment vendors.

The federal government's financial obligation to the corridor would be to allocate funds up front, perhaps on a five-year payout, to compensate the new owner for the fact that it is obtaining an asset in rundown condition. Federal legislation could limit the size of this up-front payment by requiring the states to pick a private-sector partner based in part on which one proposes the lowest federal subsidy. Whatever the payment is, it will represent a long-term savings as compared to the open-ended commitment of hundreds of millions of dollars per year now going to Amtrak service along the corridor.

The two paragraphs, above, are pie in the sky speculation.  They presume that passenger rail will produce investment returns. Without those, why would anyone, including the Unions, buy into this?

The governors of the states and the mayor of Washington would have the difficult task of negotiating among themselves and the private sector to determine how much (or little) state funding would be required to get the railroad moving. With state budgets along the corridor in distress, the prospect for major funding is certainly problematic. But if private partners are to take full advantage of the real-estate development opportunities presented by property now owned by Amtrak, as well as concession opportunities and various marketing partnerships, the need for state funding will be reduced.

**This is sheer fantasy land. It's like Mickey Rooney and Judy Garland in those old movies deciding to open a show in a barn. The key sentence above is: "With state budgets along the corridor in distress, the prospect for major funding is certainly problematic."  Isn't that the whole point?  It's that very distress that will turn off investors. The federal government would have to subsidize this operation, just as it does Amtrak currently, to keep it afloat.  Without those guarantees, there will be no revenue to return to investors.  That makes a mockery of this gossamer scheme.
Gentlemen, this is not a movie. This is the real world.

There is precedent in the U.S. rail industry for such a federal-state-private partnership. In recent years, federal grants were given to Norfolk Southern's Five-State Crescent Corridor Plan between Louisiana and New Jersey and CSX's Six-State National Gateway connecting the Mid-Atlantic and the Midwest. In both plans, the participating states kicked in a total of one-third of the project cost. While these are freight projects and not for passengers, they demonstrate how cost-sharing among the private sector, state governments and the federal government can work.

**No, gentlemen, that is not a precedent for what you are proposing here.  The difference between freight and passenger rail is day and night.  Investing in freight is a very good thing to do, as Warren Buffett has amply demonstrated.  Investing in passenger rail is a loser.  Remember that the freight operators used to also operate passenger rail.  They never made very much money off that part of their business and it even interfered with their freight service. They started to lose money as interest in passenger rail declined in the '50s.  Amtrak saved passenger rail by the Congress taking it over.  Amtrak, as we all know, costs the government billions of dollars.  Cost sharing makes sense if there are returns on equity.  That works with freight, but not with passenger service.  But, I find I'm repeating myself. 

Investment banks and private equity firms have established infrastructure funds that currently have billions of dollars sitting on the sidelines awaiting opportunities to invest in public-private partnerships. It's time to put that money to work by kicking off a process like the one suggested here.

**Yes the private equity firms do, but this ain't it.  Governor Rendell and Mr. Peyser can advocate that investors put their billions to work all they want.  But, if there is no return on those dollars, why would they?

The first step is federal legislation to create the new Northeast Corridor railroad and the strategy for selling it.

There is nothing to sell here except a rough idea or business concept.  And that idea has not been thought through.  There has been no due diligence, no homework. There needs to be a much better understanding of passenger rail and it's challenges world wide.  Otherwise, they are putting Descartes before the horse.
Mr. Rendell is the former governor of Pennsylvania. Mr. Peyser is Managing Principal of Blank Rome LLC.

Please note new email address:

Martin Engel
1621 Stone Pine Lane
Menlo Park, CA 94025

Web-site:  http://high-speedtraintalk.blogspot.com/