Wednesday, June 22, 2011

The Cox/Vranich Due Diligence Report: Executive Summary

Here's the first offering from Wendell Cox and Joseph Vranich's Due Diligence Report which I introduced on this blog yesterday.  There will be further sections of this Report presented here over time.  

You have to remember that this was published in September of 2008,  before the California voters passed Proposition 1A,  but not in enough time to have the necessary influence on their thinking.

Most of the media at that time were parroting the press-releases from the CHSRA, full of mis-statements and untruths.  They ignored this lengthy and hugely detailed report. 

Lest you misunderstand what this 180 page document really is, there are 530 footnotes/citations.  The Report is what they call a "meta-analysis" in research; that is, a review of all the existing studies integrated into one single analysis. 

This document is, in my mind, still the most definite analysis of the California HSR project and should be required reading for each and every legislator in Sacramento.  It should also be read by all those smarties at the DOT and the FRA in Washington.

The Report was produced under the auspices of the Reason Foundation.  

Executive Summary

By Wendell Cox and Joseph Vranich

The purpose of this Due Diligence Report is to examine the proposal to build a California high- speed rail system (HSR) between the San Francisco Bay Area and Sacramento to Los Angeles and San Diego via the San Joaquin Valley. The general plan is to build a system of from 700 to 800 miles with an initial state general obligation bond of $9 billion and a similar amount in grant funding from the federal government. The balance of what has now become at least a $54.3 billion system would be provided by private equity investors and commercial bond purchasers. As is noted below, the system has already encountered substantial capital cost increases and this Due Diligence report projects that the final cost of the system is likely to be between $65.2 billion and $81.4 billion (2008$).

The California High-Speed Rail Authority (CHSRA or Authority), which is responsible for the project, anticipates that operating profits will pay for operating expenses, profits to private investors, debt service to commercial bond holders and sufficient revenues to build segments beyond Phase I (downtown San Francisco to Los Angeles and Anaheim). This would include a line from Los Angeles through the Inland Empire to San Diego, a line connecting Sacramento to the system in the San Joaquin Valley, a line through Altamont Pass and an East Bay line from San Jose to Oakland. The CHSRA has expended $58 million in state funding during the last 10 years planning such a system of “bullet trains.”

It is possible that HSR can serve legitimate public and environmental purposes and be a financial success in California. However, the current CHSRA proposal cannot achieve such objectives. The principal message of this Due Diligence report is that CHSRA’s plans have little or no potential tobe implemented in their current form and that the project is highly risky for state taxpayers and private investors.

The CHSRA plans as currently proposed are likely to have very little relationship to what would eventually be built due to questionable ridership projections and cost assumptions, overly optimistic projections of ridership diversion from other modes of transport, insufficient attention to potential speed restrictions and safety issues and discounting of potential community or political opposition. Further, the system’s environmental benefits have been grossly exaggerated, especially with respect to reduction of greenhouse gas emissions that have been associated with climate change.

The CHSRA documentation provides virtually no objective analysis about risks and uncertainties, nor has CHSRA documentation been scrutinized in an independent review. This report is such an effort—which is why it is a Due Diligence Report—one that examines the CHSRA’s documentation based on empirical data, historical trends and domestic and international experience.

This report specifically examines the following topics: HSR ridership and revenue, demographics, construction costs, operating costs, financing costs, airport and highway alternatives, train speeds, train designs, safety regulations and standards, greenhouse gas reductions, potential community opposition and historical experience in the United States. Regarding ridership and costs, this report evaluates projections from CHSRA and also develops independent projections.

Financial Prospects

The HSR system can be categorized as a “mega-project,” one taking many years to decades and many billions of dollars to construct and put in operation. Such mega-projects run high risks of failing to meet their ridership projections, financial forecasts and other objectives. This analysis compares the CHSRA’s proposed system with major HSR systems operating overseas. It is noteworthy that California is proceeding with HSR plans based on assumptions that may be appropriate to European and Asian environments but hold little applicability in the state. Moreover, it is not clear that the world’s HSR systems have typically covered their operating and capital costs without subsidies—a determination that would be appropriate in a due diligence process for any commercial HSR proposal.

The CHSRA and state officials are proposing or in the past have proposed sources of public funds to pay for HSR’s construction and operation, which include bond issues, sales taxes and matching funds from the federal and local governments. Such an array of public funding is expected to induce private investment. The state Senate Transportation and Housing Committee observed that Californians are being asked to be “investors” in a project based on promises of commercial return. However, most commentary and analysis by the Authority relies on unrealistically optimistic forecasts, is promotional in nature, and falls far short of conveying the project risks to taxpayers and potential investors.

The CHSRA lacks a comprehensive financing plan. The proposed state bonds would be insufficient to build Phase I, much less the rest of the system. Little appears firm about potential matching funds from federal and local governments and from potential investors. The state Senate Transportation and Housing committee has issued cautionary statements about the availability of matching federal funds. Also, CHSRA advisor Lehman Brothers has outlined risks that can be a barrier to private investment, including cost overruns, failure to reach ridership and revenue projections and political meddling. Meanwhile, the cost of the project continues to grow.

It should give pause that previous HSR projects have been halted in three states—California (for Los Angeles–San Diego), Texas and Florida. The federally sponsored HSR program for Boston– New York–Washington serves only a fraction of its projected ridership and carries a fraction of the passengers that European and Japanese lines carry. Despite such data going back decades, it does not appear that the CHSRA has taken into sufficient account market, costs, financing or community concerns.

In the final analysis, it will be most difficult for CHSRA to obtain sufficient financing to complete the Phase I San Francisco–Los Angeles–Anaheim route. This Due Diligence report concludes that commercial revenues from that route are unlikely to be sufficient to pay operating costs and debt service, much less finance Phase II and other extensions. As a result, it seems highly unlikely that the Inland Empire–San Diego, Sacramento, East Bay San Jose–Oakland and Altamont Pass routes will be built. Further, in the worst case, funding shortfalls could require greater use of improved conventional rail infrastructure in Phase I, which could add hours to the promised travel times.

All of this could lead to negative financial consequences, such as substantial additional taxpayer subsidies, private investment losses, and commercial bond defaults.

Costs and Revenues

To determine a more realistic construction cost estimate, it should first be noted that capital costs have risen 50% to $49.0 billion in 2008$ (or $45.4 billion in 2006$) at the same time the Oakland– East Bay–San Jose line (referred to as the “Missing Phase” in this report) has been dropped from the plan. It is estimated that including the Missing Phase would raise the cost to $54.3 billion (2008$), based upon CHSRA projections.

The system, including Phase I, Phase II and the Missing Phase is likely to escalate in costs to between $65.2 billion and $81.4 billion (2008$). Additional segments, referred to as the “Implied Phase” (Altamont Pass, Anaheim–Irvine and the Dumbarton Bridge over lower San Francisco Bay) would raise costs even further.

During severe funding shortages, more expensive urban route sections would be particularly at risk and new HSR infrastructure could be relinquished in place of improvements to existing tracks. 

The HSR trains could gain access by sharing upgraded tracks with slower commuter rail and freight trains on the Peninsula line in the San Francisco area and Metrolink in Los Angeles and Orange County. Trains on such a “skeletal” HSR system would offer slower schedules, which could seriously reduce ridership and revenues.

This report offers a Case Study about what can go wrong should funding be insufficient to complete the Inland Empire line between Los Angeles and San Diego. The Authority may view service to San Diego as part of its continuing mission and revive plans to operate high-speed trains over an upgraded in-place rail alternative—the Coastal Route via Fullerton, Anaheim, Tustin, Irvine, San Juan Capistrano, San Clemente, Oceanside, Encinitas and Del Mar. The route change would likely stir strong opposition in communities that helped stop a former high-speed rail plan.

It is likely that HSR will require substantial additional taxpayer funding to complete Phase I, Phase II, and the Missing Phase or more of the state will go without high-speed rail service than is immediately apparent. Also, it is likely that the system will not generate sufficient revenues to cover either its operating costs or debt service. As result, continuing subsidies from California taxpayers are likely to be necessary and made a permanent part of Sacramento’s annual appropriations process.

Travel Time, Speed and Train Design

Based upon international HSR experience, it appears that the CHSRA speed and travel time objectives cannot be met. As a result, HSR will be less attractive as an alternative to airline travel and is likely to attract fewer passengers than projected. Notably, the CHSRA’s anticipated average speeds are not being achieved anywhere in the world, including on the most advanced systems. 

Additionally, incomplete consideration has been given to California’s urban and terrain profiles where HSR trains must operate more slowly than circumstances allow in, for example, France. This study, by assuming realistic speeds, estimates that a non-stop San Francisco–Los Angeles trip would take 3 hours and 41 minutes—59 minutes longer than the statutory requirement of 2 hours, 42 minutes. In the future, the CHSRA’s travel times may be further lengthened by train weight and safety issues and also by political demands to add stops to the system.

The proposed HSR system appears unlikely to provide travel time advantages for long-distance airline passengers. It is likely that HSR door-to-door travel times would be greater and there would be considerably less non-stop service than air service. Moreover, HSR would be unattractive to drivers in middle-distance automobile markets because little or no door-to-door time savings would be achieved and costly local connections would often be required (rental cars or taxicabs). Another convenience factor is that California urban areas lack the extensive local transit infrastructure that connects with HSR systems found in dense Asian and European urban areas. The HSR system will experience disadvantages and commercial challenges in competing with air and auto travel that have been understated in CHSRA documentation.

No existing European or Asian HSR train capable of meeting the speed and capacity goals of the CHSRA system can legally be used in the United States. The CHSRA’s intention to share tracks with commuter and freight trains complicates designing a train to meet Federal Railroad Administration (FRA) safety and crashworthiness standards that are considered the toughest in the world. The necessary regulatory approvals of an overseas train are unlikely to be achieved without substantial changes in design and weight.

The CHSRA has yet to decide on basic design specifications for a train and has based studies on inconsistent seating capacities of 450-500, 650, 1,175, 1,200 and 1,600 per train. Also, a train redesigned for the U.S. will become much heavier and is thus unlikely to reach promised speeds. In short, the Authority does not have a usable train design and the eventually required modifications could substantially impair operating performance.

Because of the above circumstances it is fair to state that the CHSRA’s train may become the world’s longest and heaviest HSR train—yet be expected to operate at the highest speed current technology permits. It is likely that a series of designs, tests, prototypes and safety reviews never before achieved anywhere in the world must succeed for the CHSRA’s train to become a reality. 

Any degradation in performance would negate the CHSRA’s assumptions on which it has based travel times, ridership and revenues, energy requirements, GHG emissions, noise generation, capital and operating costs, and overall system financial performance.

Ridership Projections

It appears that the CHSRA 2030 ridership projections are absurdly high—so much so that they could well rank among the most unrealistic projections produced for a major transport project anywhere in the world. Under a passenger-mile per route-mile standard, the CHSRA is projecting higher passenger use of the California system than is found on the Japanese and French HSR networks despite the fact that these countries have conditions that are far more favorable to the use of HSR.

The CHSRA’s ridership projections reflect assumptions contrary to actual experience, forecasts inconsistent with independent projections, load factors and other calculations that are highly questionable, and reliance on extraordinarily low fares that are not found on similar systems.

The CHSRA has been increasing forecasted ridership over time and has issued a Base Projection of 65.5 million intercity riders and a High Projection of 96.5 million intercity riders for 2030. The CHSRA ridership projections are considerably higher than independent figures developed for comparable California systems in Federal Railroad Administration and University of California Transportation Center at Berkeley studies.

Using generous assumptions this Due Diligence Report projects a 2030 base of 23.4 million intercity riders, 64% below the CHSRA’s base of 65.5 million intercity riders, and a 2030 high of 31.1 million intercity riders, nearly 60% below the CHSRA’s high of 96.5 million. It is likely that the HSR will fall far short of its revenue projections, leading to a need for substantial additional infusions of taxpayer subsidies.

Greenhouse Gas Reduction

Claims about HSR’s environmental benefits have been greatly overstated. California HSR will do little to reduce CO2 emissions (greenhouse gas emissions). Based upon California Air Resources Board projections, HSR would ultimately remove CO2 emissions equal to only 1.5% of the current state objective. This is a small fraction of the CHSRA’s exaggerated claims of “almost 50%” of the state objective. 

The Intergovernmental Panel on Climate Change (IPCC) has indicated that for between $20 and $50 per ton of reduced greenhouse gases emissions, deep reversal of CO2 concentrations can be achieved between 2030 and 2050. A McKinsey report indicates that substantial CO2 emission reductions can be achieved in the United States for less than $50 per ton. Yet the cost per ton of CO2 emission removal by HSR is far higher—between 39 and 201 times the international IPCC ceiling of $50. The reality is that HSR’s impact on CO2 would be inconsequential while being exorbitantly costly.

Hence, HSR’s CO2 emission reduction strategy cannot be legitimately included as an element of a rational strategy for reducing GHG emissions. In view of the untenable traffic impact projections and other factors, CHSRA’s claims are considered specious. There is a need for an objective, independent assessment of HSR’s CO2 impacts, including both operations and construction. Until such an analysis is completed, CHSRA should cease making any statements about CO2 or other air quality impacts.


Terrorism against rail targets is a concern considering the extent of attacks that continue to occur on rail systems around the world. The Authority appears to be have given insufficient attention to this issue notwithstanding the RAND recommendation to industry and government regarding improvements to domestic rail security. 

The CHSRA documentation provides virtually no evidence that a proper security assessment of the proposed HSR system has been undertaken, nor does it appear that security applications and methodologies elsewhere have been reviewed. The Authority assumes minimal security at HSR train stations and concludes passengers will be spared airport- like security screening and delays. However, should more stringent security measures become necessary, the CHSRA’s ridership demand forecasts would be even further undermined. The CHSRA has not issued a low-end ridership forecast based on such a circumstance.


Emerging public opposition will likely spread as site-specific urban, suburban and rural impacts become better understood. It is unlikely that the California HSR program will find smooth sailing among impacted communities. This finding is based in part on nascent opposition to the project. Opposition to prior HSR projects has been based on underestimated costs, overestimated ridership, eminent domain and environmental impacts. Also, the credibility of HSR promoters has waned as pledges of “no subsidy” or “only low subsidies” turned into calls for high subsidies. This Due Diligence Report identifies such factors as weaknesses in the CHSRA planning process.

In prior cases opponents have shown great resourcefulness in sustaining campaigns to oppose HSR construction. Opposition could spread, particularly in communities where train speeds and noise would be considered excessive, where massive elevated railways would create a “Berlin Wall” effect that divides communities—a prospect that has caused Menlo Park and Atherton to join in a lawsuit against the CHSRA’s environmental review process—or where a history of staunch opposition exists, such as in Tustin or San Diego County.

Diversion from Other Modes of Transport

The assertion that the Highway and Aviation Alternatives to HSR will cost $82 billion is highly inflated and based on dubious assumptions and fundamental flaws. Examples include the CHSRA proposing far more highway construction than is necessary to accommodate the demand that would exist if HSR were not built. 

This Due Diligence Report estimates that with realistic estimates regarding highway construction costs and diversion of drivers, HSR could reduce highway construction needs by approximately $0.9 billion. This immense cost difference illustrates how modest a future role HSR will play in reducing highway congestion. In short, meeting the highway demand that would occur if HSR were not built would require much less investment compared to the cost of HSR.

Also, diversion of air travelers is over-estimated. The CHSRA assumes that airlines will cancel a large share of the flights within California because passengers will have switched to HSR—and the diversion will free up airport capacity and make it possible to avoid costly airport expansions. This is not the experience even on the premier Japanese and French systems, which show that strong air markets remain after HSR corridors are in operation. Moreover, the CHSRA treats the commercial aviation system as if it is static—as if efficiencies to enhance capacity are impossible.

The CHSRA alternatives appear to be of little value in genuine cost analysis and cannot be taken seriously. They are, in fact, little more than “straw men,” which have the effect of misrepresenting the choices that are available to policy makers in California, in such a way that HSR, which is exceedingly expensive, is made to appear affordable.


Considering the factors enumerated above, it appears unlikely that sufficient private funding and public subsidies will be found to finance the complete HSR plan. There are no genuine financial projections that indicate there will be sufficient funds to complete Phase I, much less Phase II or any other phases. It is possible that the system will either be built only in part or not at all.

Claims of profitability could not conceivably be credible under even the most optimistic assumptions, unless some or all capital and debt costs are ignored. This due diligence analysis indicates that the San Francisco–Los Angeles line alone by 2030 would suffer annual financial losses of up to $4.17 billion, with a small profit possible under only the most optimistic and improbable conditions.

Finally, the HSR system as envisaged in state statute appears highly unlikely to be delivered under the present plan. The taxpayers and potential investors can be appropriately served only by objective analysis, not by the kind of exaggerations and projections that would be expected in brochures promoting speculative real estate investment. That nearly $58 million in public funds has been spent on such a flawed planning process makes it all the more troubling.

There is little likelihood that the passenger or revenue projections will be met, that the aggressive travel times will be achieved, that the service levels promised will be achieved, that the capital and operating costs will be contained consistent with present estimates, that sufficient funding will be found, or that the system will be profitable.

It is likely that these circumstances will represent an expensive and continuing drain on the state’s tax resources. Under three of the four scenarios outlined in this report, an early bond default, taxpayer bailout, and investment losses by private funding participants could occur.

To address a fiscal shortfall, past and present proposals to finance HSR’s construction and operation through various federal, state and local taxpayer subsidies could be futile. Hence, the HSR system is unlikely to be completed in any form consistent with the current plan and that even the delivery of a recognizable Phase I could be most difficult. The outcome could mean investors in the project will see no financial returns and the HSR system as proposed could require significant subsidies from California taxpayers in perpetuity.

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