Tuesday, June 28, 2011

The Great American Credit Card for High-Speed Rail: Our account is overdrawn.

There's a credibility war going on.  It's between the CHSRA and all their critics.  The HSR supporters and the rail authority claim that all their statements and projections are based on solid research.  Yes, but all that "solid research" was bought and paid for by the rail authority.  The rule in the consulting industries is to give the client what they wan and paid for. 

The most blatant recent example of such rigged findings was in regard to the ridership numbers. Apparently, when the mathematical model used by Cambridge  Systematics produced ridership numbers too low to substantiate the CHSRA claims of revenue based on that ridership, they fudged the numbers to come out higher.  The current 39 million ridership projection, so rigorously defended by the rail authority, lacks face validity and lack of common sense. It's implausible and totally counter-intuitive.

All of Amtrak throughout the US carries no more than 29 million annual passengers over 23,000 miles of track.  The air traffic between LA and SF annually is around 9 million travellers.  How the CHSRA could get their 39 million cooked-up number (from Cambridge Systematics) is, shall we say, at least questionable. 

There have been numerous detailed critiques published by both public government agencies (The LAO, the State auditor, the Inspector General, the peer review committee)  as well as private organizations, including independent universities.  In their cases, there was no political or economic ax to grind.  They called them as they saw them and as the empirical data and arithmetic permitted.  

A great deal of the pro and con HSR discussion consists of well informed opinion. That's not a bad thing.  But, it does matter about the data sources and their credibility.  Futhermore, underlying motives do impart a bias and that should not be ignored.  There are major political and economic forces at work here. 

Very few of these discussions focus on the central fact that HSR is, ostensibly, a transportation project.  It is meant to solve transportation problems. However, we hear next to nothing about this other than wild claims of enormous ridership projections and their impact on the other transit modalities such as highways and airways. In reality, the project is anything but a transportation project. It serves as window dressing for political purposes as well as financial ones.  The ethics underlying this project, or absence thereof, become a non-trivial challenge.

In this article, there are bottom line issues raised, such as who is going to pay for this miracle on rails.  And how much will it cost, now and in the indeterminate future?  And that's where all the uncertainty from the rail promoters leaves this debate dangling.  

When the Chairman elect, Tom Umberg says that it will be less expensive the sooner they build it, it has all the ring of the bargain that car dealers offer you if you sign their bottom line right now.  I would suggest that it is already too late and too expensive.  They missed the window forty years ago. 

It is then proper to say, until and unless there is a solid financial basis for building and operating it, don't. 

High-speed rail plan proceeds despite warnings
Analysts say project is tens of billions short.
Posted at 10:36 PM on Monday, Jun. 27, 2011
By Lance Williams / California Watch and Ronald Campbell / Orange County Register

The agency spearheading California's efforts to build a high-speed train through the center of the state is plunging forward despite repeated warnings that it may be tens of billions of dollars short of the money needed to build and operate the system, records and interviews show.

"There is an air of unreality" about the project's $45 billion construction budget, a panel of experts warned the state Legislature last year.

It's a "big gamble" to start construction, the nonpartisan Legislative Analyst's Office warned in May, saying financing was "highly uncertain."

The project lacks "a disciplined business plan that makes any sense," says state Treasurer Bill Lockyer. He fears Wall Street won't invest anywhere near the $12 billion in private capital needed to build the system.

Undergirding the warnings, an inquiry by California Watch and the Orange County Register has found, is a tangle of related concerns:

The appointed officials who make up California's High-Speed Rail Authority say they will rely on $19 billion in federal aid to pay for the 800-mile system. But the legislative analyst says federal funding may amount to less than $4 billion – a $15 billion shortfall.

The rail authority's $45 billion construction estimate may be $22 billion too low, the legislative analyst says. Cost overruns of the sort that have afflicted other big U.S. projects could even drive the actual price above $200 billion, according to a critical study by a Stanford University professor.

The high-speed train's prospects for turning big profits are founded on ridership forecasts that are deeply flawed, two studies claim. Rather than making billions in profits, high-speed rail might actually "incur significant revenue shortfalls," a University of California at Berkeley study found.

The high-speed train's boosters say these concerns are unfounded or overblown. They say they are confident that sufficient funds will be found to build the system, which would connect Orange County and San Francisco via 220-mph trains.
Rail is the cheapest way to meet the transportation needs of California's burgeoning population, which could reach 50 million by 2030, advocates say.

Construction of the first leg, linking Fresno and Bakersfield, is set to begin next year. Eventually, trains would run all the way from Sacramento to San Diego.

The authority has based its cost estimates on mountains of studies, Deputy Executive Director Jeff Barker said. When the legislative analyst criticizes the authority's cost estimate, he said, it's "simply dumbing down the process."

He criticized the analyst's office for suggesting an overhaul of the project, saying that would mean delays guaranteed to increase the price.

"The sooner we build it," said rail authority Chairman Tom Umberg, "the less expensive it will be."

Plans start rolling

Japan, France and Spain are among the nations that have turned to high-speed rail to solve 21st-century transportation problems.

For a generation, transportation planners in California have looked to trains as well. In a state where the car is king, some saw rail as a way to break the cycle of building freeways to ease traffic gridlock, only to see the new roads fill up with cars. There were other foreseen benefits: Reining in urban sprawl. Reducing dependence on foreign oil. Cutting smog. And, of course, the economic boost that would come with a massive public works project.

In 2008, state voters approved $9.95 billion in bonds to begin building the system. Trains would be fast, frequent and cheap to ride, voters were told. Once the system was built, it would make money. No taxpayer subsidy would be allowed.

In the depths of a recession, the economic boost the project would provide was another selling point: Advocates said the high-speed train would create 160,000 construction jobs and 450,000 permanent jobs – "American jobs that cannot be outsourced," the ballot argument said.

With the election of President Barack Obama, the project got another boost: $3.48 billion in federal stimulus funds. Almost half of that came when Ohio, Florida and Wisconsin dumped planned rail projects, saying they didn't pencil out.

Funding questioned

With the federal funds came deadlines: California was told it had to begin construction in 2012. As high-speed rail rolled onto the fast track, there came official scrutiny – and then alarm.

In the past two years, the state auditor, UC Berkeley's Institute of Transportation Studies, the legislative analyst and a peer-review group expert panel formed by the Legislature have studied the project's finances.

So have a Stanford-trained expert in statistical economics and a Stanford management professor affiliated with a Palo Alto citizens group called Californians Advocating Responsible Rail Design.

The studies have repeatedly red-flagged the project – starting with its source of funds. In a 2009 business plan, the rail authority said it would draw on as much as $45 billion in funding to build the system – including up to $19 billion in federal money. But three inquiries concluded that the rail authority had been wildly optimistic about receiving billions in federal funds in an era of soaring deficits and deep budget cuts.

The legislative analyst's May report was especially pessimistic, saying the rail plan was larded with "unrealistic assumptions" and suggesting that federal aid would fall $15 billion short.

Prospects for raising $12 billion in private capital for high-speed rail aren't bright either, the reviews have suggested. Echoing concerns that have been expressed by the state treasurer, the peer-review group wrote that Wall Street is aware that continued federal aid is iffy. That concern "limits the project's credibility with private investors," the group wrote.

Critics even have concerns about what seems the most solid financial commitment of all – the state bonds.

As the legislative analyst wrote, if lawmakers authorize selling all $9.95 billion of the bonds, the interest that must be paid to investors will run about $1 billion a year – money that would come out of the state's general fund.

Cost estimates vary

The studies also have criticized the rail authority's construction cost estimates.

Those estimates have marched steadily upward – from $15 billion in 1996 to between $43 billion and $45 billion in 2009 dollars, according to the authority.

That amount dovetails with the approximately $45 billion in funding that the authority says it has identified to build the system.

So what's the actual cost?

In its study, the Legislative Analyst's Office noted that the cost of building the first segment – the 100-mile stretch between Bakersfield and Fresno – was estimated at $2.8 billion in 2009. Today, it's increased by 57% to nearly $4.5 billion.

At that rate of increase, building the entire system would cost $67 billion.

For its analysis, the Palo Alto citizens group scrutinized estimates submitted by the authority in applications for federal stimulus funds. The group said the actual cost to build the system was probably $65 billion.

But if it's like the new Bay Bridge, or Boston's Big Dig highway project, the cost will be far higher, according to Stanford management professor Alain Enthoven. With the cost overruns that typically plague public works projects, the final price tag may be closer to $213 billion, he wrote.

"All megaprojects have cost overruns," Enthoven said. "For a state project, if they figure on $43 billion and then it turns out to be $66 or $80 billion, then it's the taxpayer of the state of California [who pays]. There's no fairy godmother."

Studies slam projections

Critics also take aim at the rail authority's upbeat computer forecasts, which show strong future demand for the service. By the year 2035, the rail authority estimates trains will carry 39 million passengers per year, the forecasts say.

Those big numbers undergird the rail authority's claims that the train will generate "over $1 billion in annual profits" when up and running.

The forecasts are the work of a consulting firm, Cambridge Systematics. It polled California travelers, collected other data and created a complex computer model to predict demand. To ensure accuracy, the computer model was subjected to peer review from outside experts. The firm was paid $2 million for its work, records show.

Two different studies have contended the forecasts are deeply flawed.

The first critique was by Elizabeth Alexis, a Palo Alto money manager and co-founder of Californians Advocating Responsible Rail Design.

Alexis said she also found that the consultants had privately made "drastic" changes to key assumptions in the computer model, apparently after initial results were deemed unsatisfactory. The tinkering allegedly occurred after the model was reviewed by outside experts who were supposed to provide guidance on whether its results were valid.

The forecasts were no better than "tossing darts at a board," Alexis said. "I would like to have real numbers so we can have an intelligent discussion about where California should put its transportation dollars."

Concerns were underscored when UC Berkeley's Institute of Transportation Studies weighed in. That study declared that the rail authority's model was "flawed at key decision-making junctures," as Institute Director Samer Madanat put it. The study was too unreliable to predict whether high-speed rail would pay for itself or lose "significant" money," the institute said.

Chief executive Roelof van Ark defended the model, saying there was "no foundation" for the institute's conclusion that it was useless for predicting the bullet train's bottom line.

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