Tuesday, July 5, 2011

Brief Note #12: William Grindley's continuing analysis of the financial hazards of High-Speed Rail

The bottom line here is that there is no way that an operating high-speed rail system in California will break even, and therefore not require government operating subsidies, much less produce a revenue surplus.  Most high-speed rail systems around the world are deficit operations.  This one will be no different.

Whether it's out of sheer ignorance or whether it's lying, the rail authority has promised rail operating surpluses in the range of three billion dollars annually, those to cover both the actual operations of the train, plus accumulate surplus funds to build Phase II, up to Sacramento and down to San Diego.  There is simply no way that this can possibly happen.  

Grindley, using Bushell's data, points out just some of the overlooked expenses, such as insurance.  Furthermore, even when not connected to the actual construction and its debt burden, the operation of the train will also need extensive capitalization, and interest payments should be calculated.  Risk management, now absent in the rail authority's calculations also bear a continuous cost.

In the same way that the rail authority persists in under-estimating construction costs (a standard practice), they also under-estimate their operating costs, particularly when in comes to energy consumption for 220 mph service, and even more costly is maintenance and repair/replacement.  

High-Speed Rail is far more fragile, materials more sensitive and critical to performance than regular rail, and maintenance costs are more akin to aircraft inspection, maintenance and repair, a major budget item for the air carriers. The fact is that high-speed rail rolling stock such as contemplated for use in California is far more like aircraft construction, being smaller and far lighter than heavy-rail passenger rolling stock.  We are not being advised that after around 35 years of use, all the rolling stock will require replacement.  That's a major capital cost item and should also be calculated into the operating cost equation. 

So, here's a major dilemma.  The rail authority, by law, is not allowed to receive subsidies from either the state or federal government for operating the system.  However, such subsidies are essential.   So, the rail authority persists in claiming that no subsidies will be required, in the face of stringent evidence to the contrary.  With the burden of proof resting on the rail authority, their inability to produce such proof,  shouldn't we therefore stop the construction before it starts inasmuch as we already know that the rail authority will be unable to stay within the law?


Brief Note #12 – June 27th 2011

From the authors of The Financial Risks Of California’s Proposed High-Speed Rail
Project and six Briefing Papers. Available at http://www.cc-hsr.org/

Finding: Realistic operating margins depend on realistic operating expenses.1
Background: The litmus test of the CHSRA’s ability to attract $38-54Billion of private
capital will be the perceived reasonableness of both aspects of their projected operating
margin (or operating surplus) – the ability to gather estimated revenues and pay operating
expenses to create a long-term stream of positive operating margins and therefore a Return
On Investment (ROI) for investors. This Note addresses the reasonableness of CHSRA’s
assumptions about operating expenses.

After reviewing the Authority’s 2009 Business Plan, two separate authors pointed out:
“Investors in new businesses expect to be presented with detailed line item operating
statements on a quarterly basis for five years forward and annual statements for
subsequent years.” 2 None were presented in either the 2008 or 2009 Business Plans.

The CHSRA’s 2009 contained "no risk management strategy . . . murkily noting that
"the risk would be mitigated by policies that continue to draw people to reside in California
and encourage high-speed rail as an alternative mode of transportation.” 3
“There is not one word in this section of the document (CHSRA’s 2009 Report) that
acknowledges fixed versus variable operating costs”4

Page 80 of the 2009 Report says that in the first “. . . 13 years, operating costs are
projected to be essentially flat.” Mr. Bushell responds that before allowing for inflation;
“Assuming that all costs from 2023 through 2035 will be almost constant . . . and all have
the same average rate of inflation runs counter to past experience. Medical insurance and
fuel will be major cost items for a system such as this . . . no business operator has been
able to successfully contain these.”

The 2009 Report (Page 81,Table I) says that insurance costs are zero, but page 82
says: “Insurance is assumed to be handled by the Authority and the state in the initial
phase through an owner-controlled program (OCIP).” Mr. Bushell responds: “This business
has assets that will need to be insured, even if self insured; and there are costs associated
with that which need to be revealed.”

In response to Table J (page 82) of CHSRA’s 2009 Report, Mr. Bushell said: “It is
surprising that despite forecasting fifteen consecutive years of substantial operating
surpluses there is no discussion of any tax provision with respect to such surpluses.”

Conclusions: The 2009 Plan’s operating expenses bear little resemblance to the quality of
an investment-grade document the private sector will demand for due diligence work and
further postpones, if not negates, the possibility of raising $38-$54Billion.


1. This paper is largely based on Alan Bushell’s analysis of pages 64-91 of the CHSRA’s 2009 Report to the
Legislature and page 70 of the Addendum of April 8, 2010. Mr. Bushell has over twenty years of starting, restarting,
rescuing and running companies. His work appears as Appendix C to The Financial Risks of California’s Proposed
High-Speed Rail Project; October 2010, found at http://www.cc-hsr.org/
2. Ibid: Bushell, pg. 2
3. Julian, Liam: The Trouble with High-Speed Rail; Policy Review; March 24th 2010; at
http://www.hoover.org/publications/policy-review/article/5296 s
4. Op. cit – Bushell, pg. 1

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