Tuesday, July 26, 2011

Cost Over-runs: Par for the HSR Development Course

Great article and here are some additional comments on it.  First of all, the names of Grindley, Enthoven and Warren should be known to you by now.  We have been running their documentation of all the conflicts, issues and problems regarding the finances of  California's high-speed rail project. 

The Grindley team has outlined in great detail why the project will be an abject and dismal financial failure.  They drew not only on a mountain of research, but the support and editing from over seventy major financial figures on the Bay Area Peninsula, economists, financiers, venture capitalists, and corporate executives. 

They also focused extensively on cost over-runs which are virtually guaranteed with this project, such cost increases having been cited by the rail authority itself over the past several years, from a pre-election $30 billion to the current $43 billion, and using their own cited numbers, actually now $66 billion. 

Please note that there has not yet been a single bid presented to do the construction, or a shovel of dirt raised. Wait until that happens (if indeed it does).  The cost projections will skyrocket far beyond the current forecasts.

As you can see, there as other cost numbers being proposed that are more realistic and experience based.  Professor Enthoven, calculating from the New Bay Bridge budget growth experience reaches $247 billion as the cost for the entire rail project.

As we know, the rail authority anticipates an additional $19 billion from the federal government to complete the SF to LA phase 1 of the project.  Fat chance.  And even if they did get the $19 billion, then what?

Lance Williams, the author of this article, uses the Boston Big Dig cost increase numbers from $4 to $14 billion.  Actually the final number will be much larger, including all the interest that had to be paid. That currently stands at $22 billion. (The Boston Globe estimated that the project will ultimately cost $22 billion, including interest, and that it will not be paid off until 2038.[8] :Wikipedia)

We've discussed cost over-runs often, frequently citing the research of Bent Flyvbjerg, who pointed out the reliable pattern of major cost increases, some reaching 100% and even beyond original estimates.

For some reason, most people seem not to understand where these vast sums are to come from.  They are not loans from private lenders or from Wall Street.  Projects like this are incapable of generating the surplus revenues essential for private investors to see a return on their investments. Therefore the capital development funds, regardless of how much, come from taxpayers at the state and federal levels. If borrowed such funds will need to have interest payments covered and the principal returned.  It will all come from tax dollars.  And, as you will note, this discussion here does not include operating costs which are also very large.

And it should not be forgotten that taxes are a "zero sum game." What is dedicated to HSR will not be available for education, health, other infrastructure maintenance and repair, and caring for the aged, infirm, children in poverty, and other state essentials.

Megaprojects like bullet train have big cost overruns, critics say

July 26, 2011 | Lance Williams

The coalition is among the activist groups that have lined up against California’s proposed, ambitious 800-mile high-speed rail project. It cites cost and environmental concerns.

The experts’ study makes clear that when it comes to big-ticket transportation construction projects, cost estimates are just that – estimates.

In general, U.S. rail projects tend to exceed initial cost estimates by about 60 percent, the experts write, citing U.S. Department of Transportation data.

If that holds true with the bullet train, its final cost would be not $45 billion, but about $72 billion.

But if the bullet train performs as badly as the problem-plagued new San Francisco-Oakland Bay Bridge project, the final price tag would be more than five times present cost estimates – somewhere around $247 billion.

The experts who compiled those numbers are former World Bank executive William Grindley, Stanford University management professor Alain Enthoven and Silicon Valley financier William Warren.

“Hard evidence illustrates how much a high-speed rail system’s estimated costs can go askew,” they write.

For example, the English Channel Tunnel project – aka the Chunnel, the undersea rail link between Britain and continental Europe – ran up an 80 percent cost overrun before it was completed. It was privately financed, they note.

The overruns were almost the same on Germany’s Inter-City Express, a bullet train between Cologne and Frankfurt. It, too, was built with private capital.

Bigger overruns occurred on publicly funded projects in the U.S.

The Bay Bridge, estimated at $1.3 billion, and now at $6.4 billion and counting, is the worst.

But Boston’s Big Dig – a massive airport highway project – tripled in cost, from a $4 billion estimate to a final cost of $14.5 billion. The Big Dig was managed by Parsons Brinckerhoff, the same firm retained to manage the California bullet train.

Overruns were almost triple the pre-construction estimate on Denver’s big new exurban international airport – from a $1.7 billion estimate to $5 billion actually spent.

In public statements, the California High-Speed Rail Authority has said it is confident it will find sufficient funds to build the bullet train. Its construction estimates are expressed in “year of expenditure dollars;” present estimates reflect spending in 2009 dollars, the authority says on its website. Proponents insist that rail is the most cost-effective way of providing transportation infrastructure for California’s booming population.

Jeff Barker, a rail authority deputy executive director, acknowledged to California Watch and the Orange County Register recently that putting a price tag on the project isn’t easy.

“If you think in 2035 gas is going to be a dollar a gallon and people are going to be fleeing the state, then we probably shouldn’t be building high-speed rail,” he said.

Russ Peterson, a board member for the the anti-rail coalition, said talking points based on the experts’ study are being readied for lawmakers, who by next year will have to decide whether to break ground on the project.

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