Tuesday, January 24, 2012

A few comments on the state auditor report on the California HRS project

Here are a few comments about the California State Auditor's Report on the CHSRA project. I'm not identify them all; you can read the whole summary in the prior blog entry.  But here are some notable ones. Also, a good article about this report in The Sacramento Bee, below.

We've been getting constantly growing cost numbers from the rail authority as they try to forecast as low a cost projection as possible. They are now up to $100 billion.  It will doubtlessly be much more than that, once construction begins.  And, since the cash flow from the Federal Government, if there even is any more, will be erratic, the project will drag on over time, costing ever more. The Bay Bridge went from $1.1 billion to well over the last public number $6.6 billion.  The Boston Big Dig went from around $2 billion to a mind-blowing $22 billion. 

The auditor's report points out that among the costs that the HSR authority has failed to mention, are operating and maintenance costs. And, even these costs ignore the fact that replacement of all rolling stock (since it wears out so quickly) and all electronics (since it evolves so rapidly) will have to be cycled and factored in as well.  

There are also interest carrying costs for a project this expensive, even with funds not derived from the state treasury. And there's liability and other insurance.  The list is even longer.  Please note, that construction has not yet begun; contract bids have not yet been asked for or submitted.  I believe that when we talk "$100 billion" we are not doing more than scratching the surface of this financial black hole the Brown Administration is so eager to launch this year.

•The cost estimates do not include phase one's operating and maintenance costs, yet based on data in the plan these costs could total approximately $96.8 billion from 2025 through 2060.

And, here's another aspect of the cost forecast problem: In particular, only within the business plan's chapter about funding—more than 100 pages into the plan—does the Authority mention that phase one could cost as much as $117.6 billion, whereas it uses one of its lower cost estimates of $98.5 billion throughout the plan. Moreover, neither of these cost estimates includes phase one's operating and maintenance costs, yet based on data included in the 2012 draft business plan, we estimate that these costs could total approximately $96.9 billion from 2025 through 2060. 

You know, of course, that this project, upon completion, will be enormously profitable. Right? We have been given that assurance as recently as the last presentation made by the incoming Chairman of the CHSRA Board, Dan Richard.  However, the auditor has a different spin on this issue, based on the fact that the rail authority assures us that there will be a plethora of private investors.  Well, they will only invest if there are returns on their investment.

Further, the plan assumes, but does not explicitly articulate, that the State will not receive any profits between 2024 and 2060, because private sector investors will receive all of the program's net operating profits during these years in return for their investment.

That of course presumes that there will be profits, and of that we are entitled to great doubt.

Unlike the former CEO, Roelof Van Ark and his minions, the state auditor is not satisfied with the ridership numbers as currently proposed and, like the the LAO, seeks an independent forecast of ridership for this train, not a rubber-stamp put out by a hand-picked crew of sycophants. 

It is doubtlessly challenging to project ridership thirty years out with any semblance of reliability. However, we can certainly gain a picture of what "face validity" would tell us by comparing ridership in similar HSR systems worldwide and even passenger rail within the US.  

In all cases, the currently held 40 million annual riders, a number to which the rail authority clings, continues to be a grossly inflated marketing promise (If not completely satisfied, return the unused riders for a full refund!). In other words, worthless.

•The accuracy of the Authority's estimates of the program's profits depends upon its ridership projections, which are fundamental to private investors' interest.

•An independent assessment of ridership projections was conducted by a handpicked group.

•The ridership review group presented several long-term concerns.

Then, there's this one:

•It engaged in inappropriate contracting practices involving information technology (IT) services by splitting IT services totalling $3.1 million into 13 individual contracts with one vendor.

I consider this another "tip of the iceberg."  I have little doubt that there are many unscrupulous practices at work here, and when accused, the rail authority can always fall back on the excuse that they are severely understaffed and rely on contractors to do all the heavy lifting financial book-keeping. 

We've only touched on a very few of the points of criticism of this report.  There are many, many more.

And, we are expecting a GAO report as well.  That's the Federal General Accounting Office in Washington which has taken on an audit of this project from their perspective.  Can there be any question that their report will be no less critical than this current state report is?  

And, I have to ask again, will that make any difference in the decision-making of the State Governor, the senior Congressional representatives of California, or the White House?   I don't think so.

January 24, 2012
Audit accuses high-speed rail of risky financing, contract splitting

In yet another blow to California's troubled high-speed rail project, California's state auditor said this morning that the project's financing is "increasingly risky" and its oversight inadequate.

In a follow-up report to her agency's 2010 critique of the project, state Auditor Elaine Howle said the California High-Speed Rail Authority's most recent business plan relies on uncertain funding sources and that "the program's overall financial situation has become increasingly risky."

Howle's report is the latest in a series of critical reports about the project, including by the Legislative Analyst's Office and the rail authority's own peer review group. Gov. Jerry Brown is trying to press the nearly $100 billion project through the Legislature this year.

Howle's report questions the authority's ridership projections, saying the group that reviewed those numbers was "handpicked" by the authority's chief executive officer, and it accused the authority of failing to adequately manage its many contractors.

"Without sufficient staffing," the report said, "the authority has struggled to oversee its contractors and subcontractors, who outnumber its employees by about 25 to one."

Howle also said the rail authority violated a state rule prohibiting agencies from splitting contracts to avoid competitive bidding requirements, dividing $3.1 million in information technology services into 13 different contracts with one vendor over 15 months.

In a written response, the rail authority said contract management remains "a huge challenge for the authority due to a lack of sufficient qualified staff." But it discounted as "purely speculative" Howle's claim that the plan is financially risky.

The authority all but conceded that it had mismanaged its information technology contracts, saying it "will develop procedures to detect and prevent contract splitting."

Categories: Gov. Jerry Brown, High-Speed Rail

Posted by David Siders

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