Friday, March 2, 2012

Chinese High-Speed Rail in California: Reality or Smoke

The China option has been the monster hiding under our high-speed rail beds in California for a very long time.  This article is the best, detailed explanation of the various aspects of this monstrous possibility that I've seen.  

It has long been my fear that since the federal bailout dollars for high-speed rail will do nothing of the sort; that is, bail us out, either with job creation or high-speed rail construction, we would have to look elsewhere for the resources to pull off this gigantic parlor trick.

Here are only some of the problems.  

There's not enough money. What the federal government has provided California, even in billions, is nothing like what is actually required to build this train as initially conceived; that is, a fantasy of over 800 miles from Sacramento to San Diego. What the government in Washington is providing, and what the state bond funds will provide, is seed money, merely a token of what is actually required.

Then, there is no high-speed construction or manufacturing capacity in the US. We are obliged, and the rail authority intends to go overseas to buy our high-speed rail capacity off the shelves of other nations already in that business.

Although Amtrak is a public utility service sustained by Congress, most of its passenger service loses money on every seat they sell.  However, the California HSR project promises to be profitable.  No one has explained how that will actually happen, since operating, maintenance and replacement costs will be far higher that what ticket sales can generate.

Given this, the temptation emerges that China can solve all those problems with funding loans, manufacturing and construction capacity and, as a reward, operating rights for California's high-speed rail.  Despite their history of corruption, faulty infrastructure development and horrendous accident,  they have created a larger HSR system than any other nation and their offerings will be less expensive than anything we are able to create on our own or even buy from elsewhere outside of China.

All of which is to say, that Governor Brown and the California rail authority can have it both ways; create their train vision across the length of California without having to pay for it. . . . . . . now. And, not go into greater debt. . . . . . . now.

Of course, once it's operating, who owns it, the Chinese? What will they have to do to recoup their investments?  They've had struggles along these lines in China itself already, reducing train speeds to save costs and lowering ticket costs to increase the meager ridership. They have incurred massive infrastructure debts in their haste to build HSR beyond anything any other country desires.

In any case, China is doubtlessly eager, as the article points out, to get their hands on the American high-speed rail market place. California's highly visible project would be their "loss leader" and a demonstration of their up to date, whizzy technology for the rest of the country to envy and therefore buy. Even though Governor Scharzenegger went to China to cut deals, and there have been other offers of deals, how the US or California will pay for this is not at all understood.

Isn't all this what President Obama means by our being so far behind other nations and how we must get ahead by "winning the future?"  And isn't this a good way for California, as our Governor says, to not become a Third World Nation?

Unless we actually, decisively terminate this project, China is one nightmare that just won't go away.

China Business
 Mar 3, 2012

California poses rail risk for China
By Peter Lee 

The California High Speed Rail Authority (CHRSA) would be happy to consider investment by the People's Republic of China's sovereign wealth fund, China Investment Corporation (CIC), in the state's proposed high-speed rail link between Los Angeles and San Francisco, China Daily reported last month. [1] 

The authority's chief executive, Roelof van Ark, also indicated a willingness to consider procurement of Chinese high-speed rail equipment for the project. 

The CHRSA is facing gigantic funding problems and its interest in Chinese involvement is apparently more than idle chatter. The Christian Science Monitor reported that California high-speed rail, along with Hollywood cinema and NBA basketball, was on the menu when Xi Jinping, much touted as the next PRC president, visited Los Angeles in early February:

Los Angeles Mayor Antonio Villaraigosa and California Governor Jerry Brown want to talk to Xi about Chinese investment in high-speed rail, which has come under scrutiny and has lost some public support here in recent weeks with the release of several studies suggesting major cost overruns. [2]

Chinese corporations would love to get into the US infrastructure business. China's State Construction Engineering Corporation has a subsidiary, China Construction America, in New York City. It has US$2 billion to invest and apparently sees US stinginess in the matter of infrastructure investment as a business opportunity:

Joe Catapano, a project manager with China Construction America, said the expertise and capital Chinese companies can provide are important. 

"The key issue is money. It doesn't seem the United States government is willing to spend money (on building infrastructure)," said Catapano, who has 12 years of engineering experience in New York and California. 

"High-speed rail is definitely something we can learn from China. We don't have any of that in the US, anywhere," he added. [3]
In 2010, China seemed ready to make a high profile play in Californian high-speed rail. 

The PRC was basking in largely favorable coverage of its work fabricating enormous steel modules for the new Bay Bridge connecting San Francisco and Oakland. Only China, it seemed, had the capability to undertake the massive project. Caltrans, the state road authority, estimated that outsourcing the modules to China had saved $400 million on the $7.2 billion bridge, one of the most expensive structures ever built. [4] 

In 2010, Governor Schwarzenegger visited the bridge fabrication factory in Zhuhai to express the state's appreciation, and toured China, Japan, and South Korea to investigate high-speed rail. The Chinese told Bloomberg:

China can offer a "complete package," including financing, as it competes to build a high-speed railway in California costing more than $40 billion, according to the nation's railway ministry. 

"What other nations don't have, we have," He Huawu, the ministry's chief engineer, said in a Sept. 14 interview in Beijing. "What they have, we have better." He declined to elaborate further on how much financing may be available. ... 

"The deal would be of great symbolic significance to China as it allows the nation to export technological knowhow to a country as developed as the U.S.," said Wang Sheng, an analyst at Shenyin Wanguo Securities Co. from Shanghai. "China is fully able to afford the financing." [5]

In January 2011, a US rail specialist told McClatchy:

California and America are squarely in China's sights, said Christopher Barkan, director of the Rail Transportation and Engineering Center at the University of Illinois at Urbana-Champaign. 

On a tour of China's largest rail manufacturer last summer, Barkan met with a Ministry of Railways official who prominently displayed a map of the United States on his office wall. 

"They are extremely interested in the U.S.," Barkan said. "We're the largest untapped market for high-speed rail in the world." [6]

Despite the convergence of US need and Chinese desire, however, China may find itself chugging steadily away from the California opportunity instead of racing toward it. The dreaded term "boondoggle" has been invoked, both by mass transit supporters and critics, to describe the gigantic project. [7] 

Its backers appear to have adopted the strategy of "build it and they will fund," ie, get the project started somehow and rely on a combination of government optimism, inertia, and embarrassment to pry loose the funds needed to keep the project on track. 

California voters approved a bond issue for high-speed rail in 2008 based on projections of costs and ridership that, in retrospect, appear extremely rosy - $9 billion in bonds was approved. The Obama administration agreed to provide $3 billion in matching funds, for a total of about $12 billion potentially available so far - if the California state legislature votes to actually issue the bonds approved under the referendum. The current projection for construction costs is $98 billion, up from the $45 million bruited about at the time of the bond referendum, leaving a rather hefty shortfall. 

In order to make the economic case for the higher level of expenditure, CHSRA's consultant, Parsons Brinckerhoff, made the assumption that the rail line would carry an astounding 116 million passengers per year when completed - three or four times what is actually expected. Parsons Brinckerhoff then calculated that California's freeways and airports would need $171 billion in capital expenditures to handle this level of traffic if the rail line was not built. Voila! $98 billion for the high-speed rail was actually a tremendous bargain! 

Of equal if not greater concern is the prospect that the line will operate in the red, and the state and/or federal government will be on the hook for the shortfall in operating costs if the hoped-for ridership does not materialize. 

In 2008, the CHSRA put out a questionnaire, a "Request for Expressions of Interest" in order to take the pulse of potential investors, lenders, vendors, and owner-operators. An interesting and unnerving finding was that many potential partners put little stock in traffic projections, preferring something called "availability payments":

Although almost half of RFEI respondents expressed little desire to accept compensation based on future HST ridership ... a majority of respondents communicated that they would be willing to subject a portion of their payment to performance guarantees ... Concessionaires would be given periodic payments based solel

Under this scenario, if the operators achieved their availability targets but ridership failed to generate sufficient revenue to cover the "availability payments", the HSRA would have to make up the difference.
The project is dogged by mis-steps, doubts, and shrinking political support. It is assumed that, if the bond referendum were held today, it would not pass. The California state legislature is hesitant to issue the first $2.7 billion in bonds. If they delay and construction does not begin this summer, the federal funds will likely evaporate. 

It would also appear that China would not score any white knight points if it considered stepping up and helping California in its difficulties. 

China's best known calling card in the field of high-speed rail is now the horrible collision in Wenzhou on July 21, 2011, which killed 40 people. The crash was widely reported in the West as

China's comeuppance for corruption, haste, and shoddy goods, and evidence against the idea that "China can do infrastructure better". 

Critics of high-speed rail and Chinese involvement acidly pointed out that China's railway ministry already has a presence in Los Angeles. Its former chief engineer had somehow managed to purchase a million dollar mansion in LA on his monthly salary of a $264 back in China. [9] 

Currently, hostility to China, its authoritarian system of government, and its perceived role as a thief of American jobs and technology is pretty much baked into the US political system thanks to strenuous efforts by both Democrats and Republicans. 

High-speed is, by itself, also a political third rail, having become highly politicized. Beyond the issue of questionable economics, the drive to discredit and defeat high-speed rail derives its energy from partisan desire to repudiate the Barack Obama administration's policies promoting government-directed stimulus and infrastructure investment. 

Collapse of California's high-speed rail project would be welcomed by his enemies as a defeat for President Obama and his agenda. His agenda, depending on the fervor of his enemies, is either socialism, communism, or Satanism ... or Agenda 21. 

In the mainstream, Agenda 21 is a toothless United Nations environmental initiative for sustainable development. For the Tea Party fringe, it is a conspiracy staple: a UN-created, George Soros-funded plan for leftists in the government to destroy freedom and private property by setting up a chain of gulags along passenger rail lines full of bike paths and clean air but no cars or liberty. 

Enamored of the energy of the Tea Party, the Republican leadership, especially Newt Gingrich, and Fox News have flirted with legitimizing Agenda 21. Agenda 21 Cassandras figured prominently in the public outcry that doomed the only high-speed rail project in the US other than California's: the Florida HSR. [10] 

Attitudes like this should dissuade Xi Jinping that the PRC will be welcomed as the savior of California's high-speed rail system:

Oooh baby ... High-speed rail owned and operated by the Chinese throughout the US. ... Roads, sewer systems, and water systems will be owned by the Chinese. ... I can see it now. We lose our rural roads - pulverized to gravel. Our private vehicle usage is limited, restricted, and taxed. Our bus service will be declared insolvent and not cost effective. High-speed rail will be the only way to travel. 

Fully owned and operated by the Chinese. In our country. Airport-style searches. Restricted use tickets. Overcrowding. Limited line service. Why? Because we can't maintain our own infrastructure? Can we maintain our sovereignty? Just wondering. [11]

PRC investment in California public rail, it is safe to say, will not be welcomed as an act of public philanthropy. Every aspect of Chinese participation would become a magnet for scrutiny and complaint. 

This is probably the kind of attention that China Investment Corporation doesn't need. With a war chest of $400 billion or so, CIC has the heft to make a serious investment in a California high-speed rail project. 

But CIC also got badly burned in its previous forays into the US investment shark pool. In 2007 CIC invested a combined $8 billion the Blackstone Group and Morgan Stanley, just before the derivatives hit the fan. The Blackstone shares are now limping along at about half of what CIC paid for them. CIC also took a bath on its Morgan Stanley stock, having agreed to accept a compulsory conversion of its privileged stake (which paid a 9% dividend) to common equity in 2010 at a price twice the market value. 

The fact that Mitsubishi UFJ invested $9 billion in Morgan Stanley on much better terms in 2008 did not sweeten the pill. According to Caixin, CIC's solution was to buy another $1.2 billion of Morgan Stanley common stock, reducing the aggregate cost of its holdings to $32 per share. [12] 

Today Morgan Stanley is trading at $19 per share. 

In addition, CIC had put $5 billion into Reserve Primary Fund, a gigantic money market fund that went off the cliff with Lehman Brothers. CIC got its money back, most of it anyway, after a year and some heated representations to the US government. 

The big, bad bets CIC made, and its affinity for consorting with Western capitalists, inspired ferocious criticism back home, complete with dark mutterings about the loyalty and probity of CIC's team of young, liberal-minded technocrats. [13] 

Politics and policy are a contact sport in China, and one has to wonder if CIC has the appetite to make a potentially lethal bet on California high-speed rail, given the vast uncertainties and risks associated with the project. And if CIC or somebody like CIC doesn't step up to form the core of an active, committed, and capable consortium, it is difficult to see how the California high-speed rail project will be built. 

1. California connection, China Daily, Feb 17, 2012.
2. Xi Jinping in California: a glimpse of what China really wants, CS Monitor, Feb 16, 2012.
3. Trip to reinforce ties across the ocean, China Daily, Feb 15, 2012.
4. Bridge Comes to San Francisco With a Made-in-China Label, New York Times, Jun 25, 2011.
5. China Touts 'Complete Package' for California High-Speed Rail, Bloomberg, Sep 16, 2010.
6. Read more Here.
7. More on Prop 1A, Mother Jones, Oct 27, 2008.
8. REPORT OF RESPONSES TO THE REQUEST FOR EXPRESSIONS OF INTEREST, California High-speed Authority, October, 2008.
9. Design Flaws Cited in Deadly Train Crash in China, New York Times, Dec 28, 2011.
10. Activists Fight Green Projects, Seeing U.N. Plot, New York Times, Feb 3, 2012.
11. Sheriffs Used To Intimidate Citizens, Democrats Against UN Agenda 21, Feb 28, 2012.
12. CIC's Bitter Payoff for Morgan Stanley Stake, Caixin, Aug 6, 2010.
13. Chinese Premier Blames Recession on US Actions, Wall Street Journal, Jan 29, 2009. 

Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy. 

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