While I am loathe to get into another round of back-and-forth, Chris Reed’s latest anti-high speed rail screed cries out for a response, not only because it is so completely off-the-wall, but also to clear up broader misconceptions about private investment in the system. There will be private sector investment in California’s high-speed rail program. We know because private investment entities have told us.
I sympathize with Mr. Reed’s suffering on this issue. He’s running out of arguments and one can sense the panic setting in. After I demolished each element of his seven-point critique of James Fallows’ articles on the high-speed rail program and after the San Jose Mercury News published a story about renewed interest of the private sector, Mr. Reed penned a wild essay stating that it’s all a big fraud. Never mind that neither the Mercury News nor the Wall Street Journal and Associated Press (who also wrote on this topic) recognized this perceived fraud.
Rather, he claims to have discovered that these so-called putative investors are really, gasp, “contractors.” Betraying his lack of knowledge regarding infrastructure development, Mr. Reed doesn’t realize that in addition to pure finance companies (e.g., Goldman Sachs, JP Morgan, Macquaire, etc.) many of the companies in the infrastructure sector have construction arms, operating arms, and financing arms. Their finance companies raise the funds to help build projects, often with the goal of providing work for their construction subsidiaries. In that context, they are very much investors – putting their capital at risk in order to get a return from system operations.
These are the types of firms interested in investing in California high-speed rail. But don’t take our word for it; you can see those expressions of interest (which were provided to Mr. Reed) here.
California’s high-speed rail will be built with both public and private dollars. It will then be operated entirely by the private sector under a concession agreement.
Virtually all high speed rail systems around the world – once built – generate positive operating cash flows. In other words, ridership levels produce revenues in excess of costs associated with operations and maintenance. We estimate that in California those excess revenues will be as much as $20 billion on a Net Present Value basis for the full system build out and have had that estimate tested by a number of independent, external reviews.
Our business model, then, will be based on auctioning to the private sector the right to operate on our infrastructure, giving them the opportunity to earn those excess revenues. In exchange for this opportunity, they will write a check to the People of California that will be used to help pay for building out the full system. This is how it has been done in Europe and Japan with their high-speed rail systems. We agree with infrastructure investment firms both domestic and abroad that this approach will work in California as well.
Finally, Mr. Reed pulls out a Legislative Analyst Report from 2010 to claim that the High-Speed Rail Authority secretly aspires to get around the law’s prohibition on offering revenue guarantees to induce private investment. Again, he carefully picks and chooses his facts to come to unfounded and misleading conclusions.
The fact is that leadership at the rail authority has changed dramatically since 2010. With that change, plans have evolved to the point where independent analysts have roundly given our planning positive marks – thus invalidating most critical past evaluations.
Reed is correct that we can’t offer revenue or ridership guarantees to these companies. But he doesn’t realize that we don’t have to. Within these parameters, the wisest course is to use public dollars first to get an operating segment up and going and show some good ridership history. That way, we don’t have to guarantee ridership; the private sector can see it for themselves. Otherwise, potential investors would “price” the ridership risk and the check they would write to us would be smaller.
This is why private investment firms are so enthusiastic about the Legislature’s appropriation of a steady, ongoing revenue stream for high-speed rail from the Cap-and-Trade Program: it will allow us to get to operations at an earlier date. This all makes sense to those in the business; but not to Mr. Reed.
Unfortunately, dedicated opponents to high-speed rail often pontificate about the private sector without really having any idea how it works. It’s fine to have opinions, but it’s better to have a clue.