Banks, firms not sold on bullet train

high-speed rail fly californiaAs big banks hesitate to fund California’s high-speed rail project, Sacramento officials have turned back to state coffers to keep the effort going.

In calculating the risk of loans that would likely exceed $35 billion, bankers want to see a greater willingness on the part of the public to bet on the train. “Even as builders clear land and begin work on viaducts near Fresno for the bullet train’s initial segment, financiers solicited by the state rail agency are calling on California to pitch in more than the $10 billion in bond funds already committed in order to give potential investors confidence that the project will become reality,” Bloomberg Business reported:

“Their responses point out a dilemma for Democratic Governor Jerry Brown and other supporters of the line: persuading reticent taxpayers to ante up more than already approved under a 2008 bond measure as support for the project declines, though private investors may stay away unless they see a bigger public buy-in.”

Banks’ reticence has been matched by the construction and engineering firms solicited to join in a partnership with the High Speed Rail Authority. Although many of the 36 firms to respond “expressed a willingness to participate in the project,” the international group gave the Authority more than it bargained for when it asked for “suggestions on how to complete the $68-billion project,” according to the Los Angeles Times. None offered to bring forward private funding, as the Sacramento Bee noted.

State investment so far has been significant, but is nowhere near the amount needed to bankroll the entire project. Along with $3.5 billion in federal matching funds, the 2008 measure greenlit some $10 billion more. “The state Legislature agreed last year to provide the first ongoing source of financial support to the project by tapping revenues from the state’s greenhouse gas emissions program in which companies buy and sell pollution credits,” the Associated Press confirmed — a divisive process that saw Gov. Jerry Brown claw away from environmentalists to his left about $750 million and 25 percent of future “cap-and-trade” revenue.

Pressing on a particularly sore spot for train backers — especially Gov. Jerry Brown, who has labored to fund construction while keeping a relatively tight hand on budgeting — Spanish and German companies warned that California’s rail program would require substantial and ongoing subsidies. “As part of the taxpayer protections written in to a voter-approved plan to provide funding to build the line, public subsidies for operation of passenger service were banned,” the Times noted. “State officials have consistently projected the train will turn a profit as soon as it begins carrying riders.”

One proposal advanced by some companies involved segmenting the train project into several much smaller and more affordable chunks, giving firms a greater willingness to bear risk and spread outlays of capital. “In the documents, many firms suggested breaking the project up into smaller contracts, typically in the $3 billion to $5 billion range. Anything much larger could scare off even the world’s largest construction and financing firms, the respondents said,” according to AP.

Meanwhile, construction plans have not slowed down. But evident shifts in the Authority’s strategy and priorities became clear as planners startled Silicon Valley with a sudden emphasis on the region. “Some Bay Area city officials were surprised by the California High Speed Rail Authority’s renewed focus on the San Francisco to San Jose segment because they believed the agency was going to start building the line in Southern California after finishing the first section in the Central Valley,” reported the San Jose Mercury News.

Initially, the sequence of events was expected to begin with the state’s midsection, move up toward the Bay, and then extend branches to Sacramento and San Diego — a span of “520 miles, shuttling travelers between San Francisco and Los Angeles in less than three hours,” according to the Bee.

8 comments

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  1. Ronald
    Ronald 22 October, 2015, 06:24

    Since state law says that the system MUST OPERATE WITHOUT A TAXPAYER SUBSIDY, the end results may necessitate higher fares per mile, compared with other similar rail systems worldwide, this will adversely affect ridership projections. Thus, it’s understandable that an investment in the bullet train provides significant ROI risks to that invested capital.

    Driving or flying from a multitude of airports can be done at virtually any time of day, but the inflexibility of how many train departure times would be available from a limited number of trains would impact the convenience factor offered by cars and planes and thus also adversely affect train ridership. The snowballing effect of lower ridership would be higher fares for those that do use the train as there would be no state subsidies available. Lower ridership would further impact the ROI risks for invested capital.

    Reply this comment
    • Bill
      Bill 26 October, 2015, 07:09

      This is exactly why privately funded roads or rails is the only true way to know if it is a viable project.

      No one in their right mind would build something that was destined to fail financially. Except the state of California of course (see light rail in san jose that has never broken even).

      Reply this comment
  2. El Jimador
    El Jimador 22 October, 2015, 12:37

    why not replace this train project with projects to fix our drought problem which affects us all??? $68 Billion could greatly improve water distribution and retention systems and even fund creation of potable water.

    Reply this comment
    • Queeg
      Queeg 22 October, 2015, 12:59

      Comrade El

      Assured lots of water on the train for all to enjoy!

      Reply this comment
    • Bill
      Bill 26 October, 2015, 07:11

      This would work incredibly well.

      Hydro-electric reservoirs (not fed by wildlife streams would retain water in “dead” valleys and be used during peak hours only to ensure a high return on investment and that is the cleanest energy you’ll ever see. Cost per MW for a power plant can range from 2M – 5M per MW depending on the type and size. This is a no brainer. =)

      Reply this comment
  3. readysetgo
    readysetgo 22 October, 2015, 13:11

    It still baffles me that the project was ever approved! It saddens me to realize that so many CA voters had no basic concept of economics when they approved the bond measure to fund this project in 2008. These bond measures are always presented like it’s “Free money” and the clueless voter thinks they’re being so forward thinking when they approve them, then they whine about “The Man” taxing and burdening them later. Keep smokin’ your 420 pot idiots! Wonder what 68 billion could do for our “Crumbling Infrastructure”?

    Reply this comment
  4. Dork
    Dork 22 October, 2015, 16:17

    “State officials have consistently projected the train will turn a profit as soon as it begins carrying riders.”

    GOOD, Then the State and the Public Employees should fund it with their RETIREMENT FUNDS

    Reply this comment
  5. Spurwing Plover
    Spurwing Plover 22 October, 2015, 17:28

    A few years ago there was this TV series SUPER TRAIN did’nt last long and just imagine if the thing ever derailed

    Reply this comment

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