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Tragic Misunderstanding By Governor May Kill High Speed Rail in California

By Margaret Okuzumi
Executive Director
BayRail Alliance
Governor Schwarzenegger is on the verge of destroying the most important transportation project for the state of California, and it may be because of a misunderstanding.
Almost no one I knew could understand why the Governor has taken the approach to building high-speed rail (HSR) that he has. No one, that is, until a friend of mine had an "aha" moment while listening to David Crane in the High Speed Rail Authority meeting last month. Mr. Crane is Schwarzenegger's chief advisor on HSR.
This friend of mine has a friend who is an investment banker, and another friend who is a developer. He explained the difference to me roughly as follows:
The investment banker's approach to making money is to first assemble the money, then figure out what investments to make.
The developer's approach to making money is to design a building and determine if it will make a good return on the investment, then go out and assemble the financing to pull it off.
Developers build "things"- buildings, subdivisions, theme parks and even highways and railways. They are used to having some unknowns initially about where the money is going to come from. If the project is economically sound, then they don't worry about whether they have all the money in hand from the start; they know the investors will materialize as the project begins to become "real", as the risks are reduced by that initial investment-- the land acquired, the zoning and permitting attained, the environmental risk factors analyzed. There's still a risk that a project might not pan out for any number of reasons during the process, and that the developer will take a bath, but the developers do their homework, take a calculated risk and deal with the initial uncertainty.
Investment bankers, on the other hand, operate in a different fashion. They assemble money from investors and then find "things"- bonds, real estate portfolios, companies- that will satisfy the return that they determine they should make from their investment. Money first, then find investment. Because they require assembling a huge pile of capital up front, they're not usually in the lead building mega-billion dollar projects. They are usually very cautious and don't invest until the project's risks are minimal.
Both approaches are valid and successful avenues to making money, but the processes are different. We need to realize that we have a tangible goal, build HSR, and we need to approach it as a developer would. High-speed rail is a necessary investment in the state's future. It can't be treated like an abstract Wall Street deal.
The HSR project is so big that the investment banker approach to funding it, is not possible to pull off. The California High Speed Rail Authority and their consultants have made presentations to explain that. The first stage, San Francisco to Anaheim, is over 50% longer than the original TGV line and France had no tunnels or significant mountains to cross. Just the distance from San Jose to Stockton is longer than London to the English Channel or the ENTIRE Dutch HSR system. It's a big project. No wonder Mr. Crane is cautious.
It is so funny to me, Mr. Crane's asking about whether we've nailed down federal support, because when I went to D.C. several years ago both California senators' offices and local Rep offices kept asking me about HSR, without me prompting them. It was clear that they all wanted to see it happen, were almost desperate for news that it was going to happen, and were hoping very much that California would get its act together. And every year that I went back, they got more and more cynical about HSR ever happening because it was taking so darn long for the state to make a major commitment to the project and the bond was being repeatedly delayed, even as I was telling them we had made more progress than ever before. They really want to help us, if we can get our act together.
Governor Schwarzenegger, please think long and hard about this. Your legacy is at stake. It would be tragic if California compromised its future mobility, economy, and environment because you relied on advice for building HSR from an investment banker's perspective rather than a developer's.
For more information, read my prior article, High Speed Rail: A Necessity for California.
Margaret Okuzumi is the executive director of BayRail Alliance, a non-profit organization dedicated to the improvement of passenger rail infrastructure in the San Francisco Bay Area. A committed environmentalist, she is a leader for the local Sierra Club and teaches cycling road skills classes as a certified instructor for the League of American Bicyclists. Ms. Okuzumi also serves on the Santa Clara Valley Transportation Authority Citizens Advisory Committee and is currently chair of the Metropolitan Transportation Commission Advisory Council. She is a member of the Silicon Valley Dean Democratic Club and is a state delegate from the 22nd AD.
Comments
This is a very insightful piece, Margaret - thanks so much for it. I think the letter Jim Costa and over 30 other California members of Congress - including nearly all San Joaquin Valley Republicans - is powerful proof of the support in DC for this plan that you described. I think your assessment is a good one, that we need to come at this from the perspective of infrastructure development instead of investment banking. Hopefully we can help bolster the legislature's expressed willingness to support HSR funding, and convince Arnold of the need to follow through on his promises of support with action.
Posted by: Robert in Monterey at June 15, 2007 08:08 AM
There is a lot of failed HSR "guilt" to go around and cannot solely be saddled on Arnold here.
The original passenger railroads died when private enterprise airlines proved more valuable to consumers. There was some state/federal subsidies in airports but come on, the airplane was gonna win sooner or later over train travel. Today there is no private enterprise here supporting HSR; no Union Pacific, no BNSF, no established private entity, no cocky start up like the Big Four in the 1860's. Government Railroads=AMTRAK (not a very good product and not much demand for their services either).
But the State of California DID create a HSR authority which the taxpayers have kept on the payroll for years with nothing to show for it. There never was significant political support from the legislature (lip service only), it was never actally a ballot initiative (talk, no action) and once again it is on the verge of extinction. Most of this all happened before Arnold's watch, too. He is just there at the possible end of the dirty stick.
Now the HSR authority is a State Government created entity. Therefore, it's presentation over the years has been merely "good" but not good enough to sway all who need swaying (a typical stereotypical government product). Look at their website today. Potential route for HSR is still not finalized after years of funding, specifically in the northern quadrant where political city-train stations are not much of a factor. The route between LA and Palmdale generalizes it would go between HWY 14 and the exsisting UP Soledad Canyon line when in fact they are pretty far apart-which is it? There is zero description on how to get the tracks over/through Tehachapi Pass between Palmdale/Mojave and Bakersfield. Tehachapi Pass and to a lesser degree Soledad Canyon have current track speeds as slow as 15-20MPH. The HSR authority never indicated how tracks capable of 200MPH trains were gonna make it over/through these locations. Both the TGV and Shinkansen Bullet trains run on mostly FLAT terrain. Japan does have earthquakes, we have the San Andreas Fault through and in close proximity to Soledad Canyon and Tehachapi Pass. How were we gonna build it? How much would it really cost? What cost overruns for the taxpayers could you expect with a government product of todays "quality".
I am also not too happy with some of the paid members/consultants on the HSR authority being friends & relatives of politicians partaking from the state/taxpayer trough for years. Perhaps that is part of the problem...no private enterprise/risk/rewards.
I love trains and think the general HSR concept has great merit. But it is a combination of just not the right time for it in the public folks minds even with airports, gas prices and pollution what they are today. Plus the state finances are in diarray, as usual-again. Legislator/politician support was lacking for years before today. And the product being "sold" by the HSR authority was not well presented/prepared for the big win. Good luck anyway!
Posted by: Engineer Dave at June 15, 2007 05:19 PM
You said: "They are usually very cautious and don't invest until the project's risks are minimal."
Therefore, the project's risks are NOT minimal, by your own words. Why? Say for example the line is built, and it is even somewhat close to breaking even (unlikely to the extreme). All Southwest Airlines has to do is reduce their prices 10%, and the red ink will flow faster than morals down a SF sewer!
Posted by: TB at June 15, 2007 11:22 PM
TB, you said "All Southwest Airlines has to do is reduce their prices 10%, and the red ink will flow faster than morals down a SF sewer"... if SWA reduced their prices 10%, they would have red ink flowing just as fast.
Posted by: Tom Williams at June 16, 2007 08:27 AM
Margaret--
I agree with you except for the motivation. A cynical, though likely, political possiblility is that Crane was brought in to put forth a conservative, fiscally responsible point of view that would allow the Governor to publicly turn recently to "support" the project yet then give an excuse for killing the project because of the advice of his "economically-wise" appointee to the HSRA board. The fiscal logic sounds good to most concerned about government spending, even though his approach, as you say, is not the usual one for a public works project of this size. The Governor in the end presents an "economic over environmental" paragraph as his reason for not funding the project and he can be seen as supporting the project, being environmentally concerned, yet looking out for the taxpayer--at least in the minds of those not fully informed, that being just about everyone.
Posted by: Alan Miller at June 17, 2007 10:37 AM
TB and Tom,
You both err by assuming that 2007 conditions will remain static over the next decade or two. Even under these current conditions European HSR lines have eaten heavily into air travel in nations like France and Spain despite the presence of low-cost carriers, though I would agree that under 2007 conditions we would see the sort of fare wars you describe.
But 2007 conditions will not remain static. Southwest has a limited ability to control its fares - in the next 10 years gas prices will continue to rise, there will likely be some form of a state or national carbon tax, and airports will become clogged as expensive expansion plans stall. By 2017 and the subsequent decades, HSR would have little to worry about in terms of fare competition from airlines that will be struggling to survive, who will not be able to fight HSR in a fare war. HSR is much less dependent on fossil fuels and will therefore not be hurt as much by soaring oil prices, shrinking supplies, and carbon taxes.
In the late 1950s when the state debated the California Aqueduct, the point wasn't to divert water for the few million people who lived in SoCal, but to anticipate the tens of millions who now live there and who would need the water. The HSR debate must not assume 2007 conditions will last forever - they won't. Its ultimate value is how it helps California meet the transportation challenges of the 21st century. We need to assess this investment in terms of the long view. Or has that view been outlawed in California?
Posted by: Robert in Monterey at June 17, 2007 04:49 PM
Engineer Dave writes "Today there is no private enterprise here supporting HSR" but that isn't so.
There is an Association for California High Speed Trains (ACHST) that is funded entirely by private corporations.
see
http://www.highspeedtrainsforca.com/boardofdirectors.html
The risks for private industry is not that HSR won't be successful or make money once it opens, but that it will never reach the point of opening because the state didn't commit the political resources necessary to build it -- which among other things includes agreement on the alignments. To get agreement on the alignments, the state needs to finish the environmental studies. The Sierra Club, for example, will not support the bond measure until those studies are completed, even though the Club is supportive of the concept of HSR.
These studies have a limited shelf life. Private industry isn't going to invest billions into the project if it seems the governor will pull the plug on the project as happened in Florida. The state needs to reduce the political risk that the project will not obtain the support it needs to acquire land for the right-of-way. Again to get agreement on the alignments, the state needs to provide financial support to finish the environmental studies and reduce the political risk.
California HSR has made more progress than ever before. It would be sad if the project collapsed because the state did not invest the last $100 million or so needed to complete the EIR in a timely fashion.
Posted by: Margaret at June 18, 2007 10:16 PM
Maybe there would be more support for HSR if the Bay Area and Los Angeles politicians decided to NOT screw over Sacramento by cutting us off from the first phase. You need our votes for this to pass, and so far we have not gotten any respect.
Posted by: Batman at June 20, 2007 10:55 AM
I agree that that this is a very insiightful piece by Margaret, and agree with what she says. I , on the other hand, come from the practical side as to why HSR should be built. I was born in NYC and lived there until my early 20's, thence in LA from 1955-85 and in the Bay Area since. I have seen--and in most cases--badly how, after WW II and until recently both LA and NYC have handled the issue of mobility. Both, although it took awhile, that solution didn't work. NYC most recent five year transportation budget devotes $26 Billion to mass transit and only $1.4 Billion towards highways. LA has also had an epiphany. That is a microcosm of what is happening in California: The population is going to go from 34 million to sixty million by about 2050. It becomes a no-brainer that we must put more emphazis on moving people over cars and that is why HSR makes so much sense! It will put Fresno with about 1 1/2 hours of LA and SF/SAC, eliminate the crunch at at those major airports and take thousands of cars off the roads. Governor, you would have to be blind not to see this, and how HSR can mitigate this problem and improve the quality of life in our state. Walter Straksoch
Posted by: walter Strakosch at August 10, 2007 03:44 PM
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