California's proposed high-speed rail project is neither viable nor attractive to potential investors, according to a report released Monday night by a team of Silicon Valley researchers.
The 100-page study, "The Financial Risks of California's High-Speed Rail Project," found the CHSR business model to be deeply flawed, concluding that it relies too heavily on federal grants and does not adequately address risks posed by fluctuating ticket prices.
Authored by Dr. Alain C. Enthoven, William C. Grindley and William H. Warren, the study was reviewed by more than 70 peers, including executives, economists, venture capitalists, and financial and technology analysts, all of whom determined that the CSHRA's projections are not credible.
"When an investor looks at an assertion by the CHSRA that says you're going to earn an operating surplus of $370 million in the first year of operations and $1.5 billion profit by the third year, they shake their heads and smile," said William Grindley, former World Bank analyst. "It doesn't pass the smell test."
The report also found that:
- Unmet commitments to the California Legislature diminish the project's credibility.
- The CHSRA's ridership forecasts, upon which the system's financial outcome are determined, are too optimistic.
- The CHRSA's Phase I capital costs—the price of building the train from San Francisco to Los Angeles—should be significantly higher than have been stated.
- The CHSRA's operating expenses are too low.
- CHSRA's job creation forecasts are too vague and too large to be credible.
Much of the project's business plan rests on the assumption that as population increases, so would the number of people who ride the train. But the
Legislative Analyst's Office, the
State Auditor and
Institute for Transportation Studies (UC Berkeley) in separate reports took issue with the business plan and the Authority's ridership projections, casting doubt upon the number of tickets that would be sold, which in turn would skew the project's profitability.
This new study expounds upon that, calling the CHSRA's revenue estimates "unreasonably optimistic." One key lynchpin to attaining sustainability, for example, is the Authority's ability to secure billions of dollars in additional funding from the federal government.
Jeffrey Barker, CHSRA director of communications and outreach, agreed that the project's future depends on obtaining more federal funding.
"The Authority has been saying for a year that it's critical we receive $17 to 19 billion in federal funding," said Barker. "The fact that we aren't sitting on $43 billion isn't a 'report finding' but a statement of fact."
The researchers used assumptions in the HSRA business plan to create a financial model and analyzed numerous scenarios, which combined different types of financing, as well as different types of risk for investors.
The 2009 HSRA Business Plan assumes that local governments or private investors will supply the additional funds necessary to complete the project, the cost of which has bloated to $43 billion. Some speculate that the project may eventually cost up to $100 billion.
According to this new report, the sources of funding required for the plan to become self-sustaining are:
- Federal grants, $17-19 billion.
- State grants (actually Prop. 1A bonds), $9.95 billion.
- Local grants, $4-5 billion.
- Private debt or equity funding, $10-12 billion.
Palo Alto Mayor Pat Burt said the report is unique in that it is the first major, peer-reviewed economic analysis of the rail project to date.
"These are serious people with strong professional backgrounds, and many of them highly regarded in their field," said Burt. "They appear to have done a thorough analysis and it deserves to be treated seriously."
The City Council, which once enthusiastically supported high-speed rail, has recently turned against it, voting to file suit over what it believes to be a flawed environmental impact report.
Monday's report is another hurdle for the rail project, according to Burt, expressing a lack of confidence that he and the council share, in light of recent events.
"Their plan is counting on this being the most successful high-speed rail system ever developed," he said. "And if it isn't, the whole thing fails."
For the complete report, peruse the .pdfs to the right of this article.