Feb 10, 2011

Florida's High Speed Rail: The case of California

California's High Speed Rail (HSR) is in trouble. Since we are about to embark on our own HSR project here in Florida, a good question for Floridians to ask is 'are there any lessons that can be drawn for the proposed Tampa-Orlando HSR?' Several recent studies seem to indicate that there are.

The California project is for a HSR line from San Francisco to Los Angeles. In 2008, California voters approved a $9 billion bond issue which was based on an estimated cost of $33 billion. The $33 billion was based on a business plan that was release in November 2008 by the California High Speed Rail Authority. A few months earlier, in September 2008 the Reason Foundation had released ‘The California High Speed Rail Proposal: A Due Diligence Report.’

The Reason study identified at least two major deficiencies in the numbers that were given to the voters: Estimated construction costs and ridership projections. Reason estimated construction costs at $65-81 billion. Likewise it concluded that the CHSRA ridership numbers were wildly over estimated: Reason's numbers were over 60% below the figures of the CHSRA. If Reason was right, the cost to California taxpayers would more than double for initial construction alone. Ridership projections would not come even close to paying for the ongoing operations and maintenance (O&M) costs. The Reason estimates were based on comparisons to real-world completed or ongoing HSR projects around the world. If they were correct, California taxpayers would, of course, be stuck with the bills not just for up-front construction overruns, but the O&M costs for years to come. (The US Defense Department routinely uses 70% as the O&M portion of the 'lifetime' cost of any generic project.) According to the Reason study
 'Any failure to meet the Rail Authority's lofty ridership projections would force ticket-price increases, further cutting ridership, or require taxpayer subsidies to cover the financial shortfall, adding to future budget deficits. The due diligence report finds "the San Francisco-Los Angeles line alone by 2030 would suffer annual financial losses of up to $4.17 billion." '
 After the ballot issue passed, a skeptical California legislature demanded a more in-depth cost analysis. In December 2009 the newly released CHSRA business plan raised the estimated construction costs to $43 billion and required higher fares.

In 2010, the California legislature again required an updated business plan by February 2011, which has since been delayed. On February 4, 2011,  Californians Advocating Responsible Rail Design (CARRD)--a group which describes itself as citizens who
 'value transparency, accountability and oversight and believe local communities should be partners in designing transportation projects. We work to ensure that the public's interests are upheld and that all facets of the California High Speed Rail project follow both the spirit and letter of the law.'
 released a statement which indicated that 'Our analysis, based solely on official and publicly available Authority documents, determines the current project costs are approximately $65 billion.' The CARRD construction estimate aligns with the bottom end of the 2008 Reason Foundation estimate. The ridership estimates have not yet been addressed by any other outside agencies, but since according to the Reason Foundation the estimate is so egregious that
'It appears that the CHSRA 2030 ridership projections are absurdly high—so much so that they could well rank among the most unrealistic projections produced for a major transport project anywhere in the world. Under a passenger-mile per route-mile standard, the CHSRA is projecting higher passenger use of the California system than is found on the Japanese and French HSR networks despite the fact that these countries have conditions that are far more favorable to the use of HSR.'
 It is therefore highly likely that those estimates, too, will be 'revised.'

On January 11th 2011, the Reason Foundation released a study of the Tampa-Orlando HSR project. By far, it is a much smaller project. The official estimated costs for initial construction are $2.7 billion, of which Federal taxpayers will pay $2.4 billion. Beyond that, day-to-day operations and maintenance--as well as any construction cost overruns--will be paid for by Florida taxpayers. The Reason study identified for the Florida HSR project the same two areas--initial construction costs and ridership--as areas of risk:
 1. Capital Cost Escalation: If construction cost projections prove overly optimistic, costs could increase substantially from the current estimates. The state of Florida would be responsible for virtually all of any such increase. This report estimates that the cost to Florida taxpayers could be $3 billion more than currently projected.
2. Operating Subsidy Liability: If ridership and revenue projections prove overly optimistic, it could become necessary for the state to provide an annual operating subsidy for the service. A state operating subsidy could also be necessitated by operating costs that are greater than projected. This risk could easily run into the hundreds of millions of dollars per year.
 When Reason directly compared the construction costs of the California and Florida projects, adjusting for variations and using the figures from the 2009 CHSRA estimate of approximately $43 billion, it found 'the California project to be 111 percent more costly per mile than the Tampa to Orlando project ($67.8 million per mile compared to the projected $32.1 million per mile in Florida). This difference could indicate that the capital cost projection for the Tampa to Orlando high-speed rail project is exceedingly optimistic.' If California per mile cost is applied to the Tampa-Orlando project, the overall construction cost would rise to $5.7 billion--raising the cost to Florida taxpayers from approximately $300 million to $3.3 billion. And if Florida cancels the project after construction begins--say because of massive cost overruns--Floridians could be required to repay the Federal grants: $2.4 billion.

In general, the ongoing operations and maintenance costs are harder to predict, but the major element which determines if a project pays for itself is ridership. If actual revenue from passenger fares equal or exceed operations and maintenance costs no taxpayer subsidies will be needed. Ridership however is driven by the attractiveness of HSR as an alternative to other means of transportation. The Reason study determined that travel by the Tampa-Orlando HSR will take longer and cost more than travel by car, making it much less attractive to travelers and jeopardizing the ridership projections of the Florida Rail Enterprise. Given that historically ‘projected ridership on passenger rail projects averaged 65 percent above actual patronage,’ Reason estimated that Florida taxpayers could be faced with a bill for
‘operating losses of approximately $300 million in its first 10 years of operation (2015 through 2024). The system would not produce a profit for its first 23 years of operation (2015 through 2037), with accumulated losses of approximately $575 million.’
California is charging ahead with its HSR project since getting the bulk of Federal funding from the cancelled projects in Ohio and Wisconsin. Only time will tell, but given that historically construction costs have been massively underestimated and projected ridership has been massively overestimated—combined with the potential Federal bill of $2.4 billion if we choose to cancel the project due to significant cost increases—Floridians might want to ask Governor Scott to follow the lead of Ohio and Wisconsin and tell the Federal Government, ‘Thanks, but no thanks.’

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