The high-speed rail system in Texas is proposed to be privately funded, with investors poised to develop property along the Houston to Dallas route. Photo illustration by Harold Foster Jr.

published on August 31, 2018 - 9:14 AM

Written by David Castellon

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For nearly eight years, Californians have engaged in a deep and often caustic debate over the development of a high-speed rail system.

Those debates have centered largely on fights over land acquisition, whether the plan is technically feasible and whether ridership forecasts are valid, to name just a few.

And, most notably, the cost.

When voters approved Proposition 1A in 2008 to sell state bonds for the project, the cost was projected at $39 billion.

Now, the 520-mile line between downtown San Francisco and Union Station in Los Angeles has ballooned to a base estimate of $77 billion, about 20 percent more than the base estimate offered just two years ago. And the California High-Speed Rail Authority’s 2018 business plan has put its current maximum estimate at a little more than $98 billion.

Look to the lone star

But California’s doesn’t have the only big high-speed rail project in development in the U.S., as another system is being planned to cross the 240-mile divide between Houston and Dallas in Texas.

While both projects involve commuter trains moving passengers at 200 mph-plus speeds, like the kinds used in parts of Asia and Europe, the Texas and California projects have some big differences, most notably how they’re being financed.

From the start, California’s planned bullet-train system has been funded with public money, which so far has included more than $4.29 billion in federal dollars — with $3.3 billion in American Recovery and Reinvestment Act funds spent as of September of last year — along with $4.41 billion allocated through the issuance of state bonds, part of the $9.95 billion promised by the passage of Prop. 1A, and $1.21 billion in cap-and-trade dollars earmarked by California legislators for the rail program.

Texas, however, took a far different approach, as its project has been bankrolled entirely by private investors, and they’ve vowed that private equity will fund the entire project, which has a current estimated price tag of $12-$15 billion.

“As long as taxpayer money isn’t used, that’s the only way they’ve gotten as far as they’ve gotten — by being adamant at every turn that not a dime of taxpayer money is going to this project,” said Mark Jones, a professor of political science at Rice University in Houston and a political science fellow at the James A. Baker III Institute for Public Policy at the university.

Taxpayer’s dime a poison pill

While federal loans are possible for part of the financing, officials at Texas Central Partners, LLC, the private business group formed to develop the high-speed rail system, noted that the federal government would be paid back.

“That would not be seen as a negative in Texas, unless you ask for money from the state for a loan. Then that would kill the project, in and of itself,” said Jones, noting that the state’s Republican governor and Republican-dominated legislature have had no problems approving elements of the train project because private interests are assuming the risks.

California’s Prop. 1A stated that on top of the $9.95 billion in state bond money, “any available federal monies, private monies and funds from other sources,” would be used to develop and construct the state’s system.

But the measure didn’t state an amount for private funding needed, though Mark Keppler, executive director of The Maddy Institute at Fresno State, said in early planning, the expectation was about 19 percent of the cost would be covered by private investments.

The institute is a nonprofit that does public policy analysis on issues in the San Joaquin Valley, where the 119-mile Central Valley section of the rail line — from Merced to north of Bakersfield — was the first portion of the project to begin construction in 2016.

That line extends through Madera, Fresno and Kings counties, as well as the southern tip of Tulare County before heading south into Kern County.

Differences add up

In Texas, no groundbreaking has yet occurred on its rail line. Texas Central officials said that if federal permits are approved by late this year, construction could begin in late 2019, with an estimated completion some time in 2024.

So why has the Texas effort drawn investors and not California’s? For one, Texas’ plan started with investors, though how many isn’t clear. Texas Central Partners has disclosed the names of only five of its major investors — one of them a major Texas developer and another a former Houston Astros owner — and that Central Japan Railway Co., Japan’s most profitable high-speed-rail operator, has a deal with Texas Central to help develop its rail system and provide 15 trains and sets of passenger cars, along with other technology.

When asked if the Japanese company is one of the investing partners, Holly Reed, said at least some of the Texas investors had ties to CJRC and invited the company to help develop the project, which included helping conduct studies of 97 pairs of U.S. cities looking for the best place to build a high-speed rail system.

“[CJRC] is not a financial investor in the project. It only is providing technical assistance,” she added.

Japanese connection

She said the Dallas-Houston route was chosen, in part because of the 240 miles between them, which the group considered a “sweet spot” distance for high-speed rail service.

But some believe it was CJRC that came to the U.S. looking to create a market here for its trains and approached the U.S. investors.

“The Japanese have been primarily bankrolling this, from what I could tell,” Jones said, adding that private investment was likely the only way to get a high-speed rail project going in Texas.

When asked if the California program has ever asked for private investments, Annie Parker, a spokesperson for the California High-Speed Rail Authority, said private investment wasn’t needed early on once state voters approved the bond money, and now “In the business plan, we want to make sure we’re at the right section of the project to get that private investment.”

A good investment?

Not that investors would necessarily see California High-Speed rail as a good investment now, said business and rail experts contacted.

The cost of the Texas system is a relative drop in the bucket compared to the current estimates for California’s system, which includes an $10.6 billion base estimate to build the Valley portion, a $2.6 billion increase over California HSRA’s 2016 estimate.

The lower overall cost in Texas is due partly to the fact that its planned rail line is less than half the distance of California’s, and will involve building only three train stations, one each in Dallas and Houston and one in between at College Station, where Texas A&M and about 80,000 students are located.

California has 15 stations planned between Los Angeles and San Francisco, which would include Merced, Madera, Fresno, near Hanford and north of Bakersfield.

Housing market comes into play

But beyond that, Texas’ planned HSR line is a relatively straight shot with mostly open, level ground along the way making the engineering and building costs relatively simple and easier to calculate, at least when compared to California’s challenges.

“You want to build a railroad [around] some of the most expensive housing and real estate in the world. That’s not easy” in California, said Lou Thompson, chairman of the California High Speed Rail Peer Review Group, an independent oversight group that issues reports to the state’s legislature on the project.

Technical challenges in California that the experts noted included contending with the potential effects of earthquakes on tracks, dealing with the numerous county and city governments along the track’s path — which so far has included lawsuits by Kings County — legal challenges to land acquisition, inaccuracies in estimating land costs and having to dig out 45-50 miles of tunnel through Pacheco Pass between Merced and Gilroy, as well as through the Tehachapi Mountains between Bakersfield and Palmdale and through the San Gabriel Mountains between Palmdale and Burbank.

The Pacheco Pass tunnel alone is expected to be about 15 miles long.

In addition, California tends to be a more litigious state than Texas, elevating the costs of doing business, and then there is California’s higher number of regulations that also tend to amp up costs.

Texas does things big

“Texas has a history of building pipelines, and it may be more cheaper to build” there, as local governance in that state is more apt to go along with big construction building projects, said Chris Thornberg, an economist and founding partner of Beacon Economics in Los Angeles.

“It’s just easier to do things there.”

“California is pretty much the antithesis of Texas when it comes to a business-friendly environment. I think if you’re a company engaged in large-scale infrastructure projects, the last place you probably want to invest your own money is California. Just look at the cost of overruns of the train there so far,” Jones added.

Then, of course, there is the issue of whether California ends up scrapping its train plan.

Opposition to the system is growing in California, with state Republicans leading the charge. And while the Obama Administration didn’t invest much federal money into the project, “There is no funding after the Obama Administration,” Keppler said.

“It makes this project extremely difficult to have happen.”

A new concept

But the biggest challenge for private investment is that California has never had high-speed rail, nor has any other American state.

In several other countries, conventional rail systems have existed between destinations to show demand, and it could be forecast that ridership would go up if wider, faster trains were provided, creating a basis for creating lines or at least upgrading existing commuter rail lines.

“Japan built the Shinkansen [bullet train line] from Osaka to Tokyo in 1964,” and before that 128 conventional and largely full trains ran that route daily in each direction, Thompson said. “So when they decided to build a high-speed train, they already knew the demand.”

For California, he said, “The private sector won’t take the risk associated with an unproven system. There’s no reason. The risks are too high.”

That means the California system would have to be built and run for a time to show the number of riders using it and that it can be profitable.

Parker said California rail officials agree, which is why they aren’t seeking investors at this stage.

“Private investment will come after some years of demonstrated viability and maturity. So that basically means we have to reach a certain point to bring private investors into the program,” she said.

Offering ‘concessions’

One possible investment method is to sell or lease to the private sector “concessions,” which could include long-term right to operate the trains, managing and overseeing food and retail spaces at train stations, running train maintenance and operating station parking lots.

These concession rights don’t necessarily have to be for the entire 520-mile line, so one business or investment group might own the rights to run the station in Bakersfield while a separate one could run the one in Fresno, the experts said.

One important factor, the expert agreed, is that the state should maintain ownership of the rail line and stations, like when a city contracts with a private utility to run its water system but still owns the pipes and wells.

“High-speed rail will not be fully privatized or a public system” said Parker, adding that rail officials are looking at how that may work. “It will be a partnership between the public sector and the private sector to deliver the program.”

Time is money

One thing officials with the authority don’t want to do is to wait to build the entire 520-mile line before seeking those investors.

Instead, Parker said, the goal is to finish construction of the 119-mile Central Valley Line and the 84-mile Silicon Valley Line and start service from San Francisco to Bakersfield to demonstrate passenger numbers and profitability to potential investors.

Once the “Valley-to-Valley” sections of the rail line are running and can be shown to be viable, “at that point the private sector would be a key factor in getting us down to Southern California,” with their investments helping fund that portion of the project, she said.

The authority is looking to get that Valley-to-Valley service running by 2026 or 2027 using one track through the Pacheco Pass tunnel, and then have the second track ready for use in 2029, after the tunnel is fully built out.

Once that happens, it’s highly likely to trigger economic booms for Fresno and other Valley communities, as Bay Area workers could get away from the astronomical housing prices there and relocate here where homes and rentals are far cheaper and commute to work, Keppler said.

“Think of all the benefits for the Valley — [people with] Bay Area wages going to restaurants and other businesses here.”

And once the line to Southern California is done, Keppler said, “Bakersfield would become a bedroom community of Los Angeles. It would explode.”

Foreign ownership?

As for whether California or Texas has a better business plan, that’s hard to say.

“They’re probably not going to do this with private equity from the United States in Texas,” said Keppler, noting that the train developers there are more likely to seek the loans and dollars they need from banks in Japan and China, which in turn may require some degree of ownership in the rail line.

In addition, while Texas faces far fewer technical and cost obstacles, its system isn’t without controversy, most notably objections that the developers can use eminent domain to compel the sale of property along the path of the tracks if property owners don’t want to sell.

A series of bills put forth by rail opponents in the last Texas legislative session intended to curtail the project failed, “and that was essentially their last gasp,” Jones said.

Doubts remain

But like the doubts of whether California might stop its rail project in its tracks if the costs keep elevating, some doubt whether the Texas investment group can muster sufficient private equity to build the line.

“Texas is purely hypothetical at this point. It can’t be said they’ve done anything,” said Thompson, noting that the $75 million-plus dollars the investors reportedly have collected so far is a long way from $12-$15 billion.

“You have to take it all with a grain of salt until the money’s on the line,” he said, adding, “Nobody has yet put a huge amount of money on the line betting on the demand from Houston to Dallas.”

And as far as Thompson knows, Texas Central’s plan is unprecedented, as “I don’t know of any high-speed rail systems anywhere that were not built with public money.”

Investment will come

In fact, he said California’s plan of building a system entirely with public money and then bringing in investors to buy concession rights is more common, with systems in Britain and Argentina as examples.

And once California reaches the point that it wants to field offers, there likely will be interested investors, said Mike Bennon, managing director of the Stanford Global Project Center, a division of the university that researches innovation in infrastructure development and investment.

“California High-Speed rail is going to be so big that there is going to be some public involvement. You’re not going to do just a procurement for all the stations and all of the train management from the private sector, but you could see some of those cost packaged as an investment opportunity, possibly through a public-private partnership,” he explained.

“To attract investors, California should package elements of high-speed rail as investment opportunities that investors could bid on or make proposals for.”

Thompson agreed there likely would be interest in state-offered investment packages, but only if they’re offered on reasonable terms.

But all of that is contingent on California completing the entire rail line or at least the Valley-to-Valley portion, “and the other is it has to operate and show some reasonable demand,” he advised.