(4 pm. – promoted by ek hornbeck)
Burning the Midnight Oil for Living Energy Independence
crossposted from Voices on the Square
At the beginning of this month (the 3rd of September, to be precise), in XpressWest Has $1.5 Billion In Private Investors – And A Strong Argument for Victorville ~ Robert Cruickshank brought our attention to an interview with the Tony Marnell, CEO of XpressWest, on the progress in developing a bullet train between Las Vegas and Los Angeles.
When I lived in New South Wales, Australia, I was amused by the fact that the old rail three letter acronym for the Melbourne Express, MEX, was part of the basis for Sydneysiders called Melbournians “Mexicans” (they were also, of course, “South of the Border”), and the TLA for the Sydney Express, SEX, part of the basis for Melbournians calling Sydney “Sin City”. But here we have a proposal for a real Sin City Express.
The Project Proposal
As illustrated above, there is a grander vision for the Vegas to LA corridor to be the basis for a broader Southwestern rail network, but the focus at the moment is on the main LV/LA trunk of the proposed XpressWest system.
The proposal at hand is to built the first phase as a rail corridor from Victorville to Las Vegas. Vegas bound passengers would, in effect, treat Victorville as a park and ride lot for Las Vegas. Then the plan is to extend the corridor to Palmdale, in time to connect to the California Express HSR system at Palmdale, using the Palmdale to San Fernando Valley segment of the California HSR Initial Operating Service to access the LA Basin.
This is, indeed, one of the controversial parts of the project. In the interview, Vegas Inc: Partner outlines vision for high-speed rail system, Tony Marnell argues:
Why Victorville?
I may have had a bit of an advantage because for 10 years I was the CEO of a public company that owned the Rio. I could look at the slot cards of my customers that list their ZIP codes. That was an ingenious thing.
Steve Wynn (chairman of Wynn Resorts), Jim Murren (CEO of MGM Resorts International) and Sheldon Adelson (chairman of Las Vegas Sands and owner of the Venetian) were doing that – looking at where their driving customers were coming from. And they’re not coming from Beverly Hills, Santa Monica, Laguna Beach or downtown Los Angeles. They’re coming from the Inland Empire.
The Inland Empire is only 40 minutes away from Victorville. That’s why it makes sense.
At least, that is the case being put forward as to why it makes sense on a demand front: they know where the Las Vegas bound traffic is coming from, and Victorville puts them close enough to enough of that traffic to make it worthwhile.
On the flip side, the cost front, this is one of the less expensive places in the country to build Express HSR, with an alignment that has already passed program level Environmental review, and on an alignment that requires very few grade separations. With a planned top speed along the alignment of 190mph, they reckon they can get between Las Vegas and Victorville in 86 minutes ~ just under an hour and a half.
Infrastructure, Financial Risk versus Real Risk
The finance for the project is to come from claimed private finance of $1.5b, and a request for a Federal Rail Authority infrastructure development “RRIF” loan for $5.5b to $6.5b. That is within the authorized capacity of RRIF lending, but would dwarf any single RRIF loan made to date.
The controversy regarding this finance involves the risk involved in the lending. As Alon Levy argued in Reason Releases Fraudulent Report Criticizing XpressWest{1}:
It is in reality quite easy for HSR to make enough money to cover above-the-rail expenses, and even track maintenance is quite cheap at about $125,000 per double track-km, but covering interest expenses is harder. Despite the canard that only the LGV Sud-Est and the Tokaido Shinkansen have paid back their interest, sourced to as far as I can tell just one person and reproduced by Cox and Moore on PDF-page 43, in reality multiple intercity railroads are profitable even including interests. This includes all three main island Shinkansen operators in Japan, SNCF, and DB. The belief that they are not comes from two sources: in Europe, conflation of subsidized commuter lines with profitable intercity lines, which are usually run by the same national railroads, and in Japan, the fact that the government wiped the accumulated operating deficit debt of Japan National Railways after splitting and privatizing it, but not Shinkansen construction debt (see references here).
So the problem is not whether the rail corridor can cover its operating expenses, but whether it can generate a sufficient surplus over its operating expenses to cover its capital cost.
In this, Alon Levy confuses actual financial risk and the theory of the pricing of risk in market interest rates. He argues:
At a riskier rate of return, things are troubling, as Paul Druce notes: he compared revenue estimates to the 30-year T-bill interest rates as of last year (3.75%), and found that operating margins would need to be above 25% until 2031 to maintain profitability. XpressWest is now looking for a larger loan than Paul assumed, but at a real rate of return of 2 or 3%, interest would indeed bite into the cost. If the project is that risky, it should therefore not be funded. That said, European transit projects tend to go ahead with a benefit-cost ratio higher than 1.2, which is certainly true of this project.
However, the US would not be making this loan as a financial speculator. The current rate for 30 year bonds is around 0.5%, and the RRIF would be charging the current Treasury rates on the bonds funding the loan, plus a few points for administrative overheads.
And this is exactly as it should be. A requirement for receiving the loan is that there is a positive benefit/cost ratio on the full economic benefits, and the full economic costs. So long as the XpressWest project can cover the actual interest rate charged, the fact that a market interest rate on the project would be higher due to the risk is immaterial: the loan is repaid, on time, which funds the $32m interest per year on the bonds.
But consider the worst case scenario. The XpressWest covers its operating costs, including track maintenance, but does not yield a surplus sufficient to pay the $32m interest per year. XpressWest might seek some form of bridging finance, but unless there is a prospect of revenues rising to meet the $32m in interest cost, then either the loan is restructured, or else XPressWest goes bankrupt.
If the loan is restructured, the government would have to, in effect, convert part of its loan into equity. If XpressWest goes bankrupt, the government ends up owning the rail corridor.
But in either event, its an Express HSR corridor and will generate an operating surplus. So to maximize performance of the loan, the corridor continues to operate. The net economic benefits that were a pre-requisite for granting the loan in the first place continue to be experienced. And, meanwhile, the XpressWest investers made a $1.5b contribution to the construction of the rail corridor, which would have to have been made by grant funding if it had been a publicly funded{2} HSR corridor.
Further, the odds are very high that the underperformance of the corridor will only be a temporary phase. There is no doubt that once there is a direct Express HSR corridor from the LA Basin to Las Vegas, the corridor will be able to generate surpluses well over $30m annually, since once there is a single seat connection from Las Vegas to the LA Basin, the primary transport demand from the LA area to Las Vegas is supplemented by reverse flow trips from Las Vegas to LA.
Notes
{1. As you might surmise from the title of Alon Levy’s piece, the main focus of his piece is responding to the fraudulent arguments of one of the anti-rail “Liebertarians”. Click through to his piece for the complete take-down.}
{2. Note the difference between finance and funding. If I lend Joe money, and Joe repays me by stealing the money from Susan’s purse, I provided the finance, and Susan provided the funding. The finance is what provides the money when the project needs it ~ but finance is typically expected to be refunded. The funding is finally pays for the project. In many so-called “public-private partnerships, the private side provides private finance, at higher cost than public finance, and the public side guarantees the funding, including private profits, in one way or another. That is normally a quite daft way to proceed. In the XpressWest proposition, the public provides finance, at dirt cheap interest rates at the moment, and the project aims to have the traveling public provide the funding. And there is no profit guarantee: the $1.5b that private stakeholders are putting up is at risk if they can’t generate a profit from this Express HSR railroad.}
Conclusion
Your thoughts? On XpressWest, Express HSR in general, or indeed on any topic in sustainable transportation?
Midnight Oil ~ The Dead Heart
This may be running through the American Outback, but the Mojave is not didge territory:
1 comments
Author