By Noel T. Braymer
As of 1992, in fact—though the picture would have improved since then—the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.— Warren Buffett, billionaire investor, interview 1999.
The favorite Lie opponents tell about High Speed Rail Service is it sucks up money and loses it for the taxpayers. The claim is few High Speed Trains make money! Now to set the record straight we have to define profit. Most High Speed Trains make an operating profit. That is called above the rail costs, this doesn’t include all the capital costs. Lets look at bridges for a moment. For centuries the way bridges were financed was with borrowed money. In fact this is how most businesses get started. In the case of a bridge, local governments sell bonds which earn interest which has to be paid off from tolls by users of the bridge. It takes years, but usually over time these bonds get paid off. This is how the Port Authority of New York and New Jersey has funded major infrastructure projects in the Metro New York area for years. When the bridges and tunnels are paid off they continue to charge tolls to pay for other projects. The point is, bridges usually earn enough money through tolls to pay for their operations. That’s an operating profit. But it takes years to pay off the total costs for the financing of a major project like a bridge from the profits from bridge tolls. Government Bonds are the some of the cheapest forms of financing and are in effect tax subsidized since the income from them is usually tax-exempt.
All forms of transportation depend on expensive infrastructure which is usually paid for by taxes. As Warren Buffett noted, airlines have often as much lost money as made money through the years. He includes in his statement the time between the 1920’s to the late 1970’s when airlines were highly regulated. They were regulated to insure that there was air service across the country and that the airlines made a profit. There was little in the way of competition between the airlines before deregulation. When airlines had to compete with deregulation many of the old regulated airlines went out of business as did most of the new startup airlines. The airlines are not expected to cover the full costs of air travel. The taxpayer pay for air traffic control, research for air safety and aircraft design improvements. Most pilots get their training from the military around the world which saves the airlines the high cost of training pilots needing hundreds of hours of flight time in expensive airplanes to qualify as airline pilots.
Now the claim is made that almost no High Speed Rail service makes money. The claim is only some of the Japanese Shinkansen and French TGV lines make money. What the critics are talking about is these 2 services which are the oldest High Speed Rail services having paid off the full capital expense of their construction of their original lines. Part of the reason for this is they are the oldest High Speed Rail services, so they have had enough time to pay off their full cost. Generally High Speed Rail trains make an operating profit which is often all that is expected of them. Clearly airlines are not expected to pay the full costs of air service. The trucking companies take full advantage of public roads which are generally taxpayer supported.
So is there a secret plot to lie about the “true costs” of California High Speed Rail and stick the cost to the public? Well no there isn’t. From the very beginning, in 1996 the California High Speed Rail Authority has been and continues to be a bi-partisan project. Central to the California High Speed Rail Project is it is a Public, Private Partnership (PPP). This means joint public and private funding for the project. A leading promoter for PPP projects was former British Prime Minister Margret Thatcher. In the case of California High Speed Rail with the ballot measure passed by the voters in 2008, the plan all along was the service would make an operational profit. The basic plan for the project was that it would be funded roughly with a third of the money from State and Local funding, a third from Federal Funding and the last third from private investors. The Initial service is expected to be operated at a profit. This is now expected to be between the San Joaquin Valley and the Bay Area by 2025. An operator will bid for the right to run on this Initial service and pay for the right to earn a profit.This is typical of many High Speed Rail services around the world.
Most of the money from the government will be needed to get the first segment operating at a profit before the project is ready to bring in private investors.This is a fact the critics of this project like to ignore. These same critics are also often promoters of toll roads which are privately financed. The reason these toll roads are so popular with investors isn’t because they are profitable. They aren’t, in fact most do very badly and often have to be bailed out by local government. What investors like about toll roads is the local government guarantees the loans so investors get paid no matter what. There is no risk to them even though toll roads usually go bankrupt. That is not the case with California High Speed Rail, the State is not guaranteeing the loans for private investors. That is why the service has to be operating at a profit before it is ready to get private funding.
Will the California High Speed Rail service pay all capital costs including government grants? Legally it doesn’t have to. It might over the years. The point is the loudest High Speed Rail critics are at best being disingenuous when they complain about the honesty of the backers of California High Speed Rail, After all the people who complain the most about the delays in HSR construction and cost increases to the project are the same people who seek to delay the project and increase its costs to kill it. Despite these claims of wrong doing by the opponents, the High Speed Rail Authority has successfully fought off these legal challenges. Since 2012 the cost estimates for California High Speed Rail settled at $68 billion dollars. This estimate includes very large contingency reserves to insure the project doesn’t go over budget. Since construction started in 2015, the project’s construction has been coming in under budget. To reflect this the 2016 Business plan has revised the budget for the 520 miles between San Francisco and Anaheim to $64 billion dollars. There are still large contingency reserves in this new budget, just not as high as before now that they have first hand experience in construction for this project.