In April of 2011 the California High Speed Rail Authority held a meeting of potential investors and vendors interested in participating in the proposed Los Angeles to San Francisco high-speed rail project. Project sponsors have insisted they could gain substantial private investment for the project. The Authority indicated that the meeting drew 2000 attendees at the Los Angeles Convention Center, which supporters indicated was proof of the interest of private investors in the project.
Apparently believing the claims that high-speed rail is "profitable," the Brazilian government set about planning a line stipulating that private investors would build the infrastructure and operate a line, at their own risk.
The federal government offered private investors the opportunity to bid on a concession for the proposed Rio de Janeiro to Sao Paulo and Campinas high-speed railroad (Trem de Alta Velocidade). None of the Los Angeles attendees or any others submitted a bid for the concession. It is also reported that two previous opportunities attracted no bidders.
In reviewing the project documents for the high-speed rail line in Brazil, it is easy to understand why the 510 kilometer (310 mile) route drew no interest. In Brazil, investors would be required to put their own money at risk with no revenue guarantees. Rising capital costs could be a problem as well since California’s high speed rail costs have doubled in just three years, a line that virtually everyone understands will require heavy public subsidies, despite being far richer than Brazil.
Capital Costs: The winning bidder in Brazil would have been granted a 40 year concession and would have been required to provide substantial funding toward the $20 billion (34 billion in Brazilian Reals) capital cost. If the international experience holds in Brazil, that cost could escalate to $40 billion (70 billion Reals) or more.
The Rio de Janeiro to Campinas line would not be easy to construct. The mountains south of Rio will be challenging. Unlike California, little of the route is as flat as Kansas. The line would operate through two of the world's megacities, Rio de Janeiro and São Paulo as well as two other large urban areas, Campinas and San Jose dos Campos. Unlike Los Angeles and San Francisco, Sao Paulo and Rio de Janeiro do not have well placed existing rail corridors that can (at least theoretically) be expanded to handle the fast trains. The urban densities are much higher in Brazil than in California, which means that the construction will be more disruptive. The Los Angeles and San Francisco urban areas have densities of from 6,000 to 7,000 per square mile (2,100 to 2,700 per square kilometer) while those in Sao Paulo and Rio de Janeiro range from 15,000 to 18,000 per square mile (6,000 to 7,000 per square kilometer).
Protecting the Taxpayers: Interested in protecting Brazilian taxpayers, the government has required that any cost overrun be paid for by the winning bidder. This, combined with the requirement to support the capital costs and debt service out of passenger fares and other commercial revenues seems, likely to have discouraged bidders, who in other places – from France and the United Kingdom to Korea – can rely on taxpayers to cover the inevitable cost overruns.The lesson of Taiwan, where private investors have already lost most of their capital is likely fresh in the minds of potential bidders.
Responsibility for Cost Overruns: Moreover, it is not realistic to expect a private concessionaire to have sufficient capital to pay for the extent of cost overruns. If there a concessionaire is ever selected for the Rio to Campinas line, it will likely be a limited liability firm, specifically designed to shield investors from the very kind of risk that the Brazilian government expects it to shoulder.
Thus, as would likely have been the case in Florida if Governor Scott had not canceled the Tampa to St. Petersburg line, taxpayers can expect to pay for cost overruns, despite the best intentions and good faith of the Brazilian government. No private concessionaire has funds stashed away for losses like that.
Ridership and Revenue: The ridership projections for the line appear to be aggressive. This is typical of the international experience in high-speed rail projects, where ridership projections average 65 percent higher than eventual ridership, according to investment grade research by Bengt Flyvbjerg of Oxford University, Nils Bruzelius of the University of Stockholm and Werner Rottengather of the University of Karlsruhe (Megaprojects and Risk: An Anatomy of Ambition). Ridership is forecast to be greater than the widely criticized California projections.
Nonstop fares between Rio de Janeiro and São Paulo are projected at approximately US$100, similar to the fares that would be charged in California. The demand for travel at such a price is likely to be considerably less in Brazil, where the incomes are a fraction of those in California. Project documents indicate that large numbers of people will switch from other modes of transport.
Two such modes, the car and bus, are used by people needing to travel as inexpensively as possible (whether in Brazil or the United States). The project assumes a unprecedented 50 percent of car travel would be diverted to the train. Reality is likely to be a small fraction of this. The potential for attracting bus riders was also exaggerated, projecting that 65 percent of this less affluent market would pay two to three times as much as current bus fares to ride the train.
Next Steps: The government intends to restructure the bidding process and try again. Brazil had hoped that the high-speed line would be running in time for the 2014 FIFA World Cup (soccer) and then be available for the 2016 Olympics in Rio de Janeiro. Even 2016 may even prove an impossible challenge at this point.
China Daily caught the reality of the situation in commenting on the missing bidders for the Rio to Campinas high speed rail line:
....the high-speed rail dream may be one area where the government will have to assume more of the risk ... because of the long term investment and delay in making a profit.
In a nation in which 11 of the 26 states have a gross domestic product less than the cost of the train, "investment" in high speed rail might not be the top priority. It is not surprising that no private investor is willing to take the risk for the potentially enormous losses, nor should taxpayers.
Photograph: Avenida Paulista, Sao Paulo (by author)
Wendell Cox served as a member of the Amtrak Reform Council. He authored high speed rail feasibility studies in Florida (The 1997 Evaluation of the FDOT-FOX Miami-Orlando-Tampa High Speed Rail Proposal for the James Madison Institute and the 2011 Reason Foundation report, The Tampa to Orlando High Speed Rail Project: A Taxpayer Risk Assessment) and North Carolina (Should North Carolina Add More Piedmont Trains, 2011,for the John Locke Foundation) and was co-author of the Reason Foundation's The California High Speed Rail Proposal: A Due Diligence Report, with Joseph Vranich (2008).