Recently, the US Department of Transportation indefinitely suspended a federal loan application for the XpressWest high-speed rail train from Victorville California to Las Vegas. The only public rationale for the decision was contained in a letter from former Secretary of Transportation Ray LaHood, who cited “buy-America provisions.” Important contents of the letter were not made public (presumably to protect confidential commercial information), but Secretary LaHood indicated that “serious issues” and “significant uncertainties” surrounding the project forced him to suspend “further consideration” of the loan request.
US Senate Majority Leader Harry Reid of Nevada hopes to resurrect the loan application. However even he is reported to have noted that the White House is “worried about XpressWest obtaining the remaining $1.5-billion in private financing needed to get the train running.”
That's just the beginning of the private investment concern. Current reports indicate that the Victorville to Las Vegas line will cost $7 billion to construct, $5.5 billion of which would be provided through a low interest 35 year loan from federal taxpayers, the initial payment on which would be deferred for six years.
Based upon the experience of high-speed rail programs around the world, it seems virtually inevitable that the Victorville to Las Vegas high-speed rail line would cost much more than $7 billion. All of those additional funds would be the responsibility of private investors, not federal taxpayers.
International Record of Cost Escalation
The problem is amply illustrated by European research on world infrastructure costs. Oxford professor Bent Flyvbjerg, along with Nils Bruzelius (a Swedish transport consultant) and Werner Rottenberg (University of Karlsruhe and former president of the prestigious World Conference on Transport Research) reviewed 80 years of infrastructure projects and found initial cost estimates to routinely be low (Megaprojects and Risk: An Anatomy of Ambition). They estimated that rail project costs escalation an average 40 percent and that 80 percent cost overruns are not unusual in passenger only rail (Note 1).
If the Victorville to Los Angeles high-speed rail train would escalate in costs at the average indicated by the research, the cost would rise to $9.8 billion, increasing the private investment share required from $1.5 billion to $4.3 billion. If the cost escalation were to be at the 80% level, the Victorville to Los Angeles high-speed rail train would cost $12.6 billion to build, raising the private investment requirement to $7.1 billion.
Britain’s Escalating Costs
The British, who continue to debate building a high speed rail line from London to just north of Birmingham already seen costs rise by nearly 1/3, while experts are predicting the cost will eventually escalate 120 percent or more.
Obviously, cost escalation at these levels would require additional private capital.
Nearby California’s Unprecedented High Speed Rail Cost Escalation
The actual experience of the nearby California high-speed rail line indicates that the results could be substantially worse than indicated in the academic research. Before the California High Speed Rail Authority abandoned plans to build a genuine high-speed rail line from Los Angeles to San Francisco, costs approximately tripled from the original estimates (Note 2).
A similar tripling of cost escalation on the Victorville to Las Vegas line would take the cost to $21 billion. This would require private capital of $22.5 billion – 15 times as much money as the current $1.5 billion that is apparently difficult to raise.
Serious Issues and Significant Uncertainties
Meanwhile, editorialists are raising “serious issues” and “significant uncertainties” about the project.
The Washington Post: The editorial board of the Washington Post said in a July 18 editorial (entitled “Good riddance to XpressWest, the high-speed boondoogle”) of the XpressWest project: “We’ve seen some bad policy ideas but not many more awful …” The Post continued “What XpressWest struggled to explain was why taxpayers should bet on a proposition that private investors apparently found too risky: hordes of travelers driving to Victorville, parking their cars and then boarding the train for an 80-minute ride to Vegas — as opposed to driving the whole way, flying or taking “My Party Ride,” a limo-like bus trip for up to 30 passengers at $99 each, including food and drinks.” The Post expressed relief that “common sense has prevailed,” though bemoaned the fact that “multiple federal and state agencies had given environmental and regulatory approvals.”
Las Vegas Review-Journal: The hometown metropolitan daily expressed similar concerns. In a July 18 editorial, the Review-Journal said: “Like most recent rail projects, XpressWest ridership projections were overly optimistic. The train certainly appeared capable of meeting its operational costs, but the idea that it could make good on repaying $5.5 billion in debt on top of that was a stretch. Las Vegas Monorail, anyone?” (Note 3).
The editorial continued: “The prospect of default on a train loan is too much to ask from a federal government already $17 trillion in debt,” adding, if the federal government “ is serious about “investing” those billions, spend them on improvements to the nation’s interstate system, which carries both passenger and commercial traffic and is in constant use, 24-7. Interstate 15, which runs between Los Angeles and Las Vegas and is heavily congested, could use the money. So could the planned Interstate 11 between Las Vegas and Phoenix.”
In addition, echoing my, “taxpayer risk assessment,” published by the Reason Foundation, had shown that the cost of expanding Interstate 15 to six lanes between Victorville and the California border would have been a fraction of the high speed rail costs, and would have been largely paid by highway user fees paid by drivers and truckers, and would reduce both traffic congestion, greenhouse gas emissions and energy consumption.
The editorial concluded: “Improved interstates would speed commerce, create permanent jobs and have billions upon billions of dollars in long-term economic impact across many states. That would be a return on investment. A tourist train on a high-speed trip to bankruptcy? No so much.”
Where are the Venture Capitalists?
There is no shortage of venture capital in the United States.The apparently difficulty being encountered in raising sufficient private capital for the project demonstrates that it is even more risky than the standard venture capital projects. The risks for private investors are huge at the $1.5 billion. The risks are even greater at double that number, which has to be considered among the more optimistic potential outcomes.
Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.
Note 1: Flyvbjerg et al reviewed 80 years of infrastructure projects found consistent low-balling of cost estimates. They characterize the process as "strategic misrepresentation," which they shorten to "lying," in unusually frank language.
Note 2: In response to the public outcry, the California High Speed Rail Authority substituted a somewhat less expensive plan that requires high-speed rail to mix with conventional commuter rail trains in San Francisco and Los Angeles operations.
Note 3: The Las Vegas Monorail was similarly promoted as sufficiently viable to pay its operating and capital costs in the early 2000s. My 2000 analysis projected that ridership would be well below forecast and that the Las Vegas Monorail would eventually default on its debt. That occurred.