California High-Speed Rail Sets Record—for Fastest Cost Escalation

California High-Speed Rail Sets Record—for Fastest Cost Escalation
October 12, 2011

Wendell Cox

Wendell Cox is a senior fellow of The Heartland Institute; a consultant to public and private... (read full bio)

California's high-speed rail project is setting speed records—not on tracks, but in cost escalation.

The California High Speed Rail Authority (CHSRA) recently announced the Bakersfield to Merced section, part of which will comprise the first leg of the system to be built, will cost between $10 billion and $13.9 billion. This is an increase of approximately 40 percent to 100 percent over the previous estimate of $7.1 billion—an estimate that is less than two years old.

This "flatter than Kansas" section should be the least expensive part of the system. It can only be imagined how much costs might rise where construction is more challenging, such as tunneling through the Tehachapi Mountains and for the route across the environmentally sensitive Pacheco Pass that leads to the Silicon Valley.

CHSRA officials admit the $43 billion cost estimate to complete the Los Angeles (Anaheim) to San Francisco first phase will rise substantially. This estimate is also less than two years old.

Only the most ardent supporters still believe that initial estimate. Early in the year, CARRD (Californians Advocating Responsible Rail Design) looked closely at CHSRA documentation and estimated Phase I would cost $65 billion. In May, the California Legislative Analyst's Office indicated the cost of Phase I could reach $67 billion.

Triple 2000 Projection

Alain Enthoven of Stanford University, William Grindley, formerly of the World Bank, and William Warren, a former Silicon Valley CEO, project a $66 billion price tag. They estimate costs for the full project, with extensions to San Diego and Sacramento, could be up to $116 billion. This is triple the 2000 CHSRA projection (inflation-adjusted).

Megan McArdle of The Atlantic magazine characterized the obsolete $43 billion estimate as "giddily optimistic," while Reihan Salam of National Review Online called the cost escalation "a national embarrassment." In fact, even the $43 billion represented substantial cost escalation. Over the previous decade the project cost had escalated more than 50 percent after adjustment for inflation.

Any one of the new cost projections would put the California High Speed Rail project on track for a world speed record in cost escalation. Available data indicate no transportation infrastructure project in history has experienced such a large cost increase in so little time.

In 2008, Joseph Vranich and I wrote “The California High Speed Rail Proposal: A Due Diligence Report,” for Reason Foundation. Based on the cost escalation we predicted in that report, our cost escalation estimate for Phase I would have been between $49 billion and $61 billion. Little did we expect our maximum cost escalation figure would turn out to be too conservative and be exceeded before the first shovel had been turned.

There has already been a ripple effect from California’s record cost escalation. My Reason Foundation report on the Florida high-speed rail project (“The Tampa to Orlando High Speed Rail Project: A Florida Taxpayer Assessment”) used a comparison to the first segment of the California system to produce a maximum cost overrun estimate of $3 billion for the Florida system. Had the new cost estimates been available at the time, we would have projected higher cost overruns. Gov. Rick Scott (R) early this year canceled that project to shield state taxpayers from obligations not only for cost overruns but also for operating subsidies.

Citizen Opposition

Meanwhile, the California project has encountered other difficulties. Strong community opposition has developed along the route through the generally Democratic-voting peninsula cities between San Jose and San Francisco. CHSRA had intended to expand the existing commuter rail and freight rail right-of-way from two to four tracks either elevated or in a trench. Residents fear an elevated system would be a virtual "Berlin Wall" dividing their communities, and a trench would be little better.

Vigorous opposition has also developed in the San Joaquin Valley, one of the world's leading agricultural areas.

There is also a dispute on routing, as CHSRA considers crossing the "Grapevine" parallel to Interstate 5 between Los Angeles and Bakersfield, instead of the adopted, longer route through the Antelope Valley (the Lancaster-Palmdale urban area, which is likely to have 500,000 people by 2020 when the train is supposed to begin operating).

Funding Problems

Perhaps the final blow will come from financial reality. At this point, the project has received less than $4 billion in federal grants, and a matching $4 billion in state bonds has been authorized by taxpayers. However, given the Republican control of the House of Representatives and the tight federal budget, the prospect for additional federal funding seems dim. High-speed rail was deleted from the federal budget in the agreement between Congress and the President in April. The 2012 budget passed by the House of Representatives does not include money for high-speed rail.

CHSRA is optimistic about receiving private investment to fund a major part of the construction. Yet although there is no shortage of companies looking to be paid to do work on the high-speed rail project, the room empties out when firms are asked to risk billions of their own capital on it. CHSRA's documents indicate investors are likely to require revenue guarantees, which would appear to violate provisions of the state law that placed the bond issue on the ballot in 2008.

Wendell Cox (demographia@gmail.com) is a senior fellow of The Heartland Institute and principal of Wendell Cox Consultancy, an international public policy firm. Article used with permission from NewGeography.com.


Wendell Cox

Wendell Cox is a senior fellow of The Heartland Institute; a consultant to public and private... (read full bio)