Is HSR a Cargo Cult for California?   February 24th, 2011

Editorial by Noel T. Braymer

During and shortly after World War II poor and isolated islanders in the South Pacific believed that with prayers and crude homemade airstrips they could attract planes to land and deliver “cargo”. These people were hoping to get some of the vast material wealth used to fight World War II to their poor little islands. Building a 45 plus billion dollar High Speed Rail service in California will require finding roughly 30 billion more dollars as yet unfunded to finish.

One of the potential sources of funding would be loans from state owned banks from countries that are interested in building and operating future HSR service in California. There is an ongoing game being played as delegations from China and Japan visit the state representing groups that want the contract for HSR in California. Other potential bidders could come from France, German and Korea with their state owned development banks.
In the news are stories that Denver billionaire and former owner of the Denver & Rio Grande and Southern Pacific railroads Philip Anschutz is willing to spend up to a billion dollars to build a new football stadium in downtown Los Angeles to lure a NFL team. He already owns the Los Angeles Kings Hockey team as well as other sport teams in other cities and is responsible for the Stables Center where the Kings, Clippers and Lakers play. The Staple Center would be next to this new stadium which will also be served by the Blue and Expo Light Rail Lines. Of course Mr. Anschultz has conditions to build this new stadium and his goal is to make money. This is just the latest of expensive proposed or new sports stadiums built in the last 20 years or so. What these projects have in common is sport teams are generally the plaything of very rich men. These new stadiums are very profitable for the team owners because of subsidies they win from local politicians eager to have a professional team in their city. In Los Angles the city would be expected to pay for the demolition of part of the Convention Center which is still unpaid for to make way for this new stadium.  In addition much of the revenue for sports comes from mostly tax deductible spending by large corporations for naming rights to stadiums, private boxes and season tickets. But the real money is the commercial development next to the stadium which is heavily subsidized by local government but the profits go to the team owners who pay little or no taxes.
So it remains to be seen what conditions the state owned banks will want to lend billions of dollars to finish HSR in California. Clearly a Chinese Bank will want Chinese businesses to build and run the new service; a Japanese bank will want Japanese businesses to do the same and so on. The operation of the future rail service will quite likely more than cover expenses but what about capital? For example many airlines cover their expenses and then some. But as an industry as a whole, airlines have never made money. Air service depends on government spending to keep running. Airports for example often don’t pay property taxes because they are publicly owned. The land taken off the tax rolls by publicly owned airports and the depressed value of the land around the airport costs billions of dollars of potential tax revenue. That would be just one example of a possible tax subsidy for air service. The counter argument is air service stimulates business activity and creates jobs and income. What is clear from the history of the railroads is the real money didn’t come from running trains. It came from the land development for land owned by the railroads that rail traffic opened up for development. Park Avenue in New York City was created and made money for the New York Central when it build Grand Central Terminal and put its tracks under Park Avenue and then redeveloped the land.
We are already seeing in the San Joaquin Valley cities fighting over the future maintenance facility for their town. This is not unlike sport team owners playing cities against each other to win the best deal for themselves before choosing to stay or move their team. No doubt we will see more of this as the HSR project is built. What could motivate a nation to lend money to build rail service in California? Even if the project loses money, it would create work for that nation’s local businesses and subsidizing those companies isn’t seen as a problem. This is often seen in poor countries where rich countries lend them money for expensive capital projects on the condition that companies of the lending county get the construction contracts. This is why poor counties often owe so much debt. There is also another motive in that having a country deeply in debt gives the county lending the money leverage over the debtor country. The reality that many people don’t want to face is that transportation is expensive but critical for society. Hard choices have to be made to build the most efficient and cost effective transportation system. Well designed High Speed Rail integrated with airports, and other rail services can cheaply carry large numbers of passenger in the State of California and make a major positive impact on the state’s economy. But the service must be good to get the ridership to make HSR service economical. But there is no such thing as free money.
This entry was posted on Thursday, February 24th, 2011 at 12:54 PM and is filed under Editorials.