Statement on the
FDOT-FOX HIGH SPEED RAIL PROPOSAL

Submitted to the
Florida Senate Workshop
Orlando

By Wendell Cox,
Principal, Wendell Cox Consultancy
October 13, 1998

The 1997 James Madison Institute report concluded that the proposed Miami-Orlando-Tampa high speed rail line would carry many fewer passengers than projected, cost much more than projected and expose the taxpayers of the state to enormous financial exposure.

I. TAXPAYER RISK: CAPITAL COST OVERRUNS ARE LIKELY

Florida taxpayers face a substantial risk from capital cost overruns.

A. National Academy of Sciences research: Large capital cost overruns: The James Madison Institute report estimated that capital cost overruns on the project were likely to be in the range of 15 percent to 115 percent (65 percent "Realistic case"). A recent study published by the National Academy of Sciences notes that large transportation infrastructure costs are commonly 50 to 100 percent or more above projections, confirming the reasonableness of the James Madison Institute estimate.

B. A large capital cost overrun is projected. A capital cost overrun of $1.4 billion to $11.2 billion ($6.3 billion, "Realistic Case") is projected in the James Madison Institute report. The promoters claim that taxpayer risks for cost overruns can be eliminated through performance guarantees, a pledge of corporate assets and other mechanisms designed to be bankruptcy proof ("Florida's Investment in a High Speed Rail System," Briefing Document Compiled by Senate Transportation Committee Staff and Florida Department of Transportation). Performance guarantees and other mechanisms designed to be bankruptcy proof will do nothing to protect Florida taxpayers from the much greater risk of large operating deficits (See #2, below).

C. Iron-clad capital cost guarantees are required. The taxpayers should be protected against capital cost overruns, with "iron-clad" guarantees that are bankruptcy proof. Possible approaches include performance bonds that would guarantee the agreed upon price, or a pledge of the assets of the parent companies of the sponsors. The FOX sponsors (subsidiary companies) do not have sufficient resources to provide sufficiently reliable financial guarantees.

II. TAXPAYER RISK: HIGHER OPERATING DEFICITS

Operating deficits would be the combined result of operating cost overruns and shortfalls in passenger revenue. Lower revenue would be the result of lower than projected ridership. There are a number of indications that the ridership and revenue projections are overly optimistic:

A. The USDOT Federal Railroad Administration forecasts are considerably lower than the new forecasts: Revenue projections by the Federal Railroad Administration (FRA) for virtually the same route are at least 35 percent lower than the FOX projections. A forecasting error of this magnitude could require $6.5 billion to $8.5 billion in additional Florida taxes.

B. Proposed high speed rail fares will need to be reduced to compete with air fares: To compete for airline passengers, high speed rail will need to charge fares that are no higher than air fares. Airlines routinely reduce fares to compete with low cost carriers, and there is no reason to believe that high speed rail would be able to charge lower fares than the airlines. Currently air fares are lower than projected high speed rail fares, and could fall to at least 32 percent below in response to high speed rail competition. Lowering fares to equal air fares could require up to $6 billion in additional Florida taxes.

C. The connecting passenger airline market potential appears to be nil. The high speed rail promoters assume that nearly 1.5 million annual connecting ("air connect") passengers will be supplied by airlines operating in Florida markets. The promoters assume that airlines could reduce operating losses by using high speed rail for connecting passengers, instead of short distance airline flights. But it appears that airlines are earning profits on short distance flights, and they are making major capital investments in more efficient aircraft to increase their operating margins on such services. Further, the promoters appear to have overestimated the size of the air connect market. The air connect projection was considered questionable by the Independent View of Florida's High Speed Rail Ridership Forecasts by Wilbur Smith Associates. There seems to be no realistic prospect for high speed rail to attract a material portion of the "air connect" market. This apparent invalid forecasting assumption incorrectly raises high speed rail revenues by $7 billion, which would have to be made up by Florida taxpayers.

D. Europe: Lower ridership and higher costs: The two London-Paris-Brussels Eurostar high speed rail trains carry fewer riders than are projected by the Florida promoters. The Eurostar trains serve a market three times larger than the projections for the proposed Florida route. Both automobile costs and air fares are higher than high speed rail fares.

E. Auto users will have no financial incentive to use high speed rail. Depending on the size and nature of automobile travel, high speed rail will cost from 1.5 to 25 times as much as driving an automobile over the same route. To attract a significant number of automobile users would require far lower fares.

F. National Academy of Sciences research: Large operating deficits: The Academy of Sciences report also found over-projection of ridership in major projects, on the order of 20 to 60 percent and that operating costs are often higher than projected.

G. Large operating deficits are projected. The James Madison Institute report projected unplanned operating deficits ranging from $9.5 billion to $24 billion ($17 billion "Realistic Case"). The projected operating deficit is considerably larger than the projected capital cost overrun (See #1, above). There are no plans to require a performance guarantee or pledge of parent company assets to protect Florida taxpayers from risk. The James Madison Institute projection is similar to forecasting errors found in the National Academy of Sciences research.

III. AIR AND HIGHWAY CONGESTION WILL REMAIN UNCHANGED

Despite the claims of promoters, air and highway congestion will be virtually the same regardless of whether high speed rail is built:

A. High speed rail would not reduce air traffic congestion. All airports in the Miami-Orlando-Tampa corridor are expanding or intend to expand to accommodate rising demand. Even if the optimistic FOX projections were accurate, airline operations would be reduced by only two percent.

B. High speed rail would not reduce traffic congestion. FOX would remove so few automobiles from highways that traffic congestion would remain continue to grow. Diversion from automobiles would average three percent of the traffic in a single highway lane. High speed rail would not reduce the demand for highway expansion.

IV. THE RISK TO FLORIDA TAXPAYERS: $11 TO $37 BILLION EXTRA

Once the bonds are issued, the taxpayers will have little or no financial control, because of the state's covenant to complete and operate the high speed rail system.

A. James Madison Institute: Substantial Deficits Projected for FOX: At these rates --- all below or within the range suggested by the National Academy of Sciences research, Florida taxpayers would be required to pay an additional $11 billion in subsidies. In the worst case, additional taxpayer subsidies of more than $37 billion could be required --- a range similar to that suggested by application of the National Academy of Sciences research findings.

B. Similarity to previous forecasting errors: The optimistic ridership and cost forecasts prepared by high speed rail promoters are reminiscent of the major forecasting errors in previous projects, such as Miami's Metrorail and Jacksonville's "Sky-Express" and South Florida's "Tri-Rail." It is unlikely that the high speed rail project will generate enough revenue to pay its debt beyond its third year of operation, much less earn a profit.

C. Florida taxpayers: shouldering the risk: In the final analysis, the taxpayers of Florida will take the entire risk for both over projection of revenues as well as under projection of capital and operating costs.

(1) The high speed rail developers will be liable only to the extent of their investment (less than 5 percent of project capital and debt service cost).

(2) Private bondholders will be protected by a state guaranteed "covenant to complete and operate," which will have the same effect as the full faith and credit of the state of Florida. While the promoters claim that the public will be protected by "performance bonds," there is virtually no prospect of obtaining performance bonds of sufficient value to protect the public.

(3) The federal funding will either be in the form of loans or loan (bond) guarantees --- payable by the state of Florida. Any shortfall of revenues relative to expenses will be the responsibility of the state and its taxpayers.

Sources:

Evaluation of the FDOT-FOX Miami-Orlando-Tampa High Speed Rail Proposal (4-97)
            (James Madison Institute Policy Report #21)
Addendum to James Madison Institute Policy Report #21 (11-96)
Draft Evaluation of the Florida High Speed Rail Project Draft Ridership Study (3-98)