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Monthly Archives: February 2011
There is discussion of a bill to authorize a new inter-local agency along the Tampa to Orlando high speed rail corridor to be the recipient of federal funding for the project. It will be important that the state not be involved in any such agreement. The new agency should not be a "sub-recipient." If there is to be a local agency sponsored project, the money needs to be granted from the federal government directly, not through the state.
If Florida is a party to a grant agreement, Florida taxpayers could be liable for cost overruns, operating subsidies and return the federal funding.
There is discussion of resurrecting the Tampa to Orlando high speed rail line, on the assumption that this can be accomplished without creating any liability for taxpayers. As this note makes clear, there are substantial hurdles that make achieving this goal nearly impossible.
The starting point must be a guarantee that neither state nor local taxpayers will have any liability, under any circumstances, for increases in capital costs, for operating subsidies or to pay back the federal grant, regardless of whether such circumstances are or could have been foreseen.
This could prove to be difficult, if not impossible, and the minimum requirements of such a guarantee are described below.
(1) Capital cost increases: These will ultimately be the responsibility of taxpayers. It is claimed that the project will cost $2.7 billion. Based upon the international experience, this is a fantasy and cost increases could raise the cost to as much as $5.7 billion (a $3.0 billion increase). There are claims that the private builder/operator would pay any such cost increases. However, no private consortium will have the financial capacity to pay for any such cost increase, nor has any in the past.
(2) Promoters claim that the project will pay for its operating expenses. Few rail systems in the world accomplish this and operating subsidies are likely. Operating subsidies will ultimately be the responsibility of taxpayers. Proponents claim that the private sector will pay any operating subsidies. However, the operating subsidies could become too large for the private consortium to pay.
(3) Any Florida government (state or local) accepting the federal funding would have to guarantee a certain level of service for at least 20 years and would have to pay back the federal government if that level of service is not maintained. This is no idle threat. Florida is already paying millions in subsidies annually for higher service levels on Tri-Rail (Miami) area to avoid a demand to repay one-quarter billion dollars to the federal government.
It is inconceivable for the private company (a company created by other companies, and having limited liability) to have sufficient resources to pay the potential extent of these obligations (at least under normal operating procedures). The private consortium could become insolvent, leaving taxpayers of the government entity accepting the federal grant with the obligations.
The Problem with Private Company Assumption of Liabilities: Under normal circumstances, the companies "partnering" in a consortium have no liability beyond their investment. A consortium could become insolvent and the parent companies would not be required to meet the obligations, leaving taxpayers with substantial obligations.
Protecting the Taxpayers: Thus, the private consortium accepting the liability must take the following actions to protect the taxpayers.
1. Performance Bond: The private companies forming the consortium must post a performance bond in the amount of the highest likely capital cost increase ($3 billion) as well as potential operating subsidies (an amount to be determined) for the period of obligation under the federal grant. This would, in effect, be an insurance policy to guarantee payment by a financially strong third party institution in the event that the private consortium does not pay for all cost increases.
2. Unlimited Corporate Guarantees: The private companies forming the consortium must provide their unlimited corporate financial guarantees for the obligations of the private consortium, including cost overruns, operating subsidies and any eventual requirement to pay back the federal grant.
In view of the confidence of promoters that there will be no cost overruns, these requirements should be no barrier to the project.
It is incorrect to claim that the private bidder will pay any cost overrun on the Tampa to Orlando high speed rail line. In fact, gross cost escalation has been typical of similar projects and no private company will be prepared to pay the extent of overruns that have happened elsewhere.
The reality is that whatever local government entity signs the federal grant contract will be finally responsible for any cost overruns, the requirement to run a specified level of service and any operating subsidies. There is no avoiding this obligation once the grant is accepted. Governor Scott has saved Florida taxpayers a potential liability that could reach well into the billions.
Lakeland and Polk County taxpayers, as well as those from the Orlando and Tampa areas need to understand that the huge liability from which Florida taxpayers have been saved by Governor Scott’s action will fall much more intensively on them. Instead of the entire state paying, just local taxpayers will be on the hook.
In the likely event that this happens, local taxpayers will have no more than expressions of regret from the responsible officials (and perhaps The Ledger).
Author, The Tampa to Orlando High Speed Rail Project: Florida Taxpayer Risk Assessment
So why is Obama still so determined to push the high-speed boondoggle? Largely it’s a deadly combination of theology and money. Powerful rail construction interests, notably the German giant Siemens, are spreading cash like mustard on a bratwurst to promote the scheme. Add to that construction unions and the ever voracious investment banks who would love to pocket fees for arranging to sell the bonds and you have interests capable of influencing either party.
From the article above…..”A group of Congressional officials, including Nelson and U.S. Reps Kathy Castor, D-Tampa and John Mica, R-Winter Park, say they believe these companies would follow through as some firms have indicated and chip in the $287 million required for the federal match amount. They also have said a contract could be fashioned to make the winning bidder responsible for financial shortfalls or overruns.”
The point is that the taxpayer obligation could exceed $3 billion… the $280 million is an illusion.
No sooner had Florida Gov. Rick Scott rejected federal funding for the Tampa to Orlando high-speed rail line, than proponents both in Washington and Tallahassee set about to find ways to circumvent his decision. While an approach has not been finalized, a frequently suggested alternative is to grant the federal money to a local government, such as a city or county or even to a transit agency.
Eliminating State Taxpayer Risks, Creating Local? In an announcing his decision, Governor Scott cited the substantial risks to Florida taxpayers from cost overruns, the ongoing obligation under the federal grant to subsidize operations and the fact that under certain circumstances Florida might even have to repay the $2.4 billion in federal grants. Any local government accepting the federal money would expose itself to the financial risks from which Florida taxpayers have been exempted by Governor Scott’s action.
None of these risks is an idle threat.
(1) Capital Cost Overruns: Based upon the international experience, the eventual construction cost overruns for the Tampa to Orlando high-speed rail line could easily run to $3 billion, more than doubling the price of the project (Note on Extent of Taxpayer Liability, below). In light of the recently reported 50 percent increase in California high-speed rail construction costs, even the $3 billion estimate could turn out to be conservative. The problem is that any local federal grant recipient (city, county or transit district) would be responsible for these cost overruns.
(2) Ongoing Operating Subsidies: The ridership projections for the Tampa to Orlando high-speed rail line are exceedingly optimistic. This could well lead to a situation in which substantial subsidies are necessary to operate the trains, despite claims of proponents to the contrary. These subsidies would be the responsibility of any city, county or transit district that becomes a grant recipient.
(3) Federal Pay-Back: If, for any reason, the eventual high-speed rail service levels are not sufficiently high because of lower than projected ridership or if service is canceled, any city, county or transit district could be required to return the $2.4 billion in federal grants. Florida is already paying millions annually for a similar "transgression." In 2009, service reductions on the Tri-Rail Commuter Rail System in the Miami area led the Obama Administration’s Department of Transportation to demand repayment of one quarter billion dollars in grants. Tri-Rail was saved from this obligation only by a multimillion dollar Tallahassee bailout. Proponents have claimed that this rail obligation could be negotiated away for high-speed rail. Why was the Tri-Rail obligation not negotiated away in 2009?
By rejecting the federal funding, Gov. Scott has inoculated Florida taxpayers against these risks.
However, there would be no inoculation for any local jurisdiction whose commissioners or city council accepted the expensive "gift" of federal funding for the high speed rail line. Their taxpayers would have to pay. The very financial viability of any such jurisdiction could be at risk.
The Risk Could Revert to State Taxpayers: Eventually, the risk could be again be visited upon state taxpayers as a local government facing virtual bankruptcy would doubtless seek a bailout in Tallahassee, repeating the Tri-Rail experience, though much more expensively. Moreover, canceling a half built project, which might be tempting as costs escalate above projections, would simply not be viable. The political pressure to complete the project, at whatever cost, could prove to be overwhelming.
Delusions About Private Responsibility for Cost Overruns: Some proponents claim that these huge obligations can be somehow transferred to the private builder/operator that is selected for the project. Nothing like this has ever happened in public-private partnerships around the world, and for good reason. Companies do not stash away billions of dollars for cost overruns.
Further, the winning bidder will be a consortium of other companies, established with limited liability by larger companies. The consortium would abandon a project it could not afford sooner rather than later. Any bankruptcy of the builder/operator would be limited to the consortium and would not extend to the parent companies, leaving the local taxpayers to pay.
There is no escaping the fact that the taxpayers of any city or county accepting the federal money would be providing financial guarantees to an international infrastructure industry that has left a "train" of huge and unanticipated financial obligations around the world in its wake (Note on Cost Escalation, below).
Believing in Santa Claus? Public officials, and most recently Orlando Mayor Teresa Jacobs, have indicated support for high-speed rail if private and federal funds pay for it, and state and local taxpayers aren’t exposed to liability. This is a wise position, but untenable. Expect Santa Claus to arrive in the midst of a Florida summer before that, with a sleigh full of billions.
Note on Extent of Taxpayer Liability: This $3 billion is in addition to the already committed $280 million of taxpayer funding. Proponents of the high-speed rail line have assumed that the $280 million would be the limit of taxpayer obligations. As this article shows, the $280 million could be a "drop in the bucket" compared to the likely eventual taxpayer liability.
Note on Cost Escalation: An international team of researchers led by Oxford University Professor Bent Flyvbjerg has found in Megaprojects and Risks: An Anatomy of Ambitionthat similar projects routinely cost far more than taxpayers and other funders are told. They also attract fewer riders and generate less revenue (which can require operating subsidies). The Flyvbjerg team implies that these "lowball" (our term) projections are not accidental but all are the result of "strategic misrepresentation," (their term) which project promoters employ to increase the potential that projects will be approved. The researchers also refer to "strategic misrepresentation" as "lying," which is an exceedingly strong term for academic research and is reflective of the strength of the conclusions.