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    China Business
     Mar 3, 2012

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California poses rail risk for China
By Peter Lee

The California High Speed Rail Authority (CHRSA) would be happy to consider investment by the People's Republic of China's sovereign wealth fund, China Investment Corporation (CIC), in the state's proposed high-speed rail link between Los Angeles and San Francisco, China Daily reported last month. [1]

The authority's chief executive, Roelof van Ark, also indicated a willingness to consider procurement of Chinese high-speed rail equipment for the project.

The CHRSA is facing gigantic funding problems and its interest in Chinese involvement is apparently more than idle chatter. The Christian Science Monitor reported that California high-speed rail, along with Hollywood cinema and NBA basketball, was on the


menu when Xi Jinping, much touted as the next PRC president, visited Los Angeles in early February:
Los Angeles Mayor Antonio Villaraigosa and California Governor Jerry Brown want to talk to Xi about Chinese investment in high-speed rail, which has come under scrutiny and has lost some public support here in recent weeks with the release of several studies suggesting major cost overruns. [2]
Chinese corporations would love to get into the US infrastructure business. China's State Construction Engineering Corporation has a subsidiary, China Construction America, in New York City. It has US$2 billion to invest and apparently sees US stinginess in the matter of infrastructure investment as a business opportunity:
Joe Catapano, a project manager with China Construction America, said the expertise and capital Chinese companies can provide are important.

"The key issue is money. It doesn't seem the United States government is willing to spend money (on building infrastructure)," said Catapano, who has 12 years of engineering experience in New York and California.

"High-speed rail is definitely something we can learn from China. We don't have any of that in the US, anywhere," he added. [3]
In 2010, China seemed ready to make a high profile play in Californian high-speed rail.

The PRC was basking in largely favorable coverage of its work fabricating enormous steel modules for the new Bay Bridge connecting San Francisco and Oakland. Only China, it seemed, had the capability to undertake the massive project. Caltrans, the state road authority, estimated that outsourcing the modules to China had saved $400 million on the $7.2 billion bridge, one of the most expensive structures ever built. [4]

In 2010, Governor Schwarzenegger visited the bridge fabrication factory in Zhuhai to express the state's appreciation, and toured China, Japan, and South Korea to investigate high-speed rail. The Chinese told Bloomberg:
China can offer a "complete package," including financing, as it competes to build a high-speed railway in California costing more than $40 billion, according to the nation's railway ministry.

"What other nations don't have, we have," He Huawu, the ministry's chief engineer, said in a Sept. 14 interview in Beijing. "What they have, we have better." He declined to elaborate further on how much financing may be available. ...
"The deal would be of great symbolic significance to China as it allows the nation to export technological knowhow to a country as developed as the U.S.," said Wang Sheng, an analyst at Shenyin Wanguo Securities Co. from Shanghai. "China is fully able to afford the financing." [5]
In January 2011, a US rail specialist told McClatchy:
California and America are squarely in China's sights, said Christopher Barkan, director of the Rail Transportation and Engineering Center at the University of Illinois at Urbana-Champaign.

On a tour of China's largest rail manufacturer last summer, Barkan met with a Ministry of Railways official who prominently displayed a map of the United States on his office wall.

"They are extremely interested in the U.S.," Barkan said. "We're the largest untapped market for high-speed rail in the world." [6]
Despite the convergence of US need and Chinese desire, however, China may find itself chugging steadily away from the California opportunity instead of racing toward it. The dreaded term "boondoggle" has been invoked, both by mass transit supporters and critics, to describe the gigantic project. [7]

Its backers appear to have adopted the strategy of "build it and they will fund," ie, get the project started somehow and rely on a combination of government optimism, inertia, and embarrassment to pry loose the funds needed to keep the project on track.

California voters approved a bond issue for high-speed rail in 2008 based on projections of costs and ridership that, in retrospect, appear extremely rosy - $9 billion in bonds was approved. The Obama administration agreed to provide $3 billion in matching funds, for a total of about $12 billion potentially available so far - if the California state legislature votes to actually issue the bonds approved under the referendum. The current projection for construction costs is $98 billion, up from the $45 million bruited about at the time of the bond referendum, leaving a rather hefty shortfall.

In order to make the economic case for the higher level of expenditure, CHSRA's consultant, Parsons Brinckerhoff, made the assumption that the rail line would carry an astounding 116 million passengers per year when completed - three or four times what is actually expected. Parsons Brinckerhoff then calculated that California's freeways and airports would need $171 billion in capital expenditures to handle this level of traffic if the rail line was not built. Voila! $98 billion for the high-speed rail was actually a tremendous bargain!

Of equal if not greater concern is the prospect that the line will operate in the red, and the state and/or federal government will be on the hook for the shortfall in operating costs if the hoped-for ridership does not materialize.

In 2008, the CHSRA put out a questionnaire, a "Request for Expressions of Interest" in order to take the pulse of potential investors, lenders, vendors, and owner-operators. An interesting and unnerving finding was that many potential partners put little stock in traffic projections, preferring something called "availability payments":
Although almost half of RFEI respondents expressed little desire to accept compensation based on future HST ridership ... a majority of respondents communicated that they would be willing to subject a portion of their payment to performance guarantees ... Concessionaires would be given periodic payments based solely on the condition and/or performance of the facility. [8]
Under this scenario, if the operators achieved their availability targets but ridership failed to generate sufficient revenue to cover the "availability payments", the HSRA would have to make up the difference. 

Continued 1 2  

High-speed rail crash sets reform in motion (Aug 02, '11)

China has tool-box to help head-off high-speed crash (May 03, '11)

China, Thailand foster high-speed link (Oct 22, '10)

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(24 hours to 11:59pm ET, Mar 1, 2012)


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