April 27th, 2011 
admin America’s High Speed Rail: Another Mega-Project Misstep in the Making
by David Fessler, Investment U Research
Wednesday, April 27, 2011
Winston Churchill, the Prime Minister of Fantastic Britain during World War II, was highly regarded as one of the fantastic world leaders of the day.
Most people don’t realize that Churchill was “half American.” His father was a charismatic English politician, Lord Randolph Churchill, but his mother was a consummate American socialite named Jennie Jerome.
So it’s not out of the question that he would have an opinion or two about America. Perhaps his most well-known quote about the United States is this one: “The United States will always do the right thing… when all other possibilities have been exhausted.”
With gasoline prices heading skyward, I reckon the United States is finally getting around to “doing the right thing” with regards to natural gas. I wrote about it here.
President Obama recently spoke of a new era of “doing huge things.” He spoke of wind farms and high-speed rails, otherwise known as bullet trains.
High-speed rail is certainly a “huge thing,” in every sense of the word. It’s just not the “right thing.” You’ll see why in a moment.
Fortunately, the President had to agree to take an axe to some of his pet projects, and the $ 53 billion he had earmarked for high-speed rail was one of them.
Investing in high-speed rail would certainly make construction jobs… likely in the tens of thousands. Certainly that’s what the President is pointing to, and counting on, when he talks about it. It’s what he isn’t talking about that’s the problem.
Mega-Projects: Mega-Cost Overruns
Mega-projects like the space shuttle, the Chunnel and Boston’s Huge Dig, to name a few, have all gone way over budget. Politicians, both here in the United States and elsewhere in the world, get so excited about building huge “stuff” that they vastly underestimate the cost.
They get caught up in the emotion of empire building, and it usually ends terribly for taxpayers.
Take the Chunnel for example: It exceeded original cost estimates by a mere 80 percent. Boston’s Huge Dig, a center-city tunnel upgrade, went 200 percent over budget and took more than twice the original estimated time to construct.
It turns out that on average, most mega-projects exceed initial cost estimates by 50 to 100 percent. That extra cost burden is borne by taxpayers at local, state and federal levels.
Ok, it’s Done: Where Are All the Users?
There’s another factor at work here as well: Britain’s Humber Bridge, a $ 250-million project, only receives 25 percent of its projected traffic. Why? It’s situated along a lightly traveled route, and because of the high tolls, motorists simply avoid using it.
In general, public usage of mega-projects is vastly overestimated. But nowhere, according to Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter, authors of Megaprojects and Risk: An Anatomy of Ambition, is that more right than in both high-speed and urban rail systems.
Rail systems seem to have an especially dismal record when it comes to usage when measured against original projected use and cost estimates. Japan’s system needed financial rescuing in 1987, and Taiwan’s line needed help in 2009.
But perhaps the largest mega-mess is China’s $ 300-billion high-speed rail project. It’s $ 271 billion in debt, and it’s been fraught with corruption and graft from the get-go.
According to a recent article in The Washington Post, the interest on the debt service in 2011 alone will total $ 27.7 billion, far exceeding ticket sales.
The Chinese system is saddled with numerous mechanical issues and shoddy construction. As a result, the trains are forced to run at slower speeds, defeating the purpose of having them in the first place.
The real problem, according to the authors of Megaprojects, lies in the toxic mixture of politicians, so-called “experts” and private-sector construction and engineering companies:
“It is simple to find motives for producing deceptive forecasts of costs and benefits. Politicians may have a ‘monument complex,’ engineers like to build things, and local officials sometimes have the mentality of empire-builders.
“In addition, when a project goes forward, it makes work for engineers and construction firms, and many stakeholders make money.”
There’s no question that infrastructure projects are crucial to keeping a country’s economic engine humming along. But lies, deception, intentionally underestimating costs and overestimating public usage is a real problem.
Funding political boondoggles also has the effect that some really necessary infrastructure projects fall to the wayside, and never get built.
What to Do With High Speed Rail? The Answer Couldn’t Be More Simple
According to the authors, this one included, that’s an simple one: Give the voters a say in what infrastructure mega-projects should or shouldn’t be funded.
Obama has been quoted as saying: “Within 25 years, our goal is to give 80 percent of Americans access to high-speed rail.” Is that a excellent thought? There’s a really simple way to find out, and it won’t cost the government a nickel.
Place a national referendum on the ballot, and let the American voting public choose. They know what’s needed, and have no misconceptions about who’s going to have to pay for it.
The government should forget about high-speed passenger rail. Instead, it should focus on facilitating our freight rail system here in the United States. With the ability to haul up to 500 tons per mile per gallon of diesel fuel, freight trains represent a far more economical means of transport than tractor-trailer trucks.
Having said that, the nations largest freight haulers, CSX Corporation (NYSE: CSX), Union Pacific Corporation (NYSE: UNP), Norfolk Southern Corporation (NYSE: NSC) and Warren Buffet’s Burlington Northern, are all going fantastic guns already, and don’t really require any help from the government.
It’s just one more indication that private enterprise typically trumps government when it comes to getting things done.
Excellent investing,
David Fessler
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