Friday, December 07, 2012

Why Warren Buffett didn't invest in high-speed rail


Even assuming that California will ever have enough money to build the high-speed rail system---which is doubtful---it can't legally get any subsidy from the government to operate it once it's built, even though every high-speed rail system in the world is subsidized:

“High-speed rail is good for society and it’s good for the environment, but it’s not a profitable business,” said Mr. Barrón of the International Union of Railways. He reckons that only two routes in the world---between Tokyo and Osaka, and between Paris and Lyon, France---have broken even (NY Times, May 29, 2009).

The authorizing legislation (AB3034) for California's high-speed rail system requires that the system get no operating subsidy: see Section 2704.08 (c) (2) (J) ("The planned passenger service by the authority in the corridor or usable segment thereof will not require a local, state, or federal operating subsidy") and Section 2704.08 (d) (2) (D) ("the planned passenger train service to be provided by the authority, or pursuant to its authority, will not require operating subsidy").

What if, in the unlikely event it's even built, the California system chose to operate without subsidies? The gentlemen at the Community Coalition on High-Speed Rail make some estimates:

CHSRA could choose to meet the strictures of AB3034 and not require a subsidy. It’s a simple formula: charge passengers the fares that will fully cover realistic O&M[operation and maintenance] costs. That choice would violate the promise to 2008’s Prop1A voters to transport them one way between LA to San Francisco for “about $50,” and it would probably put the HSR train out of competition with airline fares. But it would avoid eternal subsidies. What might an unsubsidized, one-way inter-metropolis fare be? Based on analyses in Section 2 and international HSR operators’ experience, a one-way LA-SF fare would be around $200, about 50¢ per passenger mile (PPM); more than double CHSRA’s present estimated PPM fare of 22¢ PPM. If CHSRA’s O&M expenses reflected Acela Express’s NY-Washington experience, the one-way fare would be nearly $340, at 90¢ per passenger mile, nearly that of Japan’s Shinkansen PPM charge.
 
These potential violations of 2008's Proposition 1A will be sorted out by the courts during the current litigation that's challenging the system.

Some exerpts from "
U.S. Rail and Infrastructure," by Elizabeth Dovel for the Council on Foreign Relations, telling us why Warren Buffett invested in freight rail, not passenger rail:

...The debate in California is a prime example of the overall contention surrounding high-speed rail innovation in the United States. Many in the state legislature support the concept of a California HSR network, but the projected cost of nearly $100 billion has lawmakers rattled.

William J. Mallett, transportation policy specialist at the
Congressional Research Service, notes: "I'm not convinced high-speed rail is the answer to some people's prayers, because the geography of the United States is different than Europe...a high-speed rail network that covers the whole country is probably not feasible." Countries with HSR generally have higher population densities, smaller land areas, and lower rates of car ownership than the United States...

Japan's Shinkansen HSR system, which broke ground in 1964, is the oldest, fastest and highest-volume HSR system in the world. But even as it boasts the highest ridership of any HSR system, the Shinkansen system still does not turn a profit and must rely on government subsidies. Western European countries such as Germany, Spain, and France have been developing their high-speed rail networks for decades, and Spain currently boasts the largest high-speed rail network in Europe. But as in Japan, European HSR systems survive because of government subsidies...(emphasis added)

The U.S. freight rail industry continues to thrive today. "America's freight railways are one of the unsung transport successes of the past thirty years," says the Economist. "They are universally recognized in the industry as the best in the world." Freight railroad is maintained with little taxpayer money, unlike alternative forms of freight transport such as trucks and barges, for which the government maintains the infrastructure. Over the last several decades, U.S. freight companies have made billion-dollar investments in the national rail network. Warren Buffett highlighted this trend in 2009, increasing Berkshire Hathaway's holdings of BNSF (USA Today)---the nation's second largest railroad---by $26 billion...

Compared to other modes of freight transport, [freight]rail also has a smaller environmental impact, better fuel efficiency, and lower costs over large distances. Steel wheel technology makes rail far more efficient than truck freight due to limited rolling resistance: railcars become more efficient as more weight is added. Trains can now move one ton of cargo approximately 484 miles on just one gallon of fuel, according to the American Association of Railroads. Lower freight rail costs save consumers money and help keep U.S. manufacturers globally competitive. According to Dr. Pasi Lautala, director of the Rail Transport Program at Michigan Technological University, "If you talk to industry experts, everyone has a positive outlook on the future of the freight rail industry, because it makes sense if you look at the world right now. You look at the economic advances, especially in fuel consumption compared to truck traffic and the limitations of marine transportation."


Ken Orski at New Geography on passenger rail in the US.

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