operations need to be judged as a business enterprise. If it did, the CHSRAwould have considered the servicing of its construction costs in conjunctionwith its operating margins (revenues less expenses). The hard fact is theCHSR project must produce a positive cash flow for its private builders andoperators. Unless the authorizing legislation changes, specifically Section2704.08 (J) of AB3034, then private sector accounting rules measuringpositive (or negative) cash flows determine what will or will not happen.Therefore, private sector financial analytical methods and accepted practicesto account for revenues and expenses are in force. Reasonable assumptionsmust be made about these facts of life, including in worst-case scenarios. Noprivate operator will knowingly step forward if there is not positive cash flowfrom the project. Their due diligence must conclude the rewards (lots of cash) clearly outweigh the risks under less-than-rosy scenarios. This axiomis even recognized by the 2009 Business Plan’s capital development phase
“.. . an after-tax equity internal rate of return (IRR) or investment hurdle rateof 16 percent has been assumed.“
Translated into laymen’s terms, theAuthority assumed private equity investors need a pre-tax annual profit of about 21% to participate in the capital development phase or operations.
In their 2009 Business Plan, the CHSRA states
“Never before has there beenmore interest and more momentum behind building a high-speed trainsystem in the United States . . . tremendous amounts of interest from privatecompanies who work with train technology as well as construction . . . “
Butby the close of 2010, twenty-five months after Prop 1A, no private investorhas come forward with any of the $10-12 billion required for the project’scapital development. Unless the State and/or Federal governments build orguarantee Phase One’s capital construction costs, there will be no project; afact the Authority knew in mid-2008.
The Authority also knows that without revenue guarantees for operations,there will be no private operator.
Private operators’ need for positive cashflows would have driven them to the project if it were clearly a ‘winner’. Theymay be hesitant to proceed since both the Director of High-Speed Rail at theInternational Union of Railways (IUR) and the Inspector General of Amtrakhave stated publically that all high-speed systems require subsidies.
Or theymay be hesitant because they suspect the information available from theCHSRA for due diligence is incomplete, unreliable or both.Whether the project meets private operators’ expectations is the acid test of its viability. While they may be sympathetic to the CHSR’s social benefits,their shareholders demand a return on their capital in what, by any measure,is a high-risk venture. Private investors, builders, equipment, softwaresuppliers or operators will perform due diligence on the project based on itsability to provide positive cash flow. So will this paper.