The 2012 business plan for California HSR, in addition to admitting to wanton cost overruns, also promises that the system will be profitable. Or does it? I did not want to comment on the plan’s notion of profits, but I see via California HSR Blog that several outfits have seized upon that part and treat the release as much better news than it actually is.
The plan says, e.g. on page 15 of the PDF, that the system will generate operating profits even on the lowest-ridership scenarios. This has led Treehugger and others to crow that this will not be a disaster. But a careful consideration suggests the opposite. The medium scenario posits $1 billion in revenue in 2025 versus $539 million in annual operating costs. But those operating costs exclude depreciation; by then the project is expected to expend about $50 billion, which at even a mild depreciation schedule is more than enough to put the system in the red.
The problem is that people in the US are used to judging transit and rail profits using transit agency metrics, by which other people pay for capital and therefore the main operating ratio excludes depreciation. This is not normal accounting; EBITDA is a much less important metric than EBIT (including depreciation but not interest) or net income (including everything) for a normal, profitable business. The profitability of HSR outside the US is measured in terms of net profits; in Taiwan, the system has had positive EBITDA since a few months after opening, but went bankrupt due to elevated interest charges.
The argument that the business plan proves something special because of the positive EBITDA may satisfy people who get their criticism of HSR from hacks who conflate capital and operating costs, but it should not satisfy people who occasionally bother to read railroad budgets. The higher the quality of a line, the lower the operating costs are excluding depreciation and the higher the depreciation and interest charges are. For example, see this breakdown of Madrid-Barcelona HSR costs and profits; infrastructure charges are dominated by depreciation and interest rather than maintenance, though rolling stock charges are more maintenance than depreciation.
Even state-of-the-art HSR infrastructure maintenance is cheap. The 2012 business plan a little more than $100,000 per route-km (cf. €30,000 per single track-km according to a 2008 study, which works out to about the same modulo inflation and a high Euro:dollar exchange rate). It’s a second-order term. The same is true of avoidable operating costs, such as rolling stock maintenance and labor. Of course ten second-order terms make a first-order term, and indeed the total operating costs of HSR are not negligible. However, they’re still lower than depreciation charges.
The importance of including depreciation is that HSR capital doesn’t last forever. Rolling stock has to be replaced. Viaducts and tunnels need to be refurbished. It’s hard to come up with exact figures since HSR lines have not yet depreciated in full in the 47-year history of the technology, but railroads all over the world have accountants who include depreciation terms in the budget. Of course, the problem is that if the capital cost is too high, then the depreciation and interest will weigh the project down. This hasn’t really been observed abroad, except in cases in which the interest rates were very high as in Taiwan, but judging by the business plan’s numbers, it could happen in California.
Finally, although the biggest bombshell in the plan is the cost overrun, the plan also has a ridership shortfall. It’s not a big shortfall, but on page 115 the plan mentions that the revised full-buildout ridership estimate for 2035 is 51-77 million, depending on fares, down from 69-98 million according to the 2008 environmental impact statement. This partly explains why the operating revenues are so low relative to full operating costs including depreciation.