Tuesday, April 26, 2011

Fast Track to Fiscal Failure

UPDATE: Warren Meyer in Forbes says it better.

In the Washington Post, Chuck Lane details "China's train wreck":
As minister of railways, Liu [Zhijun] ran China’s $300 billion high-speed rail project. U.S., European and Japanese contractors jostled for a piece of the business while foreign journalists gushed over China’s latest high-tech marvel.

Today, Liu Zhijun is ruined, and his high-speed rail project is in trouble. On Feb. 25, he was fired for "severe violations of discipline" -- code for embezzling tens of millions of dollars. Seems his ministry has run up $271 billion in debt -- roughly five times the level that bankrupted General Motors. But ticket sales can’t cover debt service that will total $27.7  billion in 2011 alone. Safety concerns also are cropping up.

Faced with a financial and public relations disaster, China put the brakes on Liu’s program. On April 13, the government cut bullet-train speeds 30 mph to improve safety, energy efficiency and affordability. The Railway Ministry’s tangled finances are being audited. Construction plans, too, are being reviewed.

Liu’s legacy, in short, is a system that could drain China’s economic resources for years. So much for the grand project that Thomas Friedman of the New York Times likened to a "moon shot" and that President Obama held up as a model for the United States.

Rather than demonstrating the advantages of centrally planned long-term investment, as its foreign admirers sometimes suggested, China’s bullet-train experience shows what can go wrong when an unelected elite, influenced by corrupt opportunists, gives orders that all must follow -- without the robust public discussion we would have in the states.

The fact is that China’s train wreck was eminently foreseeable. High-speed rail is a capital-intensive undertaking that requires huge borrowing upfront to finance tracks, locomotives and cars, followed by years in which ticket revenue covers debt service -- if all goes well. "Any . . . shortfall in ridership or yield, can quickly create financial stress," warns a 2010 World Bank staff report.

Such "shortfalls" are all too common. Japan’s bullet trains needed a bailout in 1987. Taiwan’s line opened in 2007 and needed a government rescue in 2009. In France, only the Paris-Lyon high-speed line is in the black.
Agreed. Though a centerpiece of President Obama's recent stimulus plans, even the WaPo editors label high-speed rail "a lost cause."

Most proposed new passenger rail systems would require massive subsidies. Florida turned back Federal funding for fears of the necessary state spending. Wisconsin rejected high-speed rail funding, asking instead for reduced Federal monies to improve existing train service. California's high-speed rail -- mandated by a 2008 state ballot measure -- will bankrupt the state.

As George Will writes:
Generations hence, when the river of time has worn this presidency’s importance to a small, smooth pebble in the stream of history, people will still marvel that its defining trait was a mania for high-speed rail projects. This disorder illuminates the progressive mind.
Perhaps that's why the mainstream media -- including (former) economist/columnist Paul Krugman -- ignore the actual numbers (which favor freight, not passenger, trains).

Coyote Blog's Warren Meyer calls high speed rail and mass transit modern "cargo cults" -- "great cities of the world have large mass transit systems so therefore if our city builds a rail system we will become great." Another example of liberals preferring the pretty over the proven.

(via reader Doug J., Krugman-in-Wonderland, reader Warren, Right on the Left Coast, The Antiplanner)

No comments: