HSR Construction Plans Progress, But Forecast Unaffected

BMI View : The Californian high-speed rail project remains left out of our growth forecasts for the rail infrastructure industry in the US. Although the second phase of construction is now accepting prequalification bids, litigation is still ongoing with regards to the project's funding, which if successful could see the whole project scrapped, or at least delayed further. Considering the need for the whole project to be built in order for it to be realised, even though parts of the line have been awarded we will not be pricing the billion dollar project into our forecast until legal approval for the project is confirmed.

After the first phase of the 210km Initial Operating Section (IOS) of California's planned high-speed rail project was awarded in June, the requests for qualification to bid on the second section are now being welcomed. The second construction package covers the 96km section south from Fresno to a point 1.6km north of the Tulare-Kern County line near Bakersfield, with an estimated cost of US$1.5bn to US$2bn. Companies have until December 6 to submit a statement of qualifications. The California High Speed Rail Authority (CHSRA) will then produce a shortlist based on factors including experience, technical competency and ability to perform, and shortlisted firms would be invited to submit formal design-build proposals in 2014.

However, bids for the first section of the IOS were judged on both a price and technical basis, but were heavily weighted in favour of price. As such, a joint venture comprising Tutor Perini, Parsons and Zachary, which submitted the lowest price bid for the initial 47km stretch, at US$985mn, were selected. We expect that similarly price-focused parameters will be used in the selection process for second phase of the IOS as price is the overriding factor driving the substantial opposition to California's high-speed rail development.

Legal Disputes, Financing and Opposition Keep HSR Out Of Forecasts
US Railways Infrastructure Industry Value (US$bn) and Real Growth (% Change year-on-year)

BMI View : The Californian high-speed rail project remains left out of our growth forecasts for the rail infrastructure industry in the US. Although the second phase of construction is now accepting prequalification bids, litigation is still ongoing with regards to the project's funding, which if successful could see the whole project scrapped, or at least delayed further. Considering the need for the whole project to be built in order for it to be realised, even though parts of the line have been awarded we will not be pricing the billion dollar project into our forecast until legal approval for the project is confirmed.

After the first phase of the 210km Initial Operating Section (IOS) of California's planned high-speed rail project was awarded in June, the requests for qualification to bid on the second section are now being welcomed. The second construction package covers the 96km section south from Fresno to a point 1.6km north of the Tulare-Kern County line near Bakersfield, with an estimated cost of US$1.5bn to US$2bn. Companies have until December 6 to submit a statement of qualifications. The California High Speed Rail Authority (CHSRA) will then produce a shortlist based on factors including experience, technical competency and ability to perform, and shortlisted firms would be invited to submit formal design-build proposals in 2014.

However, bids for the first section of the IOS were judged on both a price and technical basis, but were heavily weighted in favour of price. As such, a joint venture comprising Tutor Perini, Parsons and Zachary, which submitted the lowest price bid for the initial 47km stretch, at US$985mn, were selected. We expect that similarly price-focused parameters will be used in the selection process for second phase of the IOS as price is the overriding factor driving the substantial opposition to California's high-speed rail development.

As we have previously noted there are a number of risks to the high-speed rail development plans in the US. The Central Valley section of the high-speed line is a seemingly an unusual initial phase of the project. In order to qualify for federal funds allocated under the American Recovery and Reinvestment Act (ARRA) - which are the federal funds which have been allocated to the development of high-speed rail, funds must be spent by 2017. This would be an impossible task if construction were to start in the densely populated cities. One of our major concerns about the project is that despite claiming that each phase has independent utility, the link in the Central Valley will not be connected to the major population centres through this initial phase and we therefore believe this approach increases the risk to the scheme, as the entire project needs to be completed in order for rail to be put to best use ( see 'California HSR Progress Promises Little', 10 June).

Additionally, the development of high-speed rail has come with the stipulation that the infrastructure in the project is American made. In California, the railway has benefitted from ARRA funding which also comes with a Buy America Stipulation. However, in our view this requirement will be difficult to meet and international companies will need to be involved. Consequently, some flexibility will be needed in the Buy America requirements if any high speed rail industry is to be developed ( see 'Only California Remains As XpressWest Funding Slips Away', 19 July).

Legal Disputes, Financing and Opposition Keep HSR Out Of Forecasts
US Railways Infrastructure Industry Value (US$bn) and Real Growth (% Change year-on-year)

Financing for the first stage of the IOS is already secured, comprising US$3.3bn in federal funding and US$2.6bn in Proposition 1A bond proceeds. This would normally be a huge boost for the project's implementation chances. However, legal question marks are still hanging over the finances of the Proposition 1A bonds. In 2008, Californians voted to approve the creation of the bonds with a view to allow CHSRA to issue them when necessary. However, in late September, opponents of high-speed rail said that because the train system now planned by CHSRA is not what voters were promised in 2008, the issuance of the bonds should not be validated. A legal challenge to the use of the bonds is ongoing, with a decision expected to be made within weeks.

Even if the legal challenges to the Proposition 1A bonds are unsuccessful, there still remains funding challenges ahead. Senator Quentin Kopp has said the CHSRA will need another bond to finance the remaining elements of the project. That means voters could potentially weigh in on whether or not to allow the bond. With a growing number of opponents to the project this could be a serious threat to its implementation and is yet another reason why we are not factoring the major project into our forecasts. A recent poll by the University of Southern California suggested that 52% of Californians were now opposed to the lines development.

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