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Texas High Speed Rail Case Study

In 1989, former Lt. Gov. Ben Barnes joined a group of investors hoping to develop a bullet train system in Texas. The company, Texas TGV, planned to build a 200 mph line between Dallas and Houston and then expand to Austin and San Antonio. After four years and more than $70 million in investments, the project collapsed.

“It’s the closest any state has come to having a high-speed train,” Barnes said. “I’ll spend the rest of my life asking what if.” 

More than two decades later, Texas Central Railway is trying to revive a part of that earlier project, a privately financed bullet train connecting Dallas and Houston. As the company prepares to do a federally required environmental impact study and hold public meetings along the planned route, its leaders say they expect to avoid the pitfalls of the earlier project, namely inadequate financing and intense opposition from Southwest Airlines.

Texas TGV (named for Train á Grande Vitesse, the French high-speed line) “had great plans but there was a lot of things that they were counting on that did not happen,” Texas Central Railway President Robert Eckels said.

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Many rail advocates have put the blame for the demise of the earlier “Supertrain” project on Southwest Airlines, which conducted an aggressive lobbying campaign. Yet the story of the project’s failure is more complicated.

Then, as now, supporters are heralding the possibility of travel between Dallas and Houston in less than 90 minutes. The current plan would use technology from the Central Japan Railway Company, which handles more than 100 million passengers each year on its bullet trains in Japan.

During the 1990s, Japanese firms were among several foreign companies that considered partnering with American firms to bid on a high-speed rail franchise, state records show. The Texas Legislature had created the Texas High-Speed Rail Authority in 1989 to explore the potential for such a franchise after a study had found that the region’s generally flat land and fast-growing population made it an ideal location. Lawmakers made clear that the authority could only consider proposals that were privately funded.

“It is not in the public interest that a high-speed rail facility be built, financed, or operated by the public sector,” the bill creating the authority read.

The authority quickly found itself in the political crosshairs as staffers faced both public officials and private citizens convinced that the agency was setting up the state for a future boondoggle.

“From its inception, the authority has had to carefully walk the line between being an advocate for high-speed rail and being an effective regulator of the private firms wishing to bring high-speed rail to Texas,” an agency strategic plan explained at the time.

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Two firms — French-backed Texas TGV and German-backed Texas FasTrac — paid $500,000 each to apply for the state’s first high-speed rail franchise.

Texas TGV’s proposal was especially ambitious. The company envisioned using technology already in use in France to build out a 600-mile network connecting Dallas, Houston, Austin and San Antonio in less than a decade. Company officials predicted they could draw more than 9 million annual riders by 2014.

Some 70 percent of the project’s $6 billion price tag via tax-exempt private activity bonds, more than federal law allowed a company to borrow using that type of financing. The venture hinged on Texas TGV changing federal law to ease the restrictions.

Texas TGV’s optimism was based in large part on its backers’ confidence that a high-speed rail line would draw thousands of Texans who regularly flew between the state’s major cities for work. The plan was a threat to Southwest Airlines, which had built a large portion of its business on the state’s “super-commuters.” Southwest officials said the Texas project was unlike any other high-speed rail project in the world, in that it was focusing more on taking customers from air travel rather than cars.

Herb Kelleher, Southwest’s CEO at the time, predicted that the bullet train would force the airline to raise fares on some Texas routes and end service on others. He also warned that the company might move its corporate headquarters to another state. Southwest Airlines declined to comment for this article. 

“Rail has a romantic appeal; but, this case cannot be decided on the basis of nostalgia, or even a desire to emulate the rail service of France and Germany,” Southwest Airlines said in a brief filed with the authority in 1991. “The American reality is that high-speed rail will be viable in Texas only by destroying the convenient and inexpensive transportation service the airlines now provide, and only by absorbing huge public subsidies.”

The project also drew opposition in rural communities. Farmers raised concerns about the tracks dividing their land and the noise from trains impacting the health of livestock. Rick Perry, the agriculture commissioner at the time, expressed reservations about estimates that the project would put as much as 14,000 acres of farmland out of production.

Residents of communities that were on the train’s proposed route but far from the stations also had trouble seeing its value. Groups called DERAIL and Citizens Against the Bullet Train soon formed. State officials received petitions with thousands of signatures opposing the “Texas Supertrain.”

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“I would say generally people didn’t show up to say how much they liked the project,” said Steven Polunsky, who was the research and planning director for the Texas High Speed Rail Authority and attended all 39 public scoping meetings. He noted that the project had significant support in urban areas.

When the High-Speed Rail Authority launched a hearing to decide whether to move forward with one of the two franchise applications, Southwest Airlines was permitted to join the proceedings as an intervener. The company’s attorneys filed hundreds of objections, helping drag out the process for weeks. When a letter from President George H.W. Bush encouraging efforts to bring high-speed rail to Texas was submitted as evidence, Southwest’s attorneys argued it was “hearsay.” When state Sen. John Whitmire, D-Houston, submitted testimony on rail-related legislation that he had passed, the airline called it “incompetent” and asked that it be stricken from the record.

The authority’s 11-member board ultimately voted to award Texas TGV a 50-year franchise in 1991, an agreement that required that the company several financing deadlines. The first major one, at the end of 1992, required the company to show that it had secured $171 million in letters of credit.

“There were these milestones installed to make sure we didn’t end up saddled with a half-built project,” said Marc Burns, a former executive director at the authority.

After the first deadline came and went, Texas TGV acknowledged it had not secured the money. The authority revoked the franchise.

“I don’t even know if we had the power to re-award the franchise,” Burns said. “I know there wasn’t the appetite to do so.”

A year later, lawmakers abolished the Texas High-Speed Rail Authority.

Barnes said Southwest Airlines killed the project by persuading two crucial officials — Gov. Ann Richards and U.S. Sen. Lloyd Bentsen, who chaired the Finance Committee — to offer only tepid public support. That hobbled efforts to change federal law to allow for the firm to borrow the billions in tax-exempt bonds that its plan hinged on, he said.

“Our initial investors had to know that there was tax-exempt financing for the remainder of it,” Barnes said.

But others argued that Texas TGV’s financial plan simply never won over enough investors.

“I think we ended up not building the train because you couldn’t make the case that money would be there, one way or another,” Burns said.

As Texas Central High-Speed Railway attempts to succeed where Texas TGV failed, company executives have conveyed confidence in their financial backing. While tax-exempt private activity bonds are not in the firm’s current finance model, Eckels said he could not rule them out as an option. But, he did not foresee the need to change any federal or state laws in order to finance the project.

“We will take advantage of every tool that is out there that is available to every other corporation,” Eckels said.

Barnes, who is consulting for a company affiliated with the project, also expressed confidence that it won’t face the same financial challenges of his earlier effort.

“I’m very pleased,” Barnes said. “I think I’m going to live to see a high-speed train in Texas.”

Southwest Airlines has stayed neutral on the new project and Robert Mann, an aviation consultant in New York, said the company’s business has diversified enough that it would probably view a Texas high-speed rail project as less of a threat.

“They’ve established a nationwide footprint,” Mann said. “I think the issue of intrastate high-speed rail within Texas is just not the same sort of destabilizing issue to Southwest than it was 20 years ago.”

Disclosure: At the time of publication, Southwest Airlines was a corporate sponsor of The Texas Tribune. Ben Barnes was a major donor in 2009. (You can also review the full list of Tribune donors and sponsors below $1,000.)

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It’s been a busy year for the much-anticipated Texas bullet train. The project emerged as a contentious issue in the state legislative session leading to legislation that intends to protect tax payers from any potential cost of the project. Houston officially signed on in support of the high-speed rail line, and contractors have been hired to design and build the rail link.

The project, however, is still drawing skepticism. Travis Korson, a senior fellow with Frontiers of Freedom, a conservative Washington think tank, believes the numbers don’t pencil out Texas’ bullet train. In a column for the The Hill , he argues that a growing budget and inflated ridership projects suggest the privately funded rail project may not be profitable: 

Investors are probably starting to feel the same way and the few that have provided the 1 percent of capital raised to date may soon be looking to cut ties. Delays surrounding the environmental impact study have already put the project years behind schedule. Proposed construction costs have ballooned from $10 billion to $16 billion and the project is yet to break ground.

Overly optimistic ridership estimates also call into question the long-term viability of the project, should it ever secure the necessary funding to complete construction. Estimates from Texas Central Partner predict a ridership of 5 million annually by 2025 (up from earlier estimates of 4 million annual riders by 2035) and a whopping 10 million riders by 2050.

Where do those numbers come from? Texas Central Partners, the firm behind the rail project, estimates that about 14 million people travel between Houston and Dallas, and they hope  to capture about 36 percent of that traffic by 2025. Korson finds this overly optimistic and makes a comparison to Amtrak’s high-ish speed Acela line, which travels between Washington D.C. and Boston and accounts for about 2 percent of all passenger traffic in the high-density northeast corridor. Can the bullet train capture more ridership share than Amtrak enjoys in the Northeast? Korson doesn’t believe so, and he argues that the rail project’s finances will eventually unravel, if it ever gets built in the first place.

But is he right? According to a study conducted by the high-speed rail company, Texans are enthusiastic about the possibility of another option for commuting between Dallas and Houston besides air and auto, and 71 percent of frequent travelers — the ones who know how inconvenience the short flight or the grueling drive can be — say they would “probably or definitely” use the bullet train. If the bullet train can convert a portion of those eager-future riders into actual passengers, it should be okay.

However, the larger challenge for the rail project in terms of appealing to riders is solving the question of what happens to riders once they arrive in their destination city. Dallas answers that question by locating the terminal near downtown where riders can connect to public transit. But what if a Houston businesswoman has a meeting with Toyota? Will taking the bullet train only to be forced with wrestling with a commute up to Plano undo the convenience of the high-speed rail link? And what about Houston? The sprawling city plans to place its high-speed rail terminal on the outskirts of the city on the city’s ring road. Will taking the high-speed rail, then, necessitate renting a car once riders reach their destination?

These questions place the planning of the high-speed rail project within a broader process of rethinking land use and transportation systems. The success of the high-speed rail line is contingent on the ability of Dallas and Houston to address other transportation shortcomings. If that kind of planning and investment in complementary infrastructure doesn’t happen, then Korson’s doom-and-gloom prediction that ridership numbers won’t flesh out may have some merit.

But in his fear over the bullet train turning into a boondoggle and leaving tax payers on the hook for bailing it out, Korson misses this the broader question of urban sustainability. The question shouldn’t be whether or not high-speed rail will work in in the state. Rather, the question should be what can Texas do to make sure it works. High-speed rail, improved public transit, and a better approach to land-use are the kinds of projects Texas must get right in order for the state to remain competitive in the future.

 

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