oversight

High-Speed Passenger Rail: Preliminary Assessment of California's Cost Estimates and Other Challenges

Published by the Government Accountability Office on 2012-12-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States Government Accountability Office

GAO                          Testimony
                             Before the Committee on
                             Transportation and Infrastructure,
                             House of Representatives


                             HIGH-SPEED
For Release on Delivery
Expected at 9:30 a.m. EST
Thursday, December 6, 2012

                             PASSENGER RAIL
                             Preliminary Assessment of
                             California’s Cost Estimates
                             and Other Challenges
                             Statement of Susan A. Fleming, Director
                             Physical Infrastructure Issues




GAO-13-163T
                                             December 6, 2012

                                             HIGH-SPEED PASSENGER RAIL
                                             Preliminary Assessment of California’s Cost
                                             Estimates and Other Challenges
Highlights of GAO-13-163T, a testimony
before the Committee on Transportation and
Infrastructure, House of Representatives




Why GAO Did This Study                       What GAO Found
The California high-speed rail project is    Based on an initial evaluation of the California High Speed Rail Authority’s
the single largest recipient of federal      (Authority) cost estimates, GAO found that they exhibit certain strengths and
funding from the Federal Railroad            weaknesses when compared to best practices in GAO’s Cost Guide. Adherence
Administration’s (FRA) High Speed            with the Cost Guide reduces the risk of cost overruns and missed deadlines.
Intercity Passenger Rail (HSIPR) grant       GAO’s preliminary evaluation indicates that the cost estimates are comprehensive
program. The 520-mile project (see           in that they include major components of construction and operating costs.
map) would link San Francisco to Los         However, they are not based on a complete set of assumptions, such as how the
Angeles at an estimated cost of $68.4        Authority expects to adapt existing high-speed rail technology to the project in
billion. Thus far, FRA has awarded $3.5
                                             California. The cost estimates are accurate in that they are based on the most
billion to the California project. The
                                             recent project scope, include an inflation adjustment, and contain few mathematical
Authority has to continue to rely on
significant public-sector funding, in
                                             errors. And while the cost estimates’ methodologies are generally documented, in
addition to private funding, through the     some cases GAO was unable to trace the final cost estimate back to its source
project’s anticipated completion date in     documentation and could not verify how certain cost components, such as stations
2028. This testimony is based primarily      and trains, were calculated. Finally, the Authority evaluated the credibility of its
on GAO’s ongoing review of the               estimates by performing both a sensitivity analysis (assessing changes in key cost
California high-speed rail project and       inputs) and an independent cost estimate, but these tests did not encompass the
discusses GAO’s preliminary                  entire cost estimate for the project. For example, the sensitivity analysis of the
assessment of (1) the reliability of the     construction cost estimate was limited to 30 miles of the first construction segment.
project’s cost estimates developed by        The Authority also did not conduct a risk and uncertainty analysis to determine the
the Authority and (2) key challenges         likelihood that the estimates would be met. The Authority is currently taking some
facing the project.                          steps to improve its cost estimates.
As part of this review, we obtained          The California high-speed rail project faces many challenges. Chief among these
documents from and conducted                 is obtaining project funding beyond the first 130-mile construction segment. While
interviews with Authority officials, its     the Authority has secured $11.5 billion from federal and state sources, it needs
contractors, and other state officials.      almost $57 billion more. Moreover, the HSIPR grant program has not received
GAO analyzed the extent to which             federal funding for the last 2 fiscal years, and future federal funding is uncertain.
project cost estimates adhered to best       The Authority is also challenged to improve its ridership and revenue forecasts.
practices contained in GAO’s Cost
                                             Factors, such as limited data and information, make developing such forecasts
Estimating and Assessment Guide
                                             difficult. Finally, the environmental review process and acquisition of necessary
(Cost Guide), which identifies industry
best practices to ensure cost estimates
                                             rights-of-way for construction could increase the risk of the project’s falling
are comprehensive, accurate, well            behind schedule and increasing costs.
documented, and credible—the four            Map of Planned California High-Speed Rail System and Construction Timeline
principal characteristics of a reliable
cost estimate. GAO also reviewed
project finance plans as outlined in the
Authority’s April 2012 revised business
plan. To identify key challenges, GAO
reviewed pertinent legislation, federal
guidelines and best practices related to
ridership and revenue forecasting, and
interviewed, among others, federal,
state, and local officials associated
with the project.

View GAO-13-163T. For more information,
contact Susan A. Fleming at (202) 512-2834
or flemings@gao.gov.

                                                                                         United States Government Accountability Office
United States Government Accountability Office
Washington, DC 20548




                                   Chairman Mica, Ranking Member Rahall, and Members of the
                                   Committee:

                                   Thank you for the opportunity to be here today as the committee
                                   examines the Department of Transportation’s (DOT) High Speed Intercity
                                   Passenger Rail (HSIPR) program.1 As you know, this program was
                                   established to provide grant funds to states and others to develop high-
                                   speed intercity passenger-rail corridors and projects. HSIPR is
                                   administered by the Federal Railroad Administration (FRA), and, as of
                                   October 2012, almost $10 billion has been obligated for 150 projects
                                   under this program, though it has received no appropriations since fiscal
                                   year 2010. The projects range from multibillion dollar high-speed rail
                                   systems, like that in California, to smaller projects designed to improve
                                   speeds, frequency, and reliability of conventional intercity passenger-rail
                                   service.

                                   My statement today will discuss our ongoing examination of the California
                                   high-speed rail project—the largest recipient of HSIPR grant funds to
                                   date. We are providing preliminary observations based on our work to
                                   date, particularly related to the California High Speed Rail Authority’s
                                   (Authority) project cost estimates. We also identify some of the key
                                   challenges facing the project. Our ongoing review, which this committee
                                   and other Members of the House requested, focuses on assessing the
                                   reliability of the project’s cost estimates and financing plans, evaluating
                                   the reasonableness of ridership and revenue forecasts, and examining
                                   the comprehensiveness of potential project economic impacts. As such,
                                   we are assessing the quality of the information used by policymakers and
                                   not evaluating the merits of the project itself, which should be considered
                                   in light of whether this project best meets the transportation needs of the
                                   estimated 51 million Californians in 2050.

                                   This testimony is based on our preliminary assessment of the first phase
                                   of the project’s cost estimates using GAO’s Cost Estimating and
                                   Assessment Guide2 (Cost Guide). While FRA did not require HSIPR grant



                                   1
                                    The program was authorized under the Passenger Rail Investment and Improvement Act
                                   of 2008 (PRIIA). Pub. L. No. 110-432, Div. B (Oct. 16, 2008).
                                   2
                                    GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing and
                                   Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009).




                                   Page 1                                                                 GAO-13-163T
             applicants to follow the Cost Guide, the Cost Guide identifies best
             practices that help ensure cost estimates are well documented,
             comprehensive, accurate, and credible. The Cost Guide has been used to
             evaluate cost estimates across the government, including infrastructure
             projects. We also assessed the Authority’s analysis of the project’s
             finance plans as outlined in the Authority’s April 2012 revised business
             plan. We analyzed the extent to which the project’s cost estimates
             adhered to the best practices contained in the Cost Guide and
             interviewed Authority officials, its contractors, and other federal officials.
             To identify key challenges, we reviewed pertinent legislation, federal
             guidelines and best practices related to ridership and revenue
             forecasting, prior GAO reports on the topic of high-speed passenger rail
             and reports published by the DOT’s Office of Inspector General (OIG). In
             addition, we interviewed federal, state, and local officials associated with
             the project as well as members of the ridership and revenue peer review
             panel established by the Authority. We also reviewed the status of the
             project’s environmental reviews and sought to identify legal challenges to
             the project as well as interviewed officials from the Authority, the
             California Department of Transportation, and other state officials about
             right-of-way acquisition.3 We conducted our work in accordance with
             generally accepted government auditing standards. We plan to report the
             final results of our work in early 2013.


             While high-speed passenger rail has been in operation in Europe and
Background   Asia for several decades, it is in its relative infancy in the United States.
             The Passenger Rail Investment and Improvement Act of 2008 (PRIIA)
             called for development of high-speed rail corridors in the United States
             and led to establishment of the HSIPR program. FRA administers the
             HSIPR program as a discretionary grant program to states and others.
             This program was appropriated $8 billion in funding from the American
             Recovery and Reinvestment Act (Recovery Act) in 2009 and an additional
             $2.5 billion in funding from the fiscal year 2010 DOT Appropriations Act.4
             According to FRA, as of October 2012, about $9.9 billion has been


             3
              This project will construct new rail right of way to provide service, some of which may
             require acquisition of privately owned land.
             4
              Pub. L. No. 111-5, 123 Stat. 208 (Feb. 17, 2009); Pub. L. No. 111-117, 123 Stat. 3056
             (Dec. 16, 2009). For fiscal years 2011 and 2012, no appropriations were made to the
             program. For fiscal year 2011, $400 million in unobligated funds were rescinded. Pub. L.
             No. 112-10, § 2222 (Apr. 15, 2011).




             Page 2                                                                         GAO-13-163T
obligated for 150 projects.5 The California high-speed rail project is the
largest recipient of HSIPR funds, with approximately $3.5 billion (about 35
percent of program funds obligated). We have previously reported on
high-speed rail and the HSIPR program. For example, in March 2009 we
reported on the challenges associated with developing and financing
high-speed rail projects. These included securing the up-front
investments for such projects and sustaining public and political support
and stakeholder consensus.6 We concluded that whether any high-speed
rail proposals are eventually built hinges on addressing the funding,
public support, and other challenges facing these projects. In June 2010,
we reported that states would be the primary recipients of Recovery Act
funds for high-speed rail, but many states did not have rail plans that
would, among other things, establish strategies and priorities of rail
investments in a particular state.7

California’s high-speed rail project is poised to be the first rail line in the
United States designed to operate at speeds greater than 150 miles per
hour.8 The planned 520-mile line will operate between San Francisco and
Los Angeles at speeds up to 220 miles per hour (see fig.1). At an
estimated cost of $68.4 billion,9 it is also one of the largest transportation
infrastructure projects in the nation’s history. The project’s planning began
in 1996 when the Authority was created but began in earnest after initial
funding was approved in 2008 with the passage of Proposition 1A, which
authorized $9.95 billion in state bond funding for construction of the high-
speed rail system and improvements to connections (see fig. 2).
Construction is expected to occur in phases beginning with the 130-mile
first construction segment from just north of Fresno, California, to just
north of Bakersfield, California. In July 2012, the California legislature
appropriated $4.7 billion in state bond funds. The process of acquiring


5
Five of these projects were pending obligations.
6
 GAO, High Speed Passenger Rail: Future Development Will Depend on Addressing
Financial and Other Challenges and Establishing a Clear Federal Role, GAO-09-317
(Washington, D.C.: Mar. 19, 2009).
7
 GAO, High Speed Rail: Learning From Service Start-Ups, Prospects for Increased
Industry Investment, and Federal Oversight, GAO-10-625 (Washington, D.C.: June 17,
2010). California has a state rail plan that is in the process of being updated.
8
 Amtrak’s Acela service is capable of operating at speeds greater than 150 miles per hour
but is not currently authorized by FRA to do so.
9
All costs are in year-of-expenditure dollars unless otherwise noted.




Page 3                                                                       GAO-13-163T
property for the right-of-way and construction is expected to begin soon.
Request for proposals to select construction contractors and right-of-way
acquisitions were issued in March and September 2012, respectively.
According to the Authority, a design-build contract for the first
construction segment is expected to be awarded in June 2013 with
construction potentially commencing no earlier than summer 2013.

Figure 1: Map of Planned California High-Speed Rail System and Construction
Timeline




a
 The IOS includes the first construction segment. The construction southward of the IOS will continue
as funding becomes available (anticipated after 2015).
b
 Early investments will be made in the bookends of the system (San Francisco peninsula and in the
Los Angeles basin) beginning in 2013.




Page 4                                                                                 GAO-13-163T
Figure 2: Timeline of California High Speed Rail Project




                                          The project underwent substantial revision earlier this year after the
                                          Authority issued its November 2011 draft business plan in response to the
                                          initial high cost and other criticisms. Most significantly, the Authority
                                          scaled back its plans to build dedicated high-speed rail lines over its
                                          entire length. Instead, the April 2012 revised business plan adopted a
                                          “blended” system in which high-speed rail service would be provided over
                                          a mix of dedicated high-speed lines and existing and upgraded local rail
                                          infrastructure (primarily at the bookends of the system on the San
                                          Francisco peninsula and in the Los Angeles basin). This change was
                                          made, in part, to respond to criticism that the cost of the full-build system
                                          contained in the November 2011 draft business plan—$98.5 billion—was
                                          too high. The revised cost in the April 2012 plan was $68.4 billion. In
                                          addition, the ridership and revenue forecasts in the April 2012 revised
                                          business plan reflected a wider uncertainty range than the forecast




                                          Page 5                                                            GAO-13-163T
presented in the November 2011 plan.10 For example, in the November
2011 draft business plan, the Authority estimated 2030 ridership to be
between 14.4 million and 21.3 million passengers and annual revenues of
the high speed rail system to be between $1.05 billion and $1.56 billion.11
This range increased in the April 2012 revised business plan, to between
16.1 million and 26.8 million passengers and annual revenues to be
between $1.06 billion and $1.81 billion.12 The Authority attributed the
increase in the uncertainty range to additional conservatism in the low
ridership estimate and the ridership changes to several factors such as
the adoption of the blended approach which, among other things, allows
one-seat service from San Francisco to Los Angeles to begin sooner than
the original full-build approach. However, over time ridership forecasts
under the blended approach are less than the original full-build approach.

To date, the state of California and the federal government have
committed funding to the project. In July 2012, the California state
legislature appropriated approximately $4.7 billion dollars in Proposition
1A bond funds, including $2.6 billion for construction of the high-speed
rail project and $1.1 billion for upgrades in the bookends.13 The federal
government has also obligated $3.3 billion in HSIPR grant funds.14 Most
of the HSIPR money awarded to the project was appropriated under the
Recovery Act and in accordance with governing grant agreements must
be expended by September 30, 2017. In addition, approximately $945
million in fiscal year 2010 funding was awarded to the project by FRA and
is to remain available until expended.


10
  The Authority retained Cambridge Systematics—a transportation consulting firm that
provides ridership forecasting and modeling services—to develop a travel-demand model
that was used to generate the November 2011 ridership and revenue forecasts.
Cambridge Systematics also prepared the updated ridership and revenue forecasts that
were included in the April 2012 revised business plan.
11
  These revenue forecasts are in 2010 dollars.
12
  These revenue forecasts are in 2011 dollars.
13
  An additional $819.3 million was appropriated by the state legislature for connectivity
projects and about $252.6 million for environmental, system design, and preliminary
engineering work.
14
  Approximately $231 million in additional HSIPR grants have also been awarded
primarily for environmental review and preliminary engineering work. In addition, $400
million was awarded to the Transbay Joint Powers Board for construction of a train box at
the Transbay Transit Center in San Francisco. The Transbay Transit Center is the
expected northern terminus of the California high speed rail line.




Page 6                                                                         GAO-13-163T
                    The Authority estimates that the high-speed rail project in California will
Preliminary         cost $68.4 billion to construct and hundreds of millions of dollars to operate
Assessment of       and maintain annually. Since the project is relying on significant
                    investments of state and federal funds—and, ultimately private funds—it is
California’s Cost   vital that the Authority, FRA, and Congress be able to rely on these
Estimates           estimates for the project’s funding and oversight (see table 1 below for a
                    summary of the sources of funding). GAO’s Cost Guide identifies best
                    practices that help ensure that a cost estimate is comprehensive,
                    accurate, well documented, and credible.

                            A comprehensive cost estimate ensures that costs are neither
                             omitted nor double counted.

                            An accurate cost estimate is unbiased, not overly conservative or
                             overly optimistic, and based on an assessment of most likely costs.

                            A well-documented estimate is thoroughly documented, including
                             source data and significance, clearly detailed calculations and
                             results, and explanations for choosing a particular method or
                             reference.

                            A credible estimate discusses any limitations of the analysis from
                             uncertainty or biases surrounding data or assumptions.

                    These four characteristics help minimize the risk of cost overruns, missed
                    deadlines, and unmet performance targets. Our past work on high-speed
                    rail projects around the world has shown that projects’ cost estimates tend
                    to be underestimated.15 As such, it is important to acknowledge the
                    potential for this bias and ensure that cost estimates are as reliable as
                    possible.

                    Based on our ongoing review, we have found that the Authority’s cost
                    estimates exhibit strengths and weaknesses. The quality of any cost
                    estimate can always be improved as more information becomes
                    available. And based in part on evaluations from the Peer Review Group,
                    the Authority is taking some steps to improve the cost estimates that will
                    be provided in the 2014 business plan.




                    15
                     GAO-09-317.




                    Page 7                                                             GAO-13-163T
The Authority followed best practices in the Cost Guide to ensure
comprehensiveness, but also exhibited some shortcomings. The cost
estimates include the major components of the project’s construction and
operating costs.16 The construction cost estimate is based on detailed
construction unit costs that are, in certain cases, more detailed than the
cost categories required by FRA in its grant applications. However, the
operating costs were not as detailed as the capital costs, as over half of
the operating costs are captured in a single category called Train
Operations and Maintenance. In addition, the Authority did not clearly
describe certain assumptions underlying both cost estimates. For
example, Authority officials told us that the California project will rely on
proven high-speed rail technology from systems in other countries, but it
is not clear if the cost estimates were adjusted to account for any
challenges in applying the technology in California.

The Authority took a number of steps to develop accurate cost estimates
consistent with best practices in the Cost Guide. The estimates have
been updated to reflect the new “blended” system which will rely, in part,
on existing rail infrastructure; they are based on a dataset of costs to
construct comparable infrastructure projects; they contain few, if any,
mathematical errors; and they have been adjusted for inflation. For
example, the Authority’s contractor used a construction industry database
of project costs supplemented with actual bid-price data from similar
infrastructure projects. However, the cost estimates used in the April 2012
revised business plan do not represent final design and route alignments,
and the estimates will change as the project moves into construction and
operation. The Authority did not produce a risk and uncertainty analysis of
its cost estimates that would help anticipate the impact of these changes.
The Cost Guide recommends conducting a risk and uncertainty analysis
to determine the primary risk factors and assess the likelihood that they
may occur, helping to ensure that the estimate is neither overly
conservative nor optimistic.

The Authority followed some, but not all, best practices in the Cost Guide
to ensure that the cost estimate is well documented. In many cases, the
methodologies used to derive the construction cost estimates were well
documented, but in other cases the documentation was more limited.
For example, while track infrastructure costs were thoroughly



16
 Operating costs include maintenance costs.




Page 8                                                             GAO-13-163T
documented, costs for other elements, such as stations and trains, were
supported with little detail or no documentation. Additionally, in some
cases where the methodologies were documented, we were unable to
trace the estimates back to their source data and recreate the estimates
using the stated methodology. For example, we were unable to identify
how the operating costs from analogous high-speed rail projects were
adjusted for the California project.

The Authority took some steps consistent with our Cost Guide to ensure
the cost estimates’ credibility, but not with respect to some best practices.
In order to make cost estimates credible, GAO’s Cost Guide
recommends:

        testing such estimates with sensitivity analysis (making changes in
         key cost inputs),

        a risk and uncertainty analysis (discussed above), and

        an independent cost estimate conducted by an unaffiliated party to
         see how outside estimates compare to the original estimates.

While the Authority performed a sensitivity analysis for the first 30 miles of
construction and an independent cost estimate for the first 185 miles of
construction in the Central Valley, neither covered the entire Los Angeles
to San Francisco project. For the operating-cost estimate, the Authority
conducted a sensitivity test under various ridership scenarios; however,
this test was designed to measure the ability of the system to cover
operating costs with ticket revenues and not to determine the potential
risk factors that may affect the operating-cost estimate itself. The
Authority also did not compare their operating-cost estimate to an
independent cost estimate. Finally, as noted above, the Authority did not
perform a risk and uncertainty analysis, which would improve the
estimates’ credibility by identifying a range of potential costs and
indicating the degree of confidence decision-makers, can place on the
cost estimates.

The Authority is taking steps to improve its cost estimates. To make its
operating-cost estimate more comprehensive and better documented, the
Authority has contracted with the International Union of Railways to
evaluate the existing methodology and data and help refine its estimates.
In addition, to improve the construction cost estimates, the Authority will
have the opportunity to validate and enhance, if necessary, the accuracy
of its cost estimates once actual construction package contracts are


Page 9                                                             GAO-13-163T
                         awarded for the initial construction in the Central Valley in 2013. The bids
                         for the first 30-mile construction package are due in January 2013 and will
                         provide a check on how well the Authority has estimated the costs for this
                         work as well as provide more information on potential risks that cost
                         estimates of future segments may encounter.


                         In addition to challenges in developing reliable cost estimates, the
California High-Speed    California high-speed rail project also faces other challenges. These
Rail Project Faces       include obtaining project funding beyond the first construction segment,
                         continuing to refine ridership and revenue estimates beyond the current
Financial and Other      forecasts, and addressing the potential increased risks to project
Challenges               schedules from legal challenges associated with environmental reviews
                         and right-of-way acquisitions.


Challenges To Securing   One of the biggest challenges facing California’s high-speed rail project is
Project Funding          securing funding beyond the first construction segment. While the
                         Authority has secured $11.5 billion from federal and state sources for
                         project construction, almost $57 billion in funding remains unsecured. A
                         summary of funding secured to-date can be found in Table 1.


                         Table 1: Funding Secured for Constructing the High-Speed Rail Project

                         (Dollars in billions)
                             State high speed rail bonds                                                                                            $8.2a
                             Federal HSIPR grants                                                                                                   3.3 b
                             Total secured funding                                                                                                 $11.5
                         Source: GAO analysis of FRA grant information and the California High Speed Rail Authority April 2012 Revised Business Plan.
                         a
                          The Authority expects approximately $8.2 billion in proceeds from the $9.95 in authorized
                         Proposition 1A high-speed rail bonds to be available for construction of high-speed rail. The
                         remainder is for connectivity projects and engineering and environmental work.
                         b
                          Approximately $3.3 billion of $3.5 in obligated HSIPR grants is available for construction of high-
                         speed rail project. The remainder is for engineering and environmental work.


                         As with other large transportation infrastructure projects, including high-
                         speed rail projects in other countries, the Authority is relying primarily on
                         public financial support, with $55 billion or 81 percent of the total
                         construction cost, expected to come from state and federal sources. A
                         summary of the Authority’s funding plan can be found in table 2.




                         Page 10                                                                                                          GAO-13-163T
Table 2: California’s Funding Plan for Construction of the High-Speed Rail Project, according to the April 2012 Revised
Business Plan

(Dollars in billions)
                                         First              Initial operating                                                   Phase 1
Funding source                    construction                       segment                 Bay-to-Basin                       blended            Total
Federal                                     $3.3                             $20.3                         $8.4                     $10.0      $ 42.0      (61%)
State high-speed rail bond                    2.7                               4.4                          0.0                         1.1     8.2        (12)
Locally generated                             0.0                               0.7                          1.2                         3.1      5.0        (7)
Subtotal public                               6.0                             25.4                           9.6                        14.2    55.2       (81%)
Private investment                            0.0                               0.0                        10.1                          3.0    13.1        (19)
Operating cash flow                           0.0                               0.0                          0.2                         0.0      0.2        (0)
Subtotal private investment                   0.0                               0.0                        10.3                          3.0    13.3       (19%)
and operating cash flow
Total                                       $6.0                             $25.4                        $19.9                     $17.2      $68.5    (100%)
                                          Source: GAO analysis of California High Speed Authority’s April 2012 revised business plan.




                                          Of the total $55 billion in state and federal funding, about $38.7 billion are
                                          uncommitted federal funds, an average of over $2.5 billion per year over
                                          the next 15 years. Most of the remaining funding is from unidentified
                                          private investment once the system is operational—a model that has
                                          been used in other countries, such as for the High Speed One line in the
                                          United Kingdom. As a result of the funding challenge, the Authority is
                                          taking a phased approach—building segments as funding is available.
                                          However, given that the HSIPR grant program has not received funding
                                          for the last 2 fiscal years and that future funding proposals will likely be
                                          met with continued concern about federal spending, the largest block of
                                          expected funds is uncertain. The Authority has identified revenues from
                                          California’s newly implemented emissions cap and trade program in the
                                          event other funding is not made available, but according to state officials,
                                          the amounts and authority to use these funds are not yet established.17




                                          17
                                            California’s Legislative Analyst’s Office has evaluated the risks of applying cap and trade
                                          revenues to the high-speed rail project. See Legislative Analyst’s Office, The 2012-2013
                                          Budget: Funding Requests for High Speed Rail (Sacramento, CA: Apr. 17, 2012).




                                          Page 11                                                                                                  GAO-13-163T
Challenges to Developing   Developing reliable ridership and revenue forecasts is difficult in almost
Ridership and Revenue      every circumstance and for a variety of reasons. Chief among these are
Forecasts                  (1) limited data and information, (2) risks of inaccurate assumptions, and
                           (3) accepted forecast methods vary. Although forecasting the future is
                           inherently risky, reliable ridership and revenue forecasts are still critical
                           components in estimating the economic viability of a high-speed rail
                           project and in determining what project modifications, if any, may be
                           needed. For example, the financial viability of California’s high-speed rail
                           project depends on generating sufficient ridership to cover its operating
                           expenses. Ridership and revenue forecasts enable policymakers and
                           private entities to make informed decisions on policies related to the
                           proposed high-speed rail system and to determine the risks associated
                           with a high-speed rail project when making investment decisions.
                           Addressing these challenges will be important for the Authority as it works
                           toward updating its ridership and revenue forecasts for the 2014 business
                           plan.

                           Limited data and information, especially early in a project before specific
                           service characteristics are known, make developing reliable ridership and
                           revenue forecasts difficult. And to the extent early stage data and
                           information are available, they need to be updated to reflect changes in
                           the economy, project scope, and consumer preferences. For example, in
                           developing the ridership and revenue forecasts for the April 2012 revised
                           business plan, the Authority updated several assumptions and inputs
                           used to develop the initial ridership and revenue forecasts that were
                           presented in the November 2011 draft business plan. Authority officials
                           said this update was done, in part, to build in additional conservatism in
                           the ridership forecasts, in particular in the low scenario, and to avoid
                           optimism bias. Among other updates, the Authority revised model
                           assumptions to reflect changes in current and anticipated future
                           conditions for airfares and airline service frequencies, decreases in
                           gasoline price forecasts, and anticipated declines in the growth rates for
                           population, number of households, and employment. Peer review groups,
                           such as the Ridership and Revenue Peer Review Panel (Panel)
                           established by the Authority, and academic reviewers have examined the
                           Authority’s ridership and revenue forecast methodology. These reviewers




                           Page 12                                                           GAO-13-163T
recommended additional improvements to the model going forward.18 For
example, in developing the forecasts used for the April 2012 revised
business plan, the Authority relied on data from a 2005 survey that was
conducted at airports, rail stations, and by telephone from August to
November 2005.19 In a May 2012 report to the Authority, the Panel
pointed out limitations with this data source and recommended that new
data be collected to supplement the existing data for model enhancement
purposes. Authority officials stated that they are currently developing a
new revealed-preference and stated-preference survey to update the
2005 survey data and that they plan to begin collecting this new survey
data in December 2012.20 Portions of the new 2012 data will be used to
re-estimate and re-calibrate the ridership model to develop updated
ridership and revenue forecasts for the 2014 business plan. The Authority
also plans to develop a new version of the model that will make full use of
the new 2012 survey data; however, the new model is not expected to be
developed in time for the 2014 business plan. It will be important to
complete these future model improvements as the project is developed.

Risks of inaccurate forecasts are a recurring challenge for sponsors of the
project. Research on ridership and revenue forecasts for rail infrastructure
projects have shown that ridership forecasts are often overestimated and
actual ridership is likely to be lower. For example, a recent study
examined a sample of 62 rail projects and found that for 53 of them, the
demand forecasts were overestimated and that actual demand was lower
than forecasted demand.21 According to the Authority, the ridership and


18
  Several groups have examined the Authority’s ridership and revenue forecast
methodology including the Ridership and Revenue Peer Review Panel—a panel
convened by the Authority to conduct an independent review of the Authority’s ridership-
and revenue-forecasting process and outcomes. In addition, academic experts from the
University of California Berkeley’s Institute of Transportation Studies conducted a review
of ridership and revenue forecast models used to develop forecasts in June 2010.
19
  This survey data included revealed-preference and stated-preference mode choice data
from air, rail, and auto trip passengers. These data were used to construct a model of
travelers’ choices among different modes of travel, including high-speed rail, for different
segments of the market.
20
  In addition, the Authority conducted a supplemental trip-frequency survey in May 2011.
These survey data were not used to replace the 2005 survey data but were used to
enable recalibration and validation to more recent conditions.
21
  Bent Flyvbjerg, "Quality Control and Due Diligence in Project Management: Getting
Decisions Right by Taking the Outside View," International Journal of Project Management
(November 2012), http://dx.doi.org/10.1016/j.ijproman.2012.10.007.




Page 13                                                                        GAO-13-163T
revenue forecasts, in its April 2012 revised business plan, include a wider
range of ridership and revenue forecasts and lower ridership and revenue
forecasts compared to earlier forecasts, to help mitigate the risks of
optimism bias. In addition, the Authority performed a sensitivity analysis
of an extreme downside scenario to test the ridership and revenue
implications of a series of downside events coinciding, such as increased
average rail-travel time from Merced to the San Fernando Valley and
lower auto-operating costs. Based on this analysis, the Authority
determined that an extreme downside scenario would be expected to
reduce ridership and revenue forecasts by 27 percent and 28 percent,
respectively, below that shown for the low forecasts in the April 2012
revised business plan. According to the Authority, these forecasts would
still be sufficient to cover the Authority’s estimated operating costs and
would not require a public operating subsidy. Authority officials stated that
they intend to conduct additional sensitivity analyses going forward.

Finally, accepted forecasting methods vary, and FRA has not established
guidance on acceptable approaches to the development of reliable
ridership and revenue forecasts. Industry standards vary, and FRA has
established minimal requirements and guidance related to information
HSIPR grant applicants must provide regarding forecasts. As we have
previously reported, different ridership-forecasting methods may yield
diverse and therefore uncertain results.22 As such, we have
recommended that the Secretary of Transportation develop guidance and
methods for ensuring reliability of ridership forecasts. Similarly, the DOT
OIG has also recommended that FRA develop specific and detailed
guidance for the preparation of HSIPR ridership and revenue forecasts.23
Best practices identified by various agencies and transportation experts
have identified certain components of the ridership- and revenue-
forecasting process that affect results more than others and that are
necessary for developing reasonable forecasts. Among others, key
components include processes for developing trip tables,24 developing a




22
  GAO-09-317.
23
  DOT OIG, FRA Needs to Expand Its Guidance on High Speed Rail Project Viability
Assessments, CR-2012-083, (Washington, D.C.: Mar. 28, 2012).
24
  Trip tables are estimates of numbers of trips taken between specific locations. Trip
tables, in conjunction with mode-choice models, provide the foundation for ridership
forecasts.




Page 14                                                                        GAO-13-163T
                            mode-choice model,25 conducting sensitivity analyses, and conducting
                            validation testing. The Authority’s forecasts included each of these key
                            components in developing the ridership and revenue forecasts for the
                            April 2012 revised business plan.26 While addressing these components
                            does not assure ridership and revenue forecasts are accurate, it does
                            provide greater assurance that the Authority’s processes for developing
                            these forecasts are reasonable. In our ongoing review of the California
                            high speed rail project, we are evaluating the extent to which the
                            Authority’s ridership and revenue forecasts followed best practices when
                            completing each of these tasks. We will present the results of our
                            assessment of the Authority’s process in our 2013 report on this subject.


Environmental Review and    Among the other challenges facing the project, which may increase the risk
Right-of-Way Acquisitions   of project delays, are potential legal challenges associated with the
May Increase Risk of        environmental laws. Under the National Environmental Policy Act (NEPA)
                            and the California Environmental Quality Act (CEQA),27 government
Project Delays              agencies funding a project with significant environmental effects are
                            required to prepare environmental impact statements or reports (EIS/EIR)
                            that describe these impacts.28 Under CEQA, an EIR must also include
                            mitigation measures to minimize significant effects on the environment. The
                            Authority is taking a phased approach to comply with NEPA and CEQA by
                            developing EIS/EIRs for both the project as a whole as well as for particular
                            portions of the project. To date, program level EIS/EIRs have been
                            prepared for the project as a whole (August 2005) and for the Bay Area to
                            Central Valley (initial certification by the Authority in July 2008 and a
                            revised final EIS/EIR issued in April 2012). Project level EIS/EIRs have
                            been prepared for the Merced-to-Fresno portion of the project (issued April
                            2012), and a draft EIS/EIR has been prepared for the Fresno-to-Bakersfield
                            portion of the project (initial draft issued in August 2011 and revised final
                            issued July 2012). Environmental concerns have been the subject of legal


                            25
                              Mode-choice models estimate how many travelers would choose the high-speed rail
                            option versus other available modes of travel.
                            26
                              This includes validation testing of the ridership model, testing that, according to the
                            Authority, was performed in January 2012 through a comparison of actual ridership (2008)
                            and 2030 forecasts on Amtrak’s Acela service on the Northeast Corridor.
                            27
                             42 U.S.C. § 4321 et seq. (NEPA); Cal. Pub. Res.Code § 21000 et seq. (CEQA).
                            28
                              Under NEPA, the document is referred to as an EIS, while under CEQA it is called an
                            EIR.




                            Page 15                                                                     GAO-13-163T
challenges. For example, a lawsuit was filed in October 2010 against the
Authority challenging the decision to approve the Bay Area to Central
Valley segment based on an EIR alleged to be inadequate. Several
lawsuits have been filed and these cases are still pending.

The project also faces the potential challenge of acquiring rights-of-way.
Timely right-of-way acquisition will be critical since some properties will be
in priority construction zones. Property to be acquired will include homes,
businesses, and farmland. Not having the needed right-of-way could cause
delays as well as add to project costs. Acquisition of right-of-way will begin
with the first construction segment, which has been subdivided into 4
design-build construction packages. There are a total of approximately
1,100 parcels to be acquired for this segment; all of which are in
California’s Central Valley. In September 2012, the Authority issued a
Request for Proposals to obtain the services of one or more contractors to
provide right-of-way and real property services. The Authority estimated in
its April 2012 revised business plan that the purchase or lease of real
estate for the phase I blended system will cost between $3.6 billion and
$3.9 billion (in 2011 dollars). According to the Authority, the schedule for
right-of-way acquisition will be phased, based on construction priorities with
delivery of all required parcels in the Central Valley no later than spring
2016. Acquisition is anticipated to begin in February 2013. The timely
acquisition of rights-of-way may be affected by at-risk properties—that is,
those properties that the Authority considers at-risk for timely delivery to
design-build contractors for construction.29 There could be a significant
number of at-risk properties. For example, Authority officials told us there
are about 400 parcels in the first construction package, about 200 of which
are in priority construction zones. Of these, about 100 parcels (50 percent)
are considered to be potentially at-risk for timely delivery. Since right-of-
way acquisition has not yet begun, the extent that at-risk properties will
ultimately affect project schedules or cost is not known. However, there
may be an increased risk given the initial high percentage of at-risk parcels.




29
  There could be a number of reasons why a property is deemed at-risk, including
instances where a property owner is contesting a property valuation or a property owner
has not yet vacated a property.




Page 16                                                                     GAO-13-163T
                   Chairman Mica, Ranking Member Rahall, this concludes my prepared
                   remarks. I am happy to respond to any questions that you or other
                   Members of the Committee may have at this time.


                   For future questions about this statement, please contact Susan Fleming,
GAO Contacts and   Director, Physical Infrastructure, at (202) 512-2834 or flemings@gao.gov.
Staff              In addition, contact points for our Offices of Congressional Relations and
                   Public Affairs may be found on the last page of this statement. Individuals
Acknowledgments    who made key contributions to this statement include Paul Aussendorf,
                   (Assistant Director), Russell Burnett, Delwen Jones, Richard Jorgenson,
                   Jason Lee, James Manzo, Maria Mercado, Josh Ormond, Paul Revesz,
                   Max Sawicky, Maria Wallace, and Crystal Wesco.




(541102)
                   Page 17                                                         GAO-13-163T
This is a work of the U.S. government and is not subject to copyright protection in the
United States. The published product may be reproduced and distributed in its entirety
without further permission from GAO. However, because this work may contain
copyrighted images or other material, permission from the copyright holder may be
necessary if you wish to reproduce this material separately.
                      The Government Accountability Office, the audit, evaluation, and
GAO’s Mission         investigative arm of Congress, exists to support Congress in meeting its
                      constitutional responsibilities and to help improve the performance and
                      accountability of the federal government for the American people. GAO
                      examines the use of public funds; evaluates federal programs and
                      policies; and provides analyses, recommendations, and other assistance
                      to help Congress make informed oversight, policy, and funding decisions.
                      GAO’s commitment to good government is reflected in its core values of
                      accountability, integrity, and reliability.

                      The fastest and easiest way to obtain copies of GAO documents at no
Obtaining Copies of   cost is through GAO’s website (http://www.gao.gov). Each weekday
GAO Reports and       afternoon, GAO posts on its website newly released reports, testimony,
                      and correspondence. To have GAO e-mail you a list of newly posted
Testimony             products, go to http://www.gao.gov and select “E-mail Updates.”

Order by Phone        The price of each GAO publication reflects GAO’s actual cost of
                      production and distribution and depends on the number of pages in the
                      publication and whether the publication is printed in color or black and
                      white. Pricing and ordering information is posted on GAO’s website,
                      http://www.gao.gov/ordering.htm.
                      Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
                      TDD (202) 512-2537.
                      Orders may be paid for using American Express, Discover Card,
                      MasterCard, Visa, check, or money order. Call for additional information.
                      Connect with GAO on Facebook, Flickr, Twitter, and YouTube.
Connect with GAO      Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts.
                      Visit GAO on the web at www.gao.gov.
                      Contact:
To Report Fraud,
                      Website: http://www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in   E-mail: fraudnet@gao.gov
Federal Programs      Automated answering system: (800) 424-5454 or (202) 512-7470

                      Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-
Congressional         4400, U.S. Government Accountability Office, 441 G Street NW, Room
Relations             7125, Washington, DC 20548

                      Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800
Public Affairs        U.S. Government Accountability Office, 441 G Street NW, Room 7149
                      Washington, DC 20548




                        Please Print on Recycled Paper.