Report 2011-504 Recommendation 9 Responses

Report 2011-504: High-Speed Rail Authority Follow-Up: Although the Authority Addressed Some of Our Prior Concerns, Its Funding Situation Has Become Increasingly Risky and the Authority's Weak Oversight Persists (Release Date: January 2012)

Recommendation #9 To: High-Speed Rail Authority, California

To ensure that the public and the Legislature are aware of the full cost of the program, the Authority should clearly disclose that the 2012 draft business plan assumes that the State will only be receiving profits for the first two years of operation in 2022 and 2023, and potentially not again until 2060 in exchange for the almost $11 billion the Authority assumes it will receive from the private sector over a four-year period.

Annual Follow-Up Agency Response From November 2016

The 2016 Business Plan was clear on when the monetization of future cash flows through private sector investment would occur. It stated that it "could be available in 2028 after ridership and net operating cash flow have been demonstrated." The 2016 Business Plan was also clear on the length of an operating concession and the ability of the Authority to continue to enter into operating concessions after the initial operating concession on the Silicon Valley to Central Valley Line. It stated that "[a]fter completion of the Phase 1 system and its first operating concession period, the State will have a fully developed and operable asset that it can continue to monetize over successive 20-30 year periods to generate funds for reinvestment."

The full cost of the Program and the potential monetization opportunity was also transparently discussed in the 2016 Business Plan. It stated that "[t]he private financing analysis has been based on the discounting of the net operating cash flow after capital replacement at three illustrative discount rates: 8 percent, 11 percent and 14 percent" and "[t]he discount rate applied by the private sector in valuing future net operating cash flow is based, in large part, on the level of risk transferred to a private sector partner. For example, it is more likely that the private sector would apply a higher discount rate to any net revenue from a section just placed into service. Conversely, a lower discount rate (and therefore higher valuation) would be used for proven cash flows from existing operational sections.

Finally, in Section 7 of the 2016 Business Plan, the Authority clearly articulates the level of forecasted revenue, operating and maintenance costs, and lifecycle costs that the system would generate during the ramp-up period (2025 - 2028) and until the monetization event occurs. Readers are able to understand the amounts of forecasted net operating cash flow that would flow to the Authority during the ramp-up period and

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

The Authority's 2016 business plan indicates that cash flows could be available beginning in 2028. The business plan also includes the discount rates, and forecasted revenues.

Annual Follow-Up Agency Response From September 2015

The 2014 Business Plan in the Financial Analysis and Funding chapter describes that "Once the IOS is in operation, cash flows will be available from the project that can be used to support capital from government, private-sector debt programs and private sector equity investments. As discussed in the next section, $6.2 billion to $12.4 billion is anticipated to be available from project supported capital sources for use in developing the Bay to Basin."

As in typical concession transactions, the Authority would, through a competitive procurement, sell the operating rights for the segment for a period of time, such as thirty years. The concessionaire would pay the Authority upfront, an amount based on the projected revenues from the system over that time (e.g., the $6.2-12.4 billion referenced above). The Authority would then use that upfront payment to help with the expansion of the system, and the concessionaire would use the revenues generated over time by operations to recoup its investment. This process would be repeated for subsequent operating segments.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Although the Authority's 2014 business plan includes a reasonable methodology for securing up front investment, the information is not presented in an easily-accessible way--it's included as a footnote in the technical documentation the business plan references--and does not clearly disclose when the State may begin receiving profits. Until this information is explicitly disclosed in the business plan itself, we will continue to report this recommendation as partially implemented.

Annual Follow-Up Agency Response From October 2014

The 2014 Business Plan in the Financial Analysis and Funding chapter describes that "Once the IOS is in operation, cash flows will be available from the project that can be used to support capital from government, private-sector debt programs and private sector equity investments. As discussed in the next section, $6.2 billion to $12.4 billion is anticipated to be available from project supported capital sources for use in developing the Bay to Basin."

As in typical concession transactions, the Authority would, through a competitive procurement, sell the operating rights for the segment for a period of time, such as thirty years. The concessionaire would pay the Authority upfront, an amount based on the projected revenues from the system over that time (e.g., the $6.2-12.4 billion referenced above). The Authority would then use that upfront payment to help with the expansion of the system, and the concessionaire would use the revenues generated over time by operations to recoup its investment. This process would be repeated for subsequent operating segments.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Although the Authority's 2014 business plan includes a reasonable methodology for securing up front investment, the information is not presented in an easily-accessible way. Thus, we do not believe the 2014 business plan clearly discloses when the State will begin receiving profits.

Annual Follow-Up Agency Response From October 2013

As reported in our one-year response, dated January 24, 2013, to the California State Auditor, the Authority will clarify in the next business plan that a decision by the State to raise financing from the private sector based on the net cash flows of the project (i.e. profits as described by the Bureau of State Audits) will mean that the State will not be able to use those cash flows for other purposes during the term of the financing.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

1-Year Agency Response

The Authority stated that it would clarify in its next business plan the decision by the State to raise financing from the private sector based on the net cash flows of the project, which means the State will not be able to use those cash flows for other purposes during the term of the financing.

California State Auditor's Assessment of 1-Year Status: Pending

6-Month Agency Response

The Authority stated that it would clarify in its next business plan the decision by the State to raise financing from the private sector based on the net cash flows of the project, which means the State will not be able to use those cash flows for other purposes during the term of the financing. (See 2013-406, p. 244)

California State Auditor's Assessment of 6-Month Status: Pending

All Recommendations in 2011-504

Agency responses received after June 2013 are posted verbatim.