Brown Seeks Sovereign Wealth to Back High-Speed Rail Line

California is courting sovereign-wealth funds, pensions and endowments for more than $50 billion to build Governor Jerry Brown’s proposed bullet train to link the state’s largest cities, the most expensive public-works project in U.S. history.

High-speed rail ventures such as California’s, which has weathered management shake-ups and fluctuating cost estimates, pose attractive opportunities for such investors, who together have $6 trillion in assets, said Andy Kunz, president of the U.S. High Speed Rail Association, a nonprofit advocacy group meeting this week in Los Angeles.

California is the only U.S. state working to lay tracks for trains running as fast as 220 miles an hour (354 kilometers an hour). The $68.4 billion project, linking San Francisco with Los Angeles, is counting on $10 billion in bonds authorized by voters, $3.3 billion committed by the federal government and as much as $55.1 billion from private sources.

“We have active interest in and outreach to sovereign funds and foreign consortia that are looking at us,” Jeffrey Morales, chief executive of the California High-Speed Rail Authority, said Nov. 29.

In addition to sovereign wealth funds, or state-owned investment pools, other potential investors include companies that will build and operate trains and stations, he said.

“Pension funds are definitely a potential investor,” Morales said. “They have been increasingly looking at infrastructure as an investment opportunity.”

Modest Returns

Public works projects have become more attractive to investors seeking stable, if modest, returns in a volatile climate, said Bradley Morrow, a senior consultant for private markets at Towers Watson & Co., a New York-based professional-services company.

“It’s becoming more accepted as an asset class for institutional investors in North America,” Morrow said, referring to a range of capital projects and not rail specifically.

To be sure, conventional water, sewer and electrical bonds repaid through user fees, are less risky than a train whose ridership is uncertain, said Burton Mulford, who oversees $1.85 billion in municipal debt for St. Petersburg, Florida-based Eagle Asset Management.

“The mega-transportation projects have a potential for significant cost overruns,” he said. “The feasibility studies for this California project could be very optimistic for both ridership and revenues.”

Cost Overruns

The most expensive public-works project in the U.S. was Boston’s Big Dig, a highway tunnel system that cost $24.3 billion including interest and related obligations, according to a financial summary presented by transportation officials to the state House Committee on Post Audit and Oversight in July. The program, which was plagued by overruns and structural defects, was financed primarily by federal funds and debt backed by the Commonwealth of Massachusetts.

California’s nonpartisan Legislative Analyst’s Office labeled its state’s high-speed rail funding model “highly speculative” in April. In July, the Legislature voted to sell $2.6 billion in bonds approved by voters in 2008 toward the 800-mile project.

However, lawmakers shelved Brown’s plan to earmark as much as $500 million a year in proceeds from auctioning tradeable carbon-emission permits.

California’s project is the only active high-speed rail proposal in the U.S. after Congress cut off 2012 funds for such projects. New Republican governors in Ohio, Florida and Wisconsin abandoned proposals after taking office in 2011.

Calpers, Calstrs

Neither the California Public Employees’ Retirement System, which is the largest U.S. pension, nor the California State Teachers’ Retirement System, the second-largest, have committed money to high-speed rail, according to spokesmen.

In 2011, the Calpers board voted to invest as much as $800 million in transportation, energy, natural resources, utilities, water and communications in California during the next three years. Calpers has a target of investing 2 percent of its $244.2 billion of assets in infrastructure.

A spokesman for Calpers, Joe DeAnda, and a spokesman for the teachers’ fund, Ricardo Duran, declined to comment on whether asset managers were considering high-speed rail, saying their funds don’t speculate on possible investments.

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