Can a high-speed rail line from Rochester to the Twin Cities be built without any public money?

Courtesy of Twin Cities Business

Currently high-speed rail doesn’t exist in North America.

Forces are aligning in Minnesota to bring foreign and domestic funders together on the world’s first privately capitalized high-speed rail (HSR) corridor — a 77-mile, 200 mph train that will connect the MSP region with Rochester.

Unlike halting state efforts to initiate costly passenger rail projects, this project, estimated at $2 billion to $4 billion, could, if built entirely with private capital, move through Dakota, Goodhue, and Olmsted counties like a hot knife through butter.

Or could it? The fledgling company behind the effort, North American High Speed Rail (NAHSR), consists of a small band of strategists and international investment aggregators with no experience building or operating railroads in the U.S. The technical expertise will likely be outsourced to China, while the bulk of domestic efforts will go to raising money and assuaging rural fears about the taking of land, since the project as planned would make use of eminent domain.

And there are larger goals, involving building or connecting to Chicago and a Midwest HSR network. But Rochester comes first — and that seems to be challenge enough.

Rails through the corn or sky?

Though railroads have crossed Minnesota and connected its largest cities for more than a century, there has long been an exception: There are no tracks between the Twin Cities and Rochester. Rochester was not important when the network was built out in the early 20th century. There was no Mayo Clinic or IBM factory, and the Mississippi River Valley 30 miles to the east seemed a far better place for main lines.

MnDOT and Olmsted County in 2012 proposed Zip Rail — a train that would connect the two metro areas in under an hour. (Zip Rail estimated it would carry 900,000 riders a year if it could make the trip in 45 minutes.)

“There was very vocal organized opposition to Zip,” says state Rep. Frank Hornstein (DFL-Minneapolis), who sits on the House Transportation committee. The lack of an existing rail corridor meant the state would have to take land for the project. Rural interests rose up to starve it.

“Opponents in the southeast have had pipeline issues, expansion of [U.S.] Hwy. 52, power lines, wind farms. They are process-weary,” says Dan Krom, who heads MnDOT’s passenger rail office. “They wanted details that were years away.”

Lacking the $70 million needed to initiate environmental studies, last year MnDOT zapped Zip. But as the public-sector effort bogged down, private capital smelled opportunity. NAHSR emerged in 2014 with a stated interest in connecting MSP and Rochester. “A private venture would bypass so much of what slows these projects down,” says DePaul University transportation professor Joe Schwieterman.

Still, NAHSR’s interest has replicated much of Zip’s opposition. NAHSR is quick to point out that the elevated Chinese technology it plans to employ is different than Zip Rail’s at-grade plan. But the reduced transparency is already prompting bills at the Legislature to force the privately held concern be subject to public vetting and to limit its powers to acquire land.

“The premise is absurd that the public shouldn’t be concerned. There are many points where this process intersects the public good,” says Sally Jo Sorensen, a rural Minnesota blogger and one of the most pointed critics of NAHSR. She objects to everything from its public outreach to conflicts of interest with one of the company’s consultants to the opacity of its CEO’s resume. “I see the Minnesota ‘bright shiny thing’ syndrome at work.”

Missing track record

Some might also suggest NAHSR has not put its best foot forward.

In late 2014, going by the internal project name “Velos,” NAHSR asked the state to designate it as the successor to Zip Rail. (The state did not agree to the request.) The plan was to rely on real estate development at the lines’ termini to attract domestic investors. “The model only works by creating a destination at the terminals that is an economic driver,” says founder and then-CEO Joe Sperber. He considers real estate an investment vehicle that U.S. investors, who are focused on short-term return, understand far better than the long payoff of heavy infrastructure like rail.

A year later, in late 2015, NAHSR chief strategic officer Wendy Meadley and then-chairman Joe Wang cut ties with Sperber and withdrew the business plan the company had submitted to MnDOT, choosing to focus more on revenues related to transportation of people and goods. “When we pivoted the business model,” explains Sperber, “it didn’t make sense for me to lead the effort.”

The pivot required a new business plan, which is not complete. NAHSR’s four-person management team’s second approach is built around transportation and real estate. The operation is fronted by Meadley. Its key executives do not have backgrounds in the rail industry. “I think Joe Wang [now CEO] is going to lean very heavily on China for the rail expertise,” says Sperber.

Meadley has “no official statement about our relationship with China Railway Corporation,” China’s HSR export entity.

Wang is the company’s conduit to that sector, from which NAHSR hopes to attract half its capital. According to a company bio, “Mr. Wang’s focus is licensing new technologies (medical, new-energy/green-energy, agricultural and transportation) to China’s major corporations in cooperation with China’s largest investment groups. He is president of [venture capital firm] Neos Discovery Capital LLC,” based in Sunnyvale, California. Meadley and Sperber describe Wang’s professional background as “heavy infrastructure.”

The discarded business plan included an acquisition exploration with a nascent Las Vegas-based HSR operator, XpressWest. Investor capital was to be a mix of international and domestic, with limited contribution of monies from EB-5 visa solicitations—a U.S. program whereby a foreign national invests $500,000 to $1 million in a new commercial enterprise in exchange for permanent residency. Sperber and Wang used to be partners in a business aggregating such investors, but Sperber says Wang is no longer involved.

NAHSR is spending the first half of 2016 determining whether its revenue and capital model is viable, with an eye to making a go/no-go decision mid-year. At that point it would begin a two-year process to define its route and attract capital. “The biggest challenge is finding a domestic investor,” says Meadley. “It’s not a small thing.”

Sperber is now CEO of Global Development Partners, based in the Twin Cities, and is focused on an HSR project out of Chicago. His business model prioritizes real estate. “If you lead with rail,” Sperber notes, “you’re going to be more heavily reliant on foreign money, which accepts the longer-term payout.” NAHSR told MnDOT its international investment was arranged, but would not go public until the corridor was under company control.

Sperber says he is skeptical of NAHSR’s plan to rely exclusively on China. “The Chinese don’t have a successful outsourcing model for their technology yet,” he notes. “I believe [NAHSR] will need multiple sources of international investment.” Meadley suggests it is too early for the company to have an answer on this point.

The Rochester play

NAHSR’s interest in a Rochester rail link centers on a sense of infrastructure need and business opportunity as the Destination Medical Center (DMC) effort comes to fruition.

“Accessibility is key to the DMC vision,” says state transportation commissioner Charlie Zelle. Rochester does not face a transportation crisis today. Highway 52 is free-flowing, says Olmsted County chief transportation planner Charlie Reiter. He says Rochester’s housing supply is “tight” and additional commuters are expected (see Rochester infographic).

Currently, “we don’t see a lot of excess [transit] demand,” says Dan Holter, general manager of privately held Rochester City Lines, which operates coach-style buses for Rochester-bound commuters from the Twin Cities. “We’ve tried to add service going north, but people don’t want to transfer at Mall of America,” which would roughly be NAHSR’s terminus. Rail advocates point to inevitable gridlock on Hwy. 52 if DMC’s jobs vision is validated, but MnDOT says it has no data one way or another on that topic.

“Are we prepared for the movement of people and commerce as the DMC flourishes?” asks FedEx’s Bill Goins, who sits on the state’s freight advisory committee and on NAHSR’s advisory board. “Hopefully the DMC will spin off other health care businesses. Can we grow a health sciences alley along Hwy. 52?”

Mayo Clinic would seem to be a linchpin in such an effort. “We know Mayo is concerned about transportation infrastructure,” says Goins.

Mayo has little to say, however. “Mayo Clinic long supported Olmsted County’s effort to study the feasibility of high-speed rail transportation between the Twin Cities and Rochester,” says Mayo spokesman Karl Oestreich. “We are pleased with the private investor interest and look forward to their analysis of this potential project.”

Meadley will not utter Mayo’s name, only offering more broadly that “if there is not enough support from Minnesota businesses, it could be a no-go.”

Ex-CEO Sperber says NAHSR never viewed Mayo as more than a “strategic endpoint” and a patronage-driver. Though Mayo was one of the initiators of the Zip Rail effort, NAHSR did not think Mayo wanted a primary role in its project.

CEO Wang adds a crucial observation: NAHSR’s long game is not Rochester, it is Chicago. His goal is to be first in the marketplace, prove the technology, and look to the horizon. “It has to stand on its own economically to Rochester,” Wang says, “but the plan is to connect it to Chicago.”

The thesis has merit, say experts. “Rochester to Minneapolis would be a good pilot project in that the physical characteristics are quite favorable,” says DePaul’s Schwieterman. “But Rochester is a relatively small market, and getting to Chicago seems too good be true,” given Wisconsin’s stated opposition, at least to a publicly funded HSR project.

Sperber’s concern is that rail patronage will not likely justify sufficient ROI to make Rochester HSR successful. “Ridership alone only delivers an okay return,” he says.

High speed, high cost

Currently HSR doesn’t exist in North America. Amtrak’s 125 mph Northeast Corridor is too slow to qualify. The taxpayer-funded line under development in California should be the real thing, but will take decades to build out. A private venture using Japanese HSR technology to connect Dallas and Houston is a year or two ahead of NAHSR, but has not turned earth. Sperber believes it will by next year.

“America wants the amenity,” says Wang, but “they don’t want to pay for it.”

Enter the private sector.

NAHSR’s ambitions have raised eyebrows because what it is attempting to do is has no precedent—anywhere. To many observers, litigious farmers in Goodhue County and their activist state legislators are but a fly on the elephant in the room.

“I am not aware of a first-world HSR system that was built without government involvement or that was expected to deliver ROI on its capital infrastructure costs,” says Schwieterman. France, Spain, Germany, Japan and China all boast extensive HSR networks, but they are government-built or built with public-private partnerships, he adds. So there is skepticism that the U.S. will be first to disprove this reality, and that it will happen in a county of 150,000 people.

“If we are ever to get HSR outside the Northeast Corridor it will be outside capital, such as from China, that will build it,” says longtime railroad industry analyst Fred Frailey. As for where it will be built, “It will not be MSP-Rochester, alas.”

Even proponents are wary. “I have met with them on a few occasions,” says Zelle. “These are real people with a real track record. We are treating it as any large business coming in and promising to achieve a major public goal at no government cost. There are tremendous economic benefits to the state [with] such a project. But [whether] they have the resources to finish and maintain it is an obvious question.”

The China syndrome

The component of NAHSR’s model that generates the least skepticism is the plan for Chinese capital and technology. “China is a large country with its own HSR technology and a capacity to invest,” says Wang. “It’s a unique position.” (Meadley also says a number of sovereign funds are kicking the tires, to mix a metaphor.)

And China is not waiting for the world to come to it. “The Chinese are being very aggressive trying to build rail around the world,” says Rick Harnish, executive director of the Midwest High Speed Rail Association, a nonprofit advocacy group. “The Chinese national railroad came to Chicago to gauge interest in a plan to connect St. Louis, Indianapolis and Chicago. They told the states they were overestimating costs by a factor of two.”

“They’re a real player globally, eager for a place on the world stage, willing to take a financial gamble or two,” says Schwieterman, who reports that a Chinese consortium vastly underbid Canadian railcar supplier Bombardier for new Chicago “L” cars.

“The best I can figure out,” says Harnish, “is the Chinese think of money and ROI in a way we don’t.”

Despite the opportunity, NAHSR is limiting foreign capital to just half its business plan, says Meadley, who is concerned about public and government reaction to a foreign-controlled venture. Good luck, says Schwieterman: “There isn’t a lot of venture capital in the US right now. It’s mostly overseas. They’re handcuffing themselves to rely on domestic capital.”

Sperber concurs. “I don’t think you’ll ever find more than 25 percent domestic investment on these large projects. The payout horizon is too long. The international capital is comfortable with 20 to 30 years and views the U.S. as a safe harbor.”

Meadley admits “there are a limited number of investors who do big infrastructure. We’re not going to cobble together 500 investors. We’re looking for a small number of big partners.” She says NAHSR is relying on potential partners to critique its business plan.

Sperber says any domestic investor will likely have certain characteristics: “There will be a strategic aspect—construction or real estate development,” he says. “Plus a scalable model, something repeatable.”

The effort has already caused NAHSR to add time-sensitive freight to its revenue mix. “Big money comes in using models they know,” Meadley adds. “Freight has come out of trying to specify passenger numbers. The freight model is easier to document and could initially be strongest revenue component.”

To date, NAHSR has not, despite rumors to the contrary, acquired any land, though Meadley says development potential of adjacent land and licensing the project’s intellectual property are still potential sources of income.

Can the rail meet the road?

n Assuming NAHSR moves forward and can raise sufficient capital, it still faces hurdles, say observers. The lack of public funding makes capital acquisition simpler; the same may not necessarily be true for capital deployment, however.

Opponents will be relieved to learn the Rochester train will face the same onerous, time-consuming, and lawsuit-inducing environmental reviews as a public project. “The environmental review is based on scope of the project, not who’s doing it,” says University of Minnesota law professor Alexandra Klass. (The U.S. Surface Transportation Board recently said it would take three years to complete environmental study of a proposed freight railroad bypass around Chicago.)

The process isn’t entirely clear, because the last time a private rail line was built through populated areas of the state, most Minnesotans didn’t own a telephone. “We don’t have the capacity under current structures to fully engage with [NAHSR],” says Zelle, “but it is definitely MnDOT’s role to vet the project.”

“The policy pieces of a private/public partnership like this don’t exist,” says MnDOT’s Krom. But that void is being rapidly filled.

There is legislation in both the Minnesota House and Senate to require NAHSR to fund a study of its proposal at the U of M. In the House, Rep. Steve Drazkowski (R-Mazeppa) authored legislation too late for consideration this session that would “require the applicant to demonstrate a need as part of an environmental impact study.”

Quipped Hornstein (he sits with Drazkowski on the House Transportation Committee): “Their party’s dislike of passenger rail supersedes their love of private enterprise.”

The lay of the land—literally

NAHSR’s plan is to build as much of its line as possible on elevated right-of-way over Hwy. 52. This is meant to minimize impact on private land. “There’s very little land to acquire,” reassures Meadley. “And air rights are relatively low-cost.” She notes that the line will have “few bridges, no tunnels, and the soil does not require deep borings.”

Still, caveats exist. “The highway is engineered for car speeds,” so 200 mph trains elevated above a highway with curvature designed to only support 65 mph may be problematic, explains Bryan Dodds, MnDOT’s director of land management. He notes that the state owns some of Hwy. 52, but has only easements on other parts. Also, “the last 40 miles from Rosemount are very challenging for” an elevated line, says Krom.

Inevitably, there will still be land acquisition. NAHSR’s ace in the hole would appear to be eminent domain: utilities, pipelines and railroads can employ it to acquire land without the landowners’ assent. “A railroad just brings a lawsuit,” says the U’s Klass. “It has to be a public use with just compensation. The railroad does not need the state’s permission.”

As this knowledge worked its way into southeast Minnesota, alarm bells went off. “The notion that we use eminent domain to underwrite a private project, c’mon,” says blogger Sorensen.

Part of the Drazkowski bill (HF 3659) would place limits on a railroad’s capacity to use eminent domain. Whether that’s legally sound is unclear. “The state can amend its eminent domain law,” says Klass, “but it can’t impede interstate commerce.” Carrying freight puts NAHSR in the interstate commerce business.

The future is July

Right now, NAHSR sees “no obvious barrier to moving forward.” It has a brand it will debut in summer, with a logo, and assuming it can “validate ridership, validate the revenue model,” it will be a go, says Meadley.

“We have to raise $50 million for a feasibility study,” in which we would find our investors and determine most of the details,” she says. “It’s a two-year process. Then construction.”

“I totally believe in Joe [Wang]’s ability to make this happen,” affirms Sperber. “He won’t start if he can’t finish it.”

By public sector standards, two years from concept to moving earth is inconceivable. But this is a track that is particularly hard to handicap.

“The governor’s observation is this will happen in someone’s lifetime in North America. Why not here?” says commissioner Zelle. “Learning more isn’t going to hurt anyone.”

Adam Platt is TCB’s executive editor.

This article is reprinted in partnership with Twin Cities Business.