Edit post

Edit your reply below.

Post Body
Enter your post below.
The cost projections for the CHSRP, which are published by its proponents, only consider construction costs.  They don't include the financing costs.    <o:p></o:p> The cost of servicing the debt (financing costs) will be capitalized to the project in accordance with Generally Accepted Accounting Principles.  As a rough rule of thumb, the cost of financing a project over 30 years, which is the likely debt terms for the project, would nearly double the cost.  Of course, it depends on the terms of the financing, i.e. interest rates, bond terms, etc.<o:p></o:p> The latest estimated cost of the project is $42.6 billion.  I assumed that the project managers could borrow the funds at the current <st1:state w:st="on"><st1:place w:st="on">California</st1:place></st1:state> municipal bond rate (4.53 per cent) for 30 year debt.  The rate is higher than the rates for many other states because of <st1:state w:st="on"><st1:place w:st="on">California</st1:place></st1:state>’s heavy debt burden.  The state is a financial basket case.  Some of the project will be funded by the federal government, which can borrow money for less than the <st1:state w:st="on">California</st1:state> municipal rate, at least for now, although it will probably eventually cost the feds more to borrow money than <st1:state w:st="on"><st1:place w:st="on">California</st1:place></st1:state>, if historical patterns remerge, which they will in time.  The private partners may have to pay more than the <st1:state w:st="on"><st1:place w:st="on">California</st1:place></st1:state> rate to borrow money for the project, since its financial viability is in question, although it depends on their credit rating and where they borrow the money.  Accordingly, I think using the <st1:place w:st="on"><st1:state w:st="on">California</st1:state></st1:place> municipal bond rate is a reasonable estimate of what it will cost to fund the project.<o:p></o:p> For simplicity purposes I assumed the project managers would borrow all the money on day one and would pay it back in 30 years.  Moreover, I assumed that it would make monthly payments on the debt, either to the bond holders or to a sinking fund.  Accordingly, the monthly payment on $42.6 billion would be approximately $215.8 million.  Multiplying this by 360 months (30 years) shows a cost of $77.7 billion.  And dividing this by 378 miles, which is the estimated project distance from <st1:city w:st="on">Anaheim</st1:city> to <st1:city w:st="on"><st1:place w:st="on">San Francisco</st1:place></st1:city>, shows an average cost of approximately $205.5 million per mile or rounded up to $206 million per mile.  Again, these are relatively rough estimates, but there is a key point in them.  Financing a project like the CHSRP is costly and when the financing costs are charged to the project, the cost of the project jumps dramatically.  It is just like buying a house or a car.  The cost of your house or car is the sticker price plus the financing costs unless you pay cash for them.    <o:p></o:p> My analysis is overly simplistic.  For example, if I were preparing the cost estimates for a power plant or other large project, I would run separate calculations for each tranche of debt.  Moreover, I would know exactly how much the debt was like to cost, when it would be issued, and how it would be paid back.  But to keep the estimates manageable, in light of the fact that I don’t know how much of the project will be funded by various players or their weighted average cost of debt, I simply used the California tax free rate, which is a reasonable estimate of the weighted average cost of the project debt.  In fact, depending on how much money private investors put into the project, as well as their  weighted average cost of debt, as well as what happens to fed borrowing rates, the <st1:state w:st="on"><st1:place w:st="on">California</st1:place></st1:state> rate could be a bit low. <o:p></o:p> I think this is probably a pretty conservative estimate.  Of course, until the project is completed, no one will know for sure how much it will cost.  Most of these projects are notorious for coming in late and over budget.  Given the likely variances, as well as financing probabilities, the cost of construction could vary by as much as 25 per cent from my calculations.  Nevertheless, when the financing charges are added to the project, the project cost, not just the construction costs, over time will be considerably more than the project proponents have stated.
Tags (Optional)
Tags are keywords that get attached to your post. They are used to categorize your submission and make it easier to search for. To add tags to your post type a tag into the box below and click the "Add Tag" button.
Add Tag