Will California High-Speed Rail private investors take any real risk?

California High-Speed Rail is giving up on legal efforts to restore federal funding and pivoting to a public-private partnership model. In a pre-Christmas press release, the Authority announced a “Request for Qualifications for a Co-Development Agreement … aimed at selecting a private partner to evaluate opportunities to invest and deliver the project faster and more efficiently, while commercializing assets (e.g. station facilities, track access, fiber, power, real estate, and others) at the earliest possible opportunity.”

While the Authority will likely find one or more private partners, it is unlikely that any company will make a serious investment without a guarantee of more state taxpayer money. We only need to look at the experience of Brightline both in Florida and Southern California, to see that private investors lose money on passenger rail without government guarantees.

S&P Global Ratings recently downgraded Brightline Florida’s debt to CCC, indicating a high likelihood that bond investors will suffer losses. The ratings agency cited a material deviation from the ridership and revenue growth required to service the company’s massive debt load.

Brightline Florida’s ridership has been growing, but not nearly as fast as management expected. The railroad has also held down ticket prices down to maintain ridership growth. As a result, Brightline 2025 ticket revenue is coming in 70% below forecast, and S&P expects similar shortfalls in subsequent years.

Total revenues are running below operating expenses and may never catch up. Once Brightline Florida runs through its cash reserves, it will not generate enough money to cover debt service and will face default. S&P expects this to occur in early 2027.

Brightline had expected to ultimately capture 12-14% of trips between Orlando and South Florida, but the slower-than-expected growth trajectory suggests that that share is out of reach. This conclusion bodes poorly for Brightline West which projected a 17% capture rate for its service between Southern California and Las Vegas.

Brightline Florida ridership appears to be sensitive to expected traffic on parallel highways such as Florida’s Turnpike. A similar pattern for Brightline West will be a mixed blessing at best. While a train trip will be a very attractive alternative northbound on Friday and southbound on Sunday, Brightline West may not find many riders on the other days when I-15 traffic normally flows at full speed. Further, because Brightline West plans to use single tracking, its capacity will be limited, preventing it from capturing all potential riders on peak days.

But ridership is still a distant worry for Brightline West, which missed a November deadline to assemble all the financing needed to build its high-speed service. Because that deadline was written into the agreement for its March 2025 bond issue, the railroad technically defaulted and was obliged to work with bondholders on a restructuring arrangement. Creditors exchanged their 9.5% coupon bonds, for a combination of cash, new 12% bonds, and options to acquire Brightline common stock, which are likely to be worthless.

With construction cost estimates escalating from $12 billion to just over $21 billion, Brightline West will need more federal assistance. In addition to the $3 billion grant it received during the Biden Administration, the railroad has asked President Trump’s Department of Transportation for a $6 billion low-interest loan. Even with that loan in hand, Brightline West will need to round up additional financing.

Ongoing investor doubts are evident from trading on Brightline West’s new 12% bonds. They most recently traded hands at around 76 cents on the dollar for a yield of around 16%.

All of this bodes poorly for prospective investors in California High-Speed Rail, which has much higher construction costs and more questionable ridership prospects for its planned Gilroy-to-Palmdale service now slated for 2038.

In 2026, California High-Speed Rail Authority CEO Ian Choudhuri will be asking the legislature to let him temporarily bypass Merced and provide more funding beyond the $20 billion of cap-and-invest funds it has already committed between now and 2045. If he can secure that money with strong state guarantees, private investors may step up to share in the tax revenue windfall. But if they are only promised a portion of operating and real estate related revenues, it’s hard to see rational investors committing meaningful amounts of capital.

Brightline’s bicoastal struggles show that the window for companies to operate intercity rail service in the US profitably and without taxpayer support closed decades ago.

Marc Joffe is a Visiting Fellow at California Policy Center.