Did the State Screw Talgo?
The train company's stunned CEO blasts Wisconsin for breaching its contract “like a Third World country.”
For more than a year, Talgo CEO Antonio Perez has held his tongue as detractors dumped on his company and its trains, until finally he could take no more. Perez cannot believe the State of Wisconsin has chosen to terminate two contracts it signed with Talgo nearly three years ago. His company has put almost three years of work into a project to build and maintain trains in a warehouse in Milwaukee’s 30th Street Corridor, the long-dormant industrial area Gov. Scott Walker has pledged to help revive with a new, $100 million dollar plan. Yet his administration will kill the only viable company now operating there, Talgo.
“What message does this send to other businesses?” Perez asks. “They should be careful of doing business here because Gov Walker does not keep his word. It’s like we’re talking about a Third World country, where people don’t have respect for their contracts.”
Wisconsin’s commitment to Talgo and trains goes back to the days of Gov. Tommy Thompson, who served on the Amtrak board of directors. Thompson made Wisconsin “a leading member of the Midwest Regional Rail Initiative” and “developed an implementation plan for high speed passenger rail in the state,” as a 2001 Blue Ribbon Task Force established by him noted.
At the heart of that approach was Talgo, which won a 1999 bid process by three states, including Wisconsin, for a Midwest Regional Rail Plan that was never able to get funding. The 2001 task force, which reported its findings under Gov. Scott McCallum, continued that momentum, and his successor, Gov. Jim Doyle, signed two contracts with Talgo in 2009, one for the purchase of two trains (for the Milwaukee to Chicago corridor) and one for a 20 year maintenance contract. Doyle envisioned buying two more Talgo trains with the help of federal high speed rail funding, which would be needed to create the Milwaukee-to-Madison line.
“The state of Wisconsin has been planning this for ten years,” says Nora Friend, Talgo’s vice-president for public affairs. “It was Tommy Thompson’s vision that Jim Doyle put into implementation.”
And Talgo was the natural partner. Founded in 1942, Talgo has 190 trainsets in operation across the globe, and has helped make Spain one of the world’s leading innovators in high-speed rail. And because there is no American company that builds high-speed passenger trains, Talgo, Inc., a separate subsidiary of the Spanish company created in the U.S. in 1993, is as good as it gets when it comes to creating American jobs. Only its frames are built in Spain: 65 percent of its parts are sourced from American suppliers, and all of its maintenance and jobs are in America.
Unlike the hulking old-fashioned Amtrak cars, Talgo’s are built of sturdy, lightweight aluminum, and are lighter, faster and safer. Because Talgo trains place the wheels between cars rather than under them, the ride is far more comfortable. Its sleekly modern cars offer WiFi and better cell phone service, upgraded food service and seats that recline without invading the space of other passengers.
In 1993, when Washington State decided to try Talgo trains for the Seattle-to-Portland line, there were doubts about how well it would work, so the state decided to try a six month test replacing the Amtrak trains. The state leased the Talgo trains, found ridership went up immediately, then extended the lease, then finally bought the cars. Today it owns five Talgo trainsets and ridership has grown by more than 800 percent 19 years.
In Wisconsin, the state signed a July 15, 2009 contract to pay $47.5 million to purchase two trains, and a December 30, 2009, contract to pay Talgo $4 million annually for 20 years for maintenance of the trains. To help attract Talgo’s plant to Milwaukee, the city spent nearly $11 million and state invested another $3.5 million to upgrade the 82-acre site Talgo now occupies, paying for new tracks and pavement and retrofitting and making additions to the old AO Smith warehouse Talgo now uses.
While the election of Scott Walker put an end to the high-speed rail plan for Chicago to the Twin Cities via Milwaukee and Madison, Walker made it clear he would honor the state contract for the Hiawatha line from Chicago to Milwaukee. “Gov Walker called us,” Friend recalls. “He said I am a supporter of the Hiawatha Project. I have no issue with it.”
Friend accuses Walker of “manipulating data” to justify killing Talgo’s contract for the Hiawatha trains. But news accounts suggest the Walker administration was reluctantly painted into a corner on this issue by Republicans on the Legislature’s Joint Finance Committee.
Republican committee members were highly critical of former Gov. Doyle and Talgo. Perez and Friend attended its meetings but were not allowed to speak to the committee. “Sen. Lena Taylor (a Milwaukee Democrat) said the head of the company is here, why don’t you ask them to speak?” Friend recalls.
At the urging of Joint Finance, the state Department of Transportation asked the Legislative Fiscal Bureau to study the relative costs of sticking with Amtrak versus honoring the contact with Talgo. By then the state had already paid some $35 million to Talgo for the trains — “more than 75 percent of their cost,” Perez notes. The state would also have to spend money to store the unused trains, since there seems little possibility of a quick sale to any other state.
Yet even if it ate those costs, the state would still save $10 million a year over the 20-year life of the contract with Talgo, a Legislative Fiscal Bureau study concluded. But the report did not take account of savings on fuel for the lighter Talgo cars, which the company says would save some $300,000 a year. Nor did it take account of potential revenue increases from switching to the state-of-the-art Talgo cars, which attracted a 40 percent increase in ridership in Washington State in the first year there. Nor did it factor in the $11 million spent by Milwaukee, nor the possibility that Illinois might chip in some subsidy for the Talgo trains (that state now pays 25 percent of the cost of the Hiawatha line).
Friend charges that the study was based on assumptions “to create a scenario that would look bad for these trains.”
Certainly, the legislature can dictate the assumptions to be used by the Fiscal Bureau. Jon Dyck, who did the bureau’s study, concedes that the potential for fuel savings and ridership increases could lower the annual cost for Talgo’s trains, but he’s not convinced the impact would be that great.
Adding insult to injury, Dyck’s report even suggests a way to evade a suit by Talgo, noting the terms of its contract are only applicable the Department of Transportation, so if it fails to meet its contractual obligations “due to insufficiency of funds provided by the Legislature,” it would not be the department’s fault. That sort of legal trick would seem to send a “beware of doing business with Wisconsin” warning to any potential private sector partners.
Talgo’s executives seems stunned by this turn of events. If Tommy Thompson had created the rail plan, Friend says, Republicans would have been fine with it. But because it was a Democratic successor who succeeded in implementing it, “we are being punished for it. We went ahead in good faith continuing here, and now…”
Friend trails off, searching for the right word. “It’s atrocious what’s happened.”