Political gridlock railroads high-speed trains

FORTUNE -- Whether or not a multi-billion-dollar high-speed rail project is good for the nation, the current political schizophrenia over its funding is causing rail companies lot of pain.

On one side of the debate are Republican politicians like New Jersey Governor Chris Christie, Ohio Governor-elect John Kasich, Florida Governor-elect Rick Scott and Wisconsin Governor-elect Scott Walker.

Walker has called the proposed Milwaukee to Madison high-speed rail line an "$810 million boondoggle train," emblematic of "out of control taxing and spending."

On the other side are Democrats like Senators Dianne Feinstein and Barbara Boxer in California, Illinois Governor Pat Quinn and Governor-elect Andrew Cuomo of New York, each begging the Feds for some of the billions of dollars in high-speed funds that Ohio, Wisconsin, Florida and New Jersey may refuse to take.

The Obama administration has committed more than $8 billion so far to begin work on 13 planned corridor lines. A controversial study sponsored by Siemens for the U.S. Conference of Mayors' has glowingly projected that by 2035 the plan could create almost 150,000 new jobs in the hub cities of Albany, Chicago, Orlando and Los Angeles alone.

"High speed rail is critical to building the foundation for future economic growth," Cuomo wrote to U.S. Transportation Secretary Ray LaHood earlier this month, adding that "a Cuomo administration would move quickly to put the billions in rejected stimulus funding towards projects that would create thousands of good jobs for New Yorkers."

There is plenty of debate over whether high-speed rail's benefits (reduction in greenhouse gasses, oil dependency, and congestion, to name a few) would be as effective as proponents believe, or whether other alternatives would better suit the suburban sprawl that is America. Many of the proposed lines, says Samer Madanat, Director of the Institute of Transportation Studies at the University of California, Berkeley, "would not have sufficient ridership, thus losing huge amounts of money, needing excessive subsidies, and not contributing to reducing highway and airport congestion."

But it's striking that recession-weary politicians, even Republicans, might turn down huge sums of job-juicing federal funds doled out as part of the largest American infrastructure project since Eisenhower set loose the bulldozers to construct our 47,000-mile highway system. After all, Ohio is staring at more than 10% unemployment, Florida's level is at nearly 12%; New York actually looks good in comparison, with an unemployment rate just over 8%.

Jobs in jeopardy

The confusion over which states will now participate in President Obama's rail initiative and what lines will still be funded is likely to only get worse. Caught in the middle are a host of construction, engineering and rail companies that thought they already had a deal.

The Spanish train maker Talgo built a manufacturing and maintenance facility in Milwaukee and started hiring after then-governor Doyle announced that the state would purchase at least two sets of Talgo trains out of its American Recovery and Reinvestment funds. Now the company says it might have to close up the shop by the end of next year unless the state comes through on its earlier commitment to build high-speed rail.

Luckily for Talgo, it may not have to move far. Illinois Governor Pat Quinn, seeing opportunity, asked Washington to send over Wisconsin's federal funds, then wrote a letter to Talgo saying the company should scoot on over into the friendlier confines of Illinois. Although leftover funds can be re-allocated to other high-speed rail projects, Lahood has not indicated what funds will be left or where they might go, and the DOT notes there is lots of competition.

But some other companies may not be so lucky. Besides the state battles, cities and towns are squaring off too. Palo Alto, which would be crossed by the San Jose to San Francisco route, just unanimously rejected a plan by the California High-Speed Rail Authority to build a station stop there; other nearby towns, Redwood City and Mountain View, may be interested in taking the station, but only if they are given better digs and more money to build it.

Further complicating matters, back in Washington DC, Rep. Jerry Lewis, a California Republican, has introduced legislation to rescind about $12 billion in unobligated stimulus funds, of which a few billion are set for high-speed rail projects. And Rep. Ron Klein, a Florida Democrat, is sponsoring a Holocaust Accountability and Corporate Responsibility Act that would prevent companies from bidding on high speed rail contracts if they participated in the Holocaust and haven't resolved claims brought by victims and their families.

Although it currently targets SNCF, a French railroad firm that is bidding for work on both the Florida and California lines, the Klein bill could potentially cause trouble for other European companies eyeing US high-speed rail funds. Germany's Siemens AG (SI) manufactures light-rail cars out of Sacramento, California, while Alstom SA, the French transportation company, is doing the same in Hornell, NY.

Alstom, for one, doesn't need any more trouble. This year it laid off about 500 workers from the Hornell plant, reducing the workforce there to less than three hundred.

Rep. Klein's amendment could inversely help American rail companies. Unfortunately, none alone are capable of producing truly high-speed rail, which can clock in at more than 200 miles an hour. That's why California Governor Arnold Schwarzenegger -- another seeker of leftover rail funds -- has said he's interested in seeing what Chinese companies can offer, and why General Electric (GE, Fortune 500), a leader in slower diesel-electric locomotive technology, is partnering with China's Ministry of Railways. It hopes to one-day make top-speed locomotives as well.

About the only area where American companies can compete is in diesel technology. But, even here, politics has interceded. Rep. John Mica, the powerful Florida Republican who heads the House Transportation Committee, has suggested that the Obama administration is supporting the wrong types of projects, what he calls "slow-speed trains to nowhere." That talk squarely hits 11 of the high-speed corridors that are envisioned for diesel trains running at less than 100 miles per hour, notes Robert Poole, who directs Transportation Policy at the conservative Reason Foundation.

Politics, it seems, can turn even the sweetest taxpayer trough into an unreasonable gamble. Although nothing seemed amiss when American Railcar Industries (ARII) released its quarterly report at the beginning of the month, last week the Icahn-backed company shelved a nine-month-old joint venture with US Railcar to manufacture passenger cars in the United States. The companies cited "current market conditions" for diesel multiple units, which are the sort of self-propelled diesel passenger cars that would be perfect for those now-questioned corridors.