'I Saw an Opportunity to Regain Control of the Desert Line'


'I Saw an Opportunity to Regain Control of the Desert Line'

MTS CEO Paul Jablonski defended the agency’s decision to tap Pacific Imperial Railroad to revive the troubled Desert Line as a simple move to make some money off a dormant asset. He says MTS did plenty to ensure it got a good deal even if efforts to resurrect the line implode.

Perhaps no big transportation project in San Diego County is getting as much attention – and scrutiny – as the Desert Line.

And that surprises Paul Jablonski, CEO of the Metropolitan Transit System, San Diego County’s regional transportation agency. He said that only two years ago, the defunct line that runs from the U.S.Mexico border northeast into Imperial County was considered to be worth peanuts to most, and large railroad corporations shied away from any attempts to rebuild it.

Civic and business leaders on both sides of the border say a rebuilt line could usher in a new era of cross-border trade.

But current efforts have been muddied by allegations of fraud and mismanagement, and MTS has come under fire for ever making a deal with Pacific Imperial Railroad, the latest company to try and resurrect the Desert Line.

In Jablonski’s view, MTS’s effort was simple and noncontroversial: The agency simply seized an opportunity in 2012 to rework the lease to the line and make money off a dormant asset.

Before Pacific Imperial won the lease to the Desert Line in 2012, another group called Carrizo-Gorge Railway (with many of the same principals as Pacific Imperial) was on the job.

Carrizo Gorge was overtaken by infighting and nearly two dozen lawsuits related to shareholder and investor complaints, Jablonski said.

Some of the leaders of Carrizo Gorge formed Pacific Imperial and made their own play for the rights to the Desert Line lease. MTS eventually acquiesced, and that’s where the most recent chapter of the Desert Line reconstruction effort takes off.

I sat down with Jablonski this week to talk about the project, and whether he has confidence Pacific Imperial can finish the job.

This conversation has been edited for length and clarity.

An observer might reasonably ask, “Look, you had huge problems with (Carrizo Gorge Railway) and a lot of infighting between them, why would you ever want to deal with any of the same people that were involved in that mess again?”

You have to go back to 2012, and because chronologically when you go in that point in time, you make decisions based on that.

There was two things. I certainly wanted to make this asset work for MTS, it really had gotten nothing in the 34 years that we owned it, but secondly I saw an opportunity to regain control of the Desert Line and get it out from underneath this very lucrative buyout provision that had been negotiated 30 years before that.

What about the individual characters (leading Pacific Imperial)?

In the six years that I dealt with them … I never got any indication that these were bad guys, that they were unscrupulous.

What they needed was they needed long-term access to that line so they could go to investors and say we’ve got a 99-year-lease, we need to raise $50, $60, $70 million to rebuild this line and nobody’s going to take away this line from us in two years or four years or 2034, we’ve got it for 99 years … And we said, OK, that’s fine, but what we’re really concerned about is we give you a lease and nothing happens …

So we did two things. We said we’re going to make you pay for the privilege of having this lease, so while you’re getting all your ducks together, I want $1 million a year … Secondly, is that we structured this like we do certain real estate transactions. … We have a land lease with the developer and we have a cut of the proceeds from rentals … And that was the same situation here, the end game was not just $1 million a year, the end game was to get a percentage of the gross. …

Notwithstanding those two provisions, the annual amount and the percentage, what we said is that’s all fine and dandy too, but that’s not going to push this project along, and that’s why we had the milestones … Where we are right now is that they had to go out on the line, they had to survey the line, all of its assets, they had to have, create a plan to rebuild those assets based on engineering examinations or inspections. They did that … they had to present to us a reconstruction plan, we’re reviewing that right now, we have our own engineers looking at it, making sure it’s all sound. Once we approve that document, they have to start limited operations within 12 months … They have to be able to run at least a test train over all the assets to make sure everything is fine.

You discussed Chas and PIR, they needed a long-term lease so they could go to investors and say, “Hey, we’ve got a project here and we’ve got a long-term lease for it.” It’s my understanding that one of the others tools they also had to lure investors was this property in Mexico that they were hoisting up for a little while. How was that property presented to MTS? Was that presented as part of “We are PIR and this is what we have to offer?”

No. I think actually the Tembabichi thing came well after we did the lease, and I know there’s been a lot of issues raised with this Tembabichi property. (Tembabichi is the name of the Baja property that PIR’s principals were reportedly using as potential collateral to lure investors. The property’s value and who actually owns it has come into question.) And it would be one thing if when we were entertaining the lease with PIR, if we said to them, “Prove to us that you have the capability of getting this money, getting the financing” and they said, “Yes, we have this collateral, we have this property.” Didn’t happen that way.

Why did you not ask that question? Why was it not important to you to know they were capable of doing it?

This was always viewed as a public-private partnership. We gave them the lease, they had the obligation to perform. … To me, it’s up to them to raise their own financing to do the project. If they can’t raise it, they lose the lease and that was always our insurance policy, our fallback provision. … I always felt that we had our protections. Either they were going to be successful in this or they weren’t, and if they weren’t, we were going to take it back.

What I’m trying to do is put myself in your shoes a little bit. Here you’ve got some characters with some serious allegations against them. You’ve got a guy talking to you, and yeah, your job is not the financing, but here one day he’s touting a $500, $600 million thing to you, soon after you find out it’s  worth bupkis. I mean, what do you think of these guys here? This doesn’t scream to me of competence. If any of these guys were your employee, I feel like they’d be fired.

Well, you know, I’d be the first one to admit that if you take people like Chas McHaffie, Don Stoecklein’s an attorney (McHaffie is a business partner in the venture; Stoecklein is CEO of Pacific Imperial), Chas is more of a dreamer type, I always looked at these guys as they had the vision and I think they did have the vision far before anyone else had it, but they weren’t going to get the job done.

It was actually my strong suggestion to them that they hire some people with some credibility. One, a person who could raise money for them, who knew Wall Street, that knew finance, that knew investment banking. And two, somebody who really knew railroad operations. … I told Chas, I said, “You know Chas, you have to get some credibility here, because you don’t have a lot of credibility in terms of running this whole company.”

(Two people who were brought in to fill the roles identified by Jablonski left Pacific Imperial soon after arriving and are now among Pacific Imperial’s fiercest critics.)

Can (Pacific Imperial) do this?

I think they can because, you know, I see this gelling up in a different way than was really envisioned.

I think any deal to make this happen is going to have to involve Mexico. … Another model that people are strongly considering is some kind of … a joint venture between PIR and their equivalent on the Mexico side, which is Baja Rail. … They want this thing to happen over there, so there could be a joint venture. … Somebody could, they could blend companies, they could have stock transfer … they could form a new company, which would be a joint venture, there’s any number of legal ways where that could happen.

And then I think it lends a whole other dimension to what the financing prospects are. … Some kind of formal interaction between PIR and Baja Rail, and that’s what we’re exploring right now.

Correction: An earlier version of this post misspelled Carrizo Gorge Railway.

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