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Volume 2,Issue 1 2011 Article 2
Journal of Benefit-Cost Analysis
The BCA of HSR: Should the Government
Invest in High Speed Rail Infrastructure?
Gins De Rus, University of Las Palmas de G.C., Spain, andUniversity Carlos III de Madrid, Spain
Recommended Citation:
De Rus, Gins (2011) "The BCA of HSR: Should the Government Invest in High Speed Rail
Infrastructure?,"Journal of Benefit-Cost Analysis: Vol. 2: Iss. 1, Article 2.
DOI: 10.2202/2152-2812.1058
Available at: http://www.bepress.com/jbca/vol2/iss1/2
2011 Berkeley Electronic Press. All rights reserved.
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The BCA of HSR: Should the Government
Invest in High Speed Rail Infrastructure?
Gins De Rus
AbstractThis paper deals with public investment in High-Speed Rail (HSR) infrastructure and tries to
understand the economic rationale for allocating public money to the construction of new HSR
lines. The examination of data on costs and demand shows that the case for investing in HSR
requires several conditions to be met: an ex ante high volume of traffic in the corridor where the
new lines are built, significant time savings, high average willingness of potential users to pay, the
release of capacity in the conventional rail network and airports. On the contrary, net
environmental benefits seem to be insignificant in influencing the social desirability of HSR
investment. This paper discusses, within a cost-benefit analysis framework, under which
conditions the expected benefits could justify the investment in HSR projects.
KEYWORDS: infrastructure, public investment, high speed rail, benefit-cost analysis
Author Notes: This paper draws on work undertaken for the BBVA Foundation and the OECD-
ITF Transport Research Centre. The author is indebted to Chris Nash, Stephen Perkins, Kurt Van
Dender, Jorge Valido and an anonymous referee for their comments and support. The
responsibility for the opinions expressed and for any remaining errors is solely that of the author.
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IntroductionInvestmentininfrastructurerequiresasignificantamountofpublicfunds.In the case of intercity transport,most of the corridors are already in
operationandinvestmentsinlargeprojects,suchashighspeedrail(HSR),
canbeviewedasameans to reduce thecostof traveling (timeandcost
savings,reliability,comfortandexternalities)withrespecttothesituation
prevailingwithoutproject (deRusandNash,2007;deRus,2008).Asthe
typeofassetsinvestedinHSRinfrastructureisessentiallyirreversibleand
subject to cost and demand uncertainty, the optimal timing is a key
economic issue,as the investmentdecisioncanbedelayed inmostcases
(Dixitand
Pindyck,
1994).
These
characteristics
give
asignificant
value
to
theoptiontoinvest,whichisinthehandsofgovernments.
The introduction of the HSR technology, consisting of
infrastructure and rolling stock that allows themovement ofpassenger
trainscapableofspeedsabove300kmperhour,hasledtoarevivalofrail
transport.Apart from the industry claims and themyth of high speed
trains, this technology competes with road and air transport over
distances of 400600 km, and inwhich it is usually themainmode of
transport.Forshortdistance trips, theprivatevehiclehasacomparative
advantage;andforlongdistancetravel,airbecomesthehegemonicmode
oftransport.
TheHSR technology isexpandingallover theworld thanks to the
allocationofsignificantamountsofpublicmoney for theconstructionof
new lines.Mostprobably interurbanpassenger transportnetworkswill
bedeeplyaffectedbypublicdecisionsonHSRinfrastructureinvestments
thatwill change thepresent equilibrium in intercity transport.National
governments and supranational organizations, such as the European
Commission,arehelpingtointroducethenewtechnologythroughdirect
investment or by cofinancing national projects under very favorable
conditions.1
1TheproposalsoftheEuropeanCommissionfortheTransEuropeanTransportNetwork
envisageexpenditureof600beuros,ofwhich250beurosareforpriorityprojects,anda
largepartofthisexpenditureisforHSR.
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OthercountriesliketheUKorU.S.havebeenreluctantintherecent
pasttofinancetheconstructionofHSRlineswithpublicfunds.Currently,
theU.S. governments decision to includeHSR passenger services as acenterpiece of national transport policy and Chinas announcement to
spend $162 billion to expand its railway system have given a new
endorsement to thisrail technology thatmaycompetewithairandroad
transportinmediumdistanceintercitycorridors.
TheintroductionofHSRpresentssomeinterestingcharacteristicsfor
theeconomicanalysisofthispublicinvestment:
(i) Itisanewinfrastructuretechnologylinkedtomodernity,supportedbythegeneralpublic,themediaandpoliticians.
(ii) Itsintroductionisagovernmentinterventioninvolvingasignificantsumoftaxpayersmoney.
(iii) Itaffectstheprivatesectoroftheeconomy(constructionandrollingstockcompanies,airlines,busoperators,etc.).
(iv) Itshowshowastandardbenefitcostanalysisframeworkcanthrowsomelightonthevalueformoneyofthisinvestment.
TheeconomicanalysisofHSR investmenthasbeen covered from
differentperspectives,thoughresearcheffortsontheeconomicevaluation
of this infrastructure are limited comparedwith the amount of publicmoney involved. A general assessment canbe found inNash (1991),
Vickerman (1997),Martin (1997),deRus andNombela (2007).The cost
benefitanalysisofexistingorprojected linescanbefound indeRusand
Inglada (1993, 1997) forMadridSevilla, de Rus and Romn (2005) for
MadridBarcelona,Levinson et al. (1997) for LosAngelesSan Francisco,
and SteerDaviesGleave(2004)andAtkins(2004)fortheUK.Theregional
effectsofHSRinvestmentcanbefoundinVickerman(1995,2006),Blumet
al. (1997),Plassard (1994),Haynes (1997), andPreston andWall (2007),
and in a broader context in Puga (2002). See Kageson (2009) for the
environmentalimpact.
The benefitcost analysis of infrastructure requires an explicit
considerationofpricing.Theaverage fare tobe charged isan important
componentofthegeneralizedcostoftravel.Producercosts(infrastructure
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andoperation)arebasically included in thegeneralizedcostof traveling
byroadorair.ThisisnotalwaysthecasewithHSR.Railwaysarefarfrom
full cost recoverywhen infrastructure costs are included.Therefore, thedecisiononwhichkindofpricingprincipleisgoingtobefollowedforthe
calculationofrailwayfaresisreallycritical.
Given thehighproportionof fixed costsassociatedwith theHSR
option,thedecisionofchargingaccordingtoshorttermmarginalcostor,
onthecontrary,somethingclosertoaveragecost,couldradicallychange
thevolumeofdemandforrailwayintheforecastedmodalsplit,andthis
unavoidable fact obviously has a profound effect on the expected net
benefit of the whole investment. Although pricing is crucial for the
understanding of thispublic intervention, itwill notbe covered in this
paper(foradiscussionofoptimalpricinginrailwaysseeNash,2001,2003;
andRothengatter, 2003).Wewill assumehere that government charges
pricesequaltoshortrunmarginalsocialcosts.
Thispaper tries toshedsome lighton theeconomicdimensionof
theHSR investmentdecision,whichnotonlyaffects the transportsector
buthassignificanteffectsontheallocationofresources.Inthispaperwe
discussunderwhichcircumstancesitmaybejustifiedtoinvesttaxpayers
moneyintheconstructionofHSRinfrastructure.Thecostsandbenefitsof
the construction and operation ofHSR are described in Section 2. The
benefitcost analysis of investing inHSR infrastructure is presented inSection3.Section4concludes.
CostsandBenefitsofHSRTotal social costs of building and operating an HSR line consist of
producer,userandexternalcosts.Producercosts involve twomajor types
ofcosts:infrastructureandoperatingcosts.Usercostsaremainlyrelatedto
totaltimecosts,includingaccess,egress,waitingandtraveltimeinvested,
reliability, probability of accident, and comfort.2
External costs areassociatedwithconstructionandoperationoftheline.
2The introductionofHSR services reduces travel timeand increasesquality.Wedeal
withthereductionofusercostsasabenefitoftheproject.
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The construction costs of a newHSR line are determinedby the
challenge to overcome the technical problemswhich cause it to fail to
reach speeds above 300 km per hour, such as roadway level crossings,frequent stops or sharp curves, new signaling mechanisms and more
powerful electrification systems. Building new HSR infrastructure
involvesthreemajortypesofcosts:planningandlandcosts,infrastructure
building costs and superstructure costs (UIC, 2005). Feasibility studies,
technicaldesign, landacquisition, legalandadministrative fees, licenses,
permits,etc.areincludedinplanningandlandcosts,whichcanreachupto
10%of total infrastructure costs innew railway lines that require costly
land expropriations. Infrastructure building costs involve terrain
preparation and platformbuilding.Depending on the characteristics of
the terrain, theremaybeaneed forviaducts,bridgesand tunnels,with
costsranging from15to50%oftotal investment.Finally,theremaybea
need for railspecific elements such as tracks, sidings along the line,
signaling systems, catenary, electrification, communications and safety
equipment,etc.,whicharecalledsuperstructurecosts.
Railway infrastructure also requires the construction of stations.
Althoughsometimes it isconsidered thatthecostsofbuildingrailstations,
whichareusuallysingularbuildingswithexpensivearchitectonicdesign,
areabove theminimum required for technicaloperation, these costsare
part of the system and the associated services provided affect thegeneralized costof travel (e.g.,qualityof service in the stations reduces
thedisutilityofwaitingtime).
From the actual construction costs (planning and land costs, and
mainstationsexcluded),of45HSRlinesinservice,orunderconstruction,
theaveragecostperkmofaHSRlinerangesfrom10to40millioneuros,
with an average of 20 million. The upper values are associated with
difficult terrain conditions and crossing of high density urban areas
(CamposanddeRus,2009).
The operation of HSR services involves two types of costs:
infrastructuremaintenanceandoperating costs,and those related to the
provision of transport services using the infrastructure. Infrastructure
maintenanceandoperatingcostsincludethecostsoflabor,energyandother
material consumed by the maintenance and operations of the tracks,
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terminals, stations, energy supplying and signaling systems, aswell as
trafficmanagementandsafetysystems.Someofthesecostsarefixed,and
dependonoperations routinelyperformed inaccordancewith technicalandsafetystandards. Inothercases,as in themaintenanceof tracks, the
cost isaffectedby the traffic intensity.Similarly, the costofmaintaining
electrictractioninstallationsdependsonthenumberoftrainsrunningon
operation. Infrastructuremaintenance costs equal 100,000 eurosperkm,
representing4067%ofthetotalmaintenancecosts.Hence,theinvestment
costsofarepresentative500kmHSR lineare10billioneuros (planning,
land costsand stations excluded),and50million eurosperyear for the
maintenance costs of the line. To these fixed costswe have to add the
operatingcostsofrunningthetrains.
TheoperatingcostsofHSRservices(trainoperations,maintenanceof
rollingstockandequipment,energy,andsalesandadministration)vary
across rail operators depending on traffic volumes and the specific
technologyusedbytrains.InthecaseofEurope,almosteachcountryhas
developed its own technological specificities: each train has different
technical characteristics in terms of length, composition, seats,weight,
power, traction, tilting features, etc. The estimated acquisition cost of
rollingstockperseatgoesfrom33,000to65,000euros.Thetrainoperating
costs per seat goes from 41,000 to 72,000 euros and rolling stock
maintenance from 3,000 to 8,000 euros. Adding operating andmaintenancecostsandtaking intoaccount thatatrainrunsfrom300,000
to500,000kmperyear,andthatthenumberofseatspertraingoesfrom
330to630,thecostperseatkmcanbeashighastwiceasitisindifferent
countries(UIC,2005;CamposanddeRus,2009).
AcommonargumentregardingtheintroductionofHSRservicesis
thatnegativeexternalitieswillbereducedintheaffectedcorridor,thanks
to the deviation of traffic from less environmentally friendlymodes of
transport. Nevertheless, building and operating a HSR line lead to
environmental costs in terms of land occupied, barrier effects, visual
intrusion, noise, air pollution and contribution to globalwarming. The
firstfouroftheseimpactsarelikelytobestrongerwheretrainsgothrough
heavilypopulatedareas.
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Recent research has shown that,besides land occupation,barrier
effects, visual intrusion and noise, the environmental effect of theHSR
technologyisparticularlyacuteintheconstructionphase.Kageson(2009)concludesthatinvestmentinhighspeedrailisundermostcircumstances
likely to reduce greenhouse gases from traffic compared to a situation
when the linewasnotbuilt.The reduction, though, issmalland itmay
take decades for it to compensate for the emissions caused by
construction. However, where capacity restraints and large transport
volumesjustify investment inhigh speed rail thiswillnot causeoverall
emissionstoraise.Itisworthpointingouttheimportanceoffixedcosts
of this technology (infrastructureconstruction,maintenanceandexternal
costsassociatedwithconstruction)tounderstandwhytheexistingtraffic
volumeissocriticalforthesocialjustificationofanHSRproject.
Regarding the energy consumption of high speed rail in
comparisonwithothermodes (CEDelft, 2003),whileHSRmay involve
twicetheenergyconsumptionperseatkmofanaveragetrain,thismaybe
substantiallyoffsetbyhigher loadfactors.TheFrenchTGV,forexample,
operateswith an average load factor of 67%,whereas for conventional
trains,loadfactorsaretypicallynomorethananaverageof4045%. The
reason for thedifference is that the limitednumberof stopsof theTGV
makes it possible to enforce compulsory seat reservation and yields
management techniques to a greater extent than on trains which alsohandle significant numbers of shortdistance passengers. HSR clearly
results inasubstantialsaving inenergyoverair,buttheadvantageover
car,which arisesbecause high speed rail typically operates at a higher
loadfactorthancar,ismoremarginal(deRusandNash,2007).
TheprincipalbenefitsfromHSRcomefrom:lowertotaltraveltime,
higher comfort and reliability, generated demand, reduction in the
probability of accident, and in some cases, the release of extra capacity
whichhelpstoalleviatecongestion inothermodesoftransport.Lastbut
not least, it has been argued that HSR investment reduces the net
environmentalimpactoftransportandhasfavorablelocationeffects.
Letusstartwithtotaltraveltime.Theusertimeinvestedinaround
tripincludesaccessandegresstime,waitingtimeandinvehicletime.The
totaluser time savingswilldepend on the transportmode that isused
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where the passengers come from. Evidence from case studies onHSR
development insevencountriesshows thatwhen theoriginalmode isa
conventional rail with operating speed of 130 km/h, representative ofmanyrailwaylinesinEurope,theintroductionofHSRservicesyields45
50 minutes savings for distances in the range of 350400 km. When
conventional trainsrunat100km/h,potential timesavingsareonehour
ormore,butwhen theoperatingspeed is160km, timesaving isaround
halfanhouroveradistanceof450km(SteerDaviesGleave,2004).Access,
egressandwaitingtimearepracticallythesame.
When a passenger shifts from road or air, the situation changes
dramatically. For road transport and line lengths around 500 km,
passengersbenefit from travel timesavingsbut they losewithrespect to
access,egressandwaitingtime.Benefitsarehigherthancostswhentravel
distance is long enough, asHSR runs, on average, twice as fast as the
average car. Nevertheless, as the travel distance gets shorter the
advantage of theHSR diminishes as invehicle time losesweightwith
respect to access, egress and waiting time. Nevertheless, in choosing
modesbetweencarandHSR,akey factorcouldbewhether the traveler
will need a car at his destination. This, in turn, could depend on trip
purposeand theavailabilityofmass transitat thedestination.Similarly,
thenumberofpeopletravelingtogethercouldmatterasthemarginalcost
ofasecondpersontravelinginacarthatisalreadymakingthetripisnearzero.Moreover, it isusuallyassumed that tripquality ishigher forHSR
thanforautotravel.Insomeways,thatmaybetrue,butnotinallways.
Forexample,one can stopwhenandwhereone likesand it iseasier to
carryluggagewithoneselfiftravelingbyauto.
Air transport is, insomeway, theoppositecase toroad transport.
IncreasingthedistancereducestheHSRmarketshare.Fora2,000kmtrip
(and shorterdistances) the competitiveadvantageofHSRvanishes.But,
whataboutthemediumdistance(500km)wherethemarketshareofHSR
issohigh?InastandardHSRlineof500600km,airtransporthaslower
invehicletime.TheadvantageofHSRrestsonaccess,egressandwaiting
time,plusdifferencesincomfort.
AssumingthataccessandegresstimesarelessforHSRthanforair
travel, thenetuserbenefitof shiftingapassenger fromair to rail could
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evenbepositiveinthecaseoflongertotaltravelaftertheshift.Thiswould
bethecaseifthevaluesoftimeofaccessegressandwaitingtimearehigh
enough to compensate the longer invehicle time. Nevertheless, theconditionofaloweraccessandegresstimeforHSRthanforairtravelnot
alwaysholds.Clearly, itdependson the exactoriginanddestinationof
thetrip.Particularly fornonbusiness travel,buteven forbusiness travel
to suburban locations,air travelmighthaveanadvantage inaccessand
egresstimeaswellasinlinehaultime.
The relative advantage of HSR with respect to air transport is
significantlyaffectedbytheexistingdifferencesinthevaluesoftime,and
thesevaluesarenotunconnectedwith theactual experienceofwaiting,
queuing andpassing through security controlpoints in airports.Hence,
one should not discard the implications of potential increased security
measuresforrailtravel.Ifthesemeasuresareincreased,demandforHSR
relative to othermodes coulddecrease for two reasons: trip time could
increaseandtripqualitycoulddecrease.
Benefits also come from generated traffic. The conventional
approachforthemeasurementofthebenefitofnewtraffic istoconsider
that thebenefitof the inframarginaluser isequal to thedifference inthe
generalized costof travelwithandwithoutHSR.The lastuserwith the
projectisindifferentbetweenbothalternatives,sotheuserbenefitiszero.
Assuming a lineardemand function, the totaluserbenefit of generateddemand is equal toonehalfof thedifference in the generalized costof
travel. Nevertheless, there hasbeenmuch debate as to whether these
generatedtripsreflectwidereconomicbenefitsthatarenotcapturedina
traditionalcostbenefitanalysis.Leisuretripsmaybenefitthedestination
bybringing in touristspending,andcommuterandbusinesstripsreflect
expansionorrelocationofjobsorhomesoradditionaleconomicactivity.
Besides,many indirectbenefits are associatedwith investment in
transport infrastructure ingeneral,andnotexclusively inhighspeed,so
eveniftheyincreasethesocialreturnontheinvestmentintransport,they
donotnecessarilyplacehighspeedinabetterpositionoverotheroptions
for transport investment.Moreover, inundistorted competitivemarkets
theory tells us that the netbenefit ofmarginal change in a secondary
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market iszero (foramoredetaileddiscussionon intermodal effects see
Section3).
Regardingthespatialeffects,highspeedlinestendtofavorcentrallocations,so that if theaim is toregenerate thecentralcities,highspeed
train investmentcouldbebeneficial.However, ifthedepressedareasare
on theperiphery, the effect canbenegative.Thehigh speed train could
alsoallowtheexpansionofmarketsandtheexploitationofeconomiesof
scale,reducing the impactof imperfectcompetitionandencouraging the
locationofjobsinmajorurbancenterswherethereareexternalbenefitsof
agglomeration (Venables, 2007),Graham, 2007).Anyof these effectsare
most likely tobe present in the case of service industries (Bonnafous,
1987).Locationeffectsaredependentonmanyfactorsanditisdifficultto
determineaprioriwhetherthecenterortheperipherywillbebenefitfrom
therelocationoftheeconomicactivity(Puga,2002).
Althoughtheeffectsofbuildingahighspeedrailinfrastructureare
many, the first direct effect is the reduction of travel time (while
simultaneouslyincreasingthequalityoftravel)and,whencrosseffectsare
significant, the reduction of congestion in roads and airports. In cases
where the saturation of the conventional rail network requires capacity
expansions,theconstructionofanewhighspeedlinehastobeevaluated
as analternative to the improvement and extension of the conventional
network,with theadditionalbenefitofreleasingcapacity.Obviously theadditional capacity has value when the demand exceeds the existing
capacityon theroute.Under thesecircumstances theadditionalcapacity
can be valuable not only because it can absorb the growth of traffic
between cities served by the highspeed railway, but also because it
releases capacityon existing lines tomeetother traffic like suburbanor
freight. In the caseof theairport, theadditionalcapacitycanbeused to
reducecongestionorscarcity.Inanycase,theintroductionofHSRwould
producethisadditionalbenefit.
The environmental impact of investment in HSR points in two
directions: one of them is the reduction in air and road traffic. In such
cases, its contribution to reducing the negative externalities of these
modes couldbepositive,althoughwemustnot forget that it requiresa
significantdeviationofpassengers from thesemodes.Moreover, theuse
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ofcapacitymustbehighenoughtooffsetthepollutionassociatedwiththe
productionofelectricpowerconsumedbyhighspeed trains (and in the
construction period), aswell as noise pollution.Rail infrastructure alsohasanegativeenvironmentalimpactsuchasthebarriereffect,aswellas
the land taken for the access roads needed for construction and the
subsequentmaintenance andoperation.Thenetbalanceof these effects
dependson thevalueof theaffectedareas, thenumberpeopleaffected,
thebenefitsfromdivertedtrafficandsoon.
To the extent that infrastructure charges on thesemodes do not
cover the marginal social cost of the traffic concerned, there will be
benefits from such diversion. Estimation of these benefits requires
valuation of marginal costs of congestion, noise, air pollution, global
warmingandexternalcostsofaccidentsandtheircomparisonwithtaxes
and charges. The marginal external costs (including accidents and
environmental costbut excluding congestion)perpassengerkm for two
European corridors, havebeen estimated in INFRAS/IWW (2000). The
resultsshowthatHSRbetweenParisandBrusselshavelessthanaquarter
oftheexternalcostofcarorair.Inlongdistances,theadvantageoverair
is reduced, as much of the environmental cost of the air transport
alternativeoccursattakeoffandlanding.
The existence of network externalities is another alleged direct
benefitofHSR(seeAdleretal.,2007).Undoubtedly,adenseHSRnetworkoffers more possibilities to rail travelers than a less developed one.
Nevertheless,weareskepticalof theeconomicsignificanceof thiseffect.
Wedonotargueagainst the idea thatnetworksaremorevaluable than
disjointed links. The point is thatwhen there are network effects, they
shouldbe treated asbenefits at a route level.Although rail passengers
gainwhenthewiderorigindestinationmenuisinadensernetwork,the
utilityofaspecifictravelerwhoistravelingfromAtoBdoesnotincrease
with thenumber ofpassengersunless the frequency increases, and this
effect(asortofMohringeffect)iscapturedatalinelevel.
Airlines operate in open competition so the adjustment to the
externalshock indemandproducedbythe introductionofHSRservices,
isa reduction in thenumberofoperations.Thisaffects frequencies, first
becausethereduction indemandissubstantiallyhigher;second,because
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airlinesarenotsubjecttopublicserviceobligationsandsotheadjustment
is legally feasible; and third,because of the nature of flight operations
(slots required for takeoff and landing), frequencies are necessarilyaffectedwhenservicesarecut.Thereductioninthenumberofflightsper
hour increases total travel time when passengers arrive randomly, or
decreasesutilitywhen they choose their flight in advancewithin a less
attractivetimetable.Thesameargumentappliestobuses.Evenifintercity
services are provided through franchising, the longterm adjustment
wouldinevitablymeanalessattractivetimetable.
BCAofHSRThe history of the railways shows that public regulation based on
restraintsoncompetitionandheavysubsidieswereineffectivetoprevent
the road and air transport from replacing the railways as thedominant
modeoftransportation(GmezIbaez,2006).Thisischangingrapidlyin
themediumdistance passengermarkets.Massive public investment in
newdedicated infrastructureofhighcapitalcosts isbringingback to the
railwaysa leadingrole incorridorswhere theautoand theairplanehad
left the railwith amarginalmarket share. Today, in corridorswith a
lengtharound500kmandHSR services, it isnotunusual to finda rail
shareintherangeof7090%.
It seems clear that the success of HSR is related both to its
attractiveness(timesavings,reliabilityandcomfort)anditspublicsupport
(prices barely cover 40% of total costs in some lines). The network
expansion of HSR is taking place outside the market discipline. HSR
technologyisnotamarketresponsetotheproblemofairportdelaysand
roadcongestion,buttheresultofgovernmentsdecisionstodealwiththe
problem of congestion and environmental externalities.3 In the railway
industryandpoliticalheadquarters,itiscommonplacetolinkthesuccess
3 AnalternativeexplanationofthegovernmentsdecisiontoinvestinHSRcanbefound
inthe`interestgroupcompetitionmodel(Becker,1983,2001)orinthe`whiteelephant
modelofpoliticalbehavior(RobinsonandTorvik,2005),orintheexistenceoftwolevels
ofgovernment(deRusandSocorro,2010).
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of theHSR public investmentwith the highmarket share the rail has
achievedwithspeedierandmorereliableservices.Foraneconomistthisis
not the point,but ratherwhether the society iswilling to pay for thisinvestment.
SupposethatanewHSRprojectisbeingconsidered.Thefirststep
in the economic evaluation of this project is to identify how the
investment, a `do something alternative, compares with the situation
withouttheproject.Arigorouseconomicappraisalwouldcompareseveral
relevant`dosomethingalternativeswiththebasecase.Thesealternatives
include upgrading the conventional infrastructure, management
measures,roadandairportpricingoreven theconstructionofnewroad
andairportcapacity.Weassumeherethatrelevantalternativeshavebeen
properlyconsidered.Thepublic investment inHSR infrastructure canbecontemplated
asawayofchangingthegeneralizedcostofrailtravelincorridorswhere
conventional rail, air transport and road are substitutes.4 Instead of
modeling the construction ofHSR lines as a new transportmode,we
consider thisspecific investmentasan improvementofoneof theexisting
modes of transport, the railway.Therefore, it ispossible to ignore total
willingness to pay and concentrate on the incremental changes in
surpluses or, alternatively, on the changes in resource costs and
willingnesstopay.We follow here a resourcecost approach, concentrating on the
changeinnetbenefitsandcosts,andignoringtransfers.
The social profitability of the investment in HSR requires the
fulfillmentofthefollowingcondition:
4Inthecaseofcomplements(BanisterandGivoni,2006)theeconomicappraisalofHSR
projectsfollowsthesameprinciples.
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( ) ( )
0 0 0( ) ( )
T T Tr g t rt r g t
f q B Q e dt I C e dt C Q e dt > + + , (1)
where:B(Q):annualsocialbenefitsoftheproject.
Cf:annualfixedmaintenanceandoperatingcost.
Cq(Q):annualmaintenanceandoperatingcostdependingonQ.
Q: passengertrips.
I:investmentcosts.
T:projectlife.
t;year.
r:socialdiscountrate.
g:annualgrowthofbenefitsandcosts.
B(Q) is the annual gross socialbenefitof introducingHSR in the
corridor subject to evaluation, where a `conventional transport mode
operates.ThemaincomponentsofB(Q)are: timeand cost savings from
deviated traffic, increase in quality, generated trips, the reduction of
externalities and, in general, any relevant indirect effect in secondary
markets including,particularly,theeffectsonothertransportmodes (the
conventional transportmode).Otherbenefits related to the relocationof
economicactivityandregional inequalitiesarenot included inB(Q).The
netpresentvalueofbenefitsincludedinequation(1)canbeexpressedas:
0 1
0
( ) ( )
0 0
1 0 ( )
01
( ) [ ( ) ](1 )
( ) ,i i
T Tr g t r g t
C
N Tr g t
i
i
B Q e dt v Q C e dt
q q e dt
=
= + +
+
(2)
where:
v :averagevalueoftime(includingdifferencesinservicequality).0
: averageusertimepertripwithouttheproject.1
: averageusertimepertripwiththeproject.
Q0:firstyeardiverteddemandtoHSR.
CC:annualvariablecostoftheconventionalmode.
:proportionofgeneratedpassengerswiththeprojectwithrespecttoQ0.
i :distortioninmarketi.0
iq :equilibriumdemandinmarketiwithouttheproject.
1
iq :equilibriumdemandinmarketiwiththeproject.
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Equation(2)assumesthatalternativetransportoperatorsbreakeven
andthattheaveragegrossbenefitofageneratedpassengertripisequalto
the value of a diverted passengertrip (Abelson and Hensher, 2001).Substituting (2) in (1),assuming indirecteffectslast termofexpression
(2)are equal to zero, it is possible to calculate the initial volume of
demandrequired forapositivenetpresentvalue (deRusandNombela,
2007).
HSR technology canbe characterized as a faster transportmode
than conventional railway and road transport, and amore convenient
alternativethanairforsomedistances.Althoughtheeconomicevaluation
of a particular project requires disaggregate information on passengers
shifting from other modes, and generated traffic and the specific
conditions in thecorridor, it ispossible tosimplify theproblemworking
withsomeassumptions.
Themain purpose of these assumptions is to concentrate on the
HSRbenefitsderived from timesavingsandgenerateddemand, leaving
asidethebenefitsfromtheprovisionofadditionalrailcapacityandfrom
thenetreductionofaccidents,congestionandenvironmentalimpactsdue
todiversion from road and airmodes,which aremore sensitive to the
local conditions of each corridor. The idea is tomake thebasicmodel
workable with real data, concentrating efforts on the uncontroversial
effectsofHSRinvestment,inordertoestablishsomebasisfortherationaldiscussionontheeconomicdesirabilityofthisinvestment.
The assumptions are the following: indirect effects (positive and
negative)cancelout in theaggregate; thenetreduction inexternalities is
negligible;firstyearnetbenefitsgrowataconstantannualrateduringthe
project life; producer surpluses do not change in alternative modes;
marketpricesareequal toopportunitycostsand therearenobenefits to
usersother than timesavings; improvedquality;andwillingness topay
forgenerated trips.Thecondition tobe satisfied forapositiveNPV can
thenbeexpressedasfollows:
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( )
0 0[ ( ) ( )]
T Tr g t rt
q f B Q C Q e dt C e dt I > , (3)
where:
B(Q):annualsocialbenefitsoftheproject.
Cq(Q):annualmaintenanceandoperatingcostvariablewithQ.
Cf:annualfixedmaintenanceandoperatingcost.
I:investmentcosts.
T:lifeoftheproject.
r:socialdiscountrate.
g:annualgrowthofbenefitsandcosts.
Assuming r g> , and solving expression (3) for the project tobe
sociallydesirable,thefollowingconditionisobtained:
( )( ) ( )
(1 ) (1 )q fr g T rT
B Q C Q C e e I
r g r
>
. (4)
DividingbyIandrearrangingterms:
( ) ( )
( ) ( ) 1
1 1
rTq f
r g T r g T
B Q C Q C r g r g e
I e I r e
> +
. (5)
The economic interpretation of expression (5) is quite intuitive,
assumingthattheprojectlifeisverylong(Ttendstoinfinity).Inthiscase,the netbenefits of the first year (annualbenefitsminus variable costs
depending on Q) expressed as a proportion of the investment costs,
shouldbehigherthanthesocialdiscountrateminusthegrowthrateofnet
benefitsplusaproportion ( ( ) /r g r )of fixedannualmaintenancecosts.
In the caseofa finiteproject life, theonly change isamoredemanding
benchmarkforprofitability.5
ThesocialprofitabilityofHSR infrastructurecruciallydependson
the netbenefit of the first year of the project.When externalities and
indirect effects are not significant, first year annual benefits
5( )
11
1 r g Te >
,
( )
11
1
rT
r g T
e
e
>
when r g> and0 T< < .Bothexpressionstendto1when
T .
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( ( ) ( ))qB Q C Q come mainly from time savings, improved quality, and
benefits fromgenerated traffic,6netofvariable costs.Thesenetbenefits
dependon thevolumeofdemand tobeserved, the time savingson thelinewithrespecttoexistingmodes,andtheaverageusersvalueoftime.
Thecaseforinvesting inanHSR linerequiresaminimum levelof
demand in the firstyearofoperation.Thisminimumdemand threshold
requiredforapositiveNPVishigherthelowerarethevalueoftime,the
averagetimesavingperpassenger,theproportionofgeneratedtraffic,the
growth or benefits overtime, the project life and the cost savings in
alternativemodes; and thehigher are the investment,maintenance and
operatingcosts,andthesocialdiscountrate.
deRusandNombela(2007)anddeRusandNash(2007)calculate
therequiredvolumeofdemand(existinganddeviatedpassengertrips)in
thefirstyearoftheproject(Q0)underdifferentassumptionsregardingthe
mainparameters in(1)and (2).TheminimumvalueofQ0 thatwouldbe
necessaryforapositiveNPVisthefollowing:
0 10 ( ) ( )
1 1(1 )
( )(1 ) 1 1
rT
q f Cr g T r g T
r g r g eQ I C C C
v e r e
= + + + +
(6)
Theresultsshowthat,withtypicalconstructionandoperatingcosts
(seeSection2),timesavings,valuesoftime,annualgrowthofbenefitsand
the socialdiscount rate, theminimumdemand threshold required fora
newhighspeed line investment tobejustifiedon socialbenefit terms is
around 10million passengertrips in the first year of the project. This
initialdemandvolumewasobtainedunder theassumption thatbenefits
comemainly from time savings fromdeviated traffic, thewillingness to
pay associatedwith generated demand and the avoidable costs of the
reductionofservicesinalternativetransportmodes.
Moreover,theseaveragevaluesimplythatallpassengerstravelthe
wholelengthoftheline.Giventheexistenceofintermediatestationsalong
thelineanddifferenttriplengths,thesevaluesunderestimatetherequireddemandthreshold.Inaddition,divertedtrafficalsocomesfromroadand
6Willingnesstopayforthedifferenceincomfortisanothersourceofbenefit,although
theempiricalevidenceisscarce.16
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air transport. Time savings are lowerwhen passengers divert from air
transport,althoughhigherwhenpassengersshiftfromroadtransport.In
thispaperwe assume that the average time saving per passenger goesfrom half an hour to an hour and a half,whichprobably includes any
potentialcaseinmediumdistanceHSRlines.
Otherkeyparametersarethevalueoftimeandthesocialdiscount
rate.Weuseaveragevaluesof timeranging from15 to30euros.Forthe
sakeofrobustness, themaximumvaluechosen isabove thestateofthe
art values (see for example,Nellthorp et al., 2001).This range includes
different possibilities of trip purposes and initial transport mode
combinations,andthepossibilityofanextrawillingnesstopayforquality
notincludedinthereportedvaluesoftime.Thesocialdiscountrateis5%
in real terms, as recommended, for example, by the European
Commissionfortheevaluationofinfrastructureprojects.7
Sensitivity testswere applied to see the effects on the firstyear
demand threshold leading to aNPV=0, obtainedwith themeanvalues.
Investmentcostsperkilometerwereallowedtotakethevalues,12,20,30
and 40million euros.The averagebenefitperpassenger: 20, 30 and 45
euros.Thepercentageofgenerateddemandrelativetodiverteddemand:
20, 30, 40 and 50.Annualgrowth rateofnetbenefits: 2,3and 4%.The
socialdiscountrate:5and3%alternatively.Theresultsof thesensitivity
testshow thatweonly findacase forHSRata totaldemandbelow6mpassengertrips in the firstyearbut inunlikelycircumstanceswhere low
constructioncostsandalowdiscountratearecombinedwithhighvalues
oftimesavingsperpassenger.Withhighconstructioncostsbutotherwise
favorable circumstances, a total firstyear demand of at least 10m
passengertrips isneeded; inunfavorablecircumstances,therequirement
maybeconsiderablymorethanthat.
Ashasbeenstressedthroughoutthispaper,theestimateddemand
thresholds havebeen obtained assuming thatbenefits come from time
savingsofdivertedtrafficfromcompetingmodesandwillingnesstopay
fromgeneratedpassengertrips.When theprovisionofnewrailcapacity
is needed and there is significant congestion in roads and airports,
7SeeEuropeanCommission(2008).
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additionalbenefits ofHSR investmentwould reduce the required first
year demand for a positive NPV. The construction of new HSR lines
increasescapacity,forbothpassengersandfreight,bothbyprovidingthenew infrastructure itself andby releasing capacity in existing routes. In
thosecaseswhereseriousbottlenecksmake itverydifficult to introduce
upgraded services on existing routes, the case for HSR investment is
stronger.The casewould alsobe stronger in circumstanceswhere high
speed rail provided major environmental benefits or wider economic
benefits.
The fulfillment of condition (1) is not sufficient. Even with a
positiveNPV itmightbebetter topostpone theconstructionof thenew
railinfrastructure(evenassumingthatthereisnouncertaintyandthatno
newinformationisrevealedasabenefitofthedelay).Letusassumethat
theannualgrowth rateofnetbenefits ishigher than thesocialdiscount
rate (g>r) and that the new infrastructure lasts long enough to be
compatiblewithapositiveNPV.Even inthiscaseofexponentialgrowth
ofnetbenefits,thequestionofoptimaltimingremains.Itisworthwaiting
oneyearifthenetbenefitslostarelowerthantheopportunitycostsofthe
investment.
IntermodalEffects:ACloserLookThehighmarket share achievedby railways inmediumdistanceswith
HSR services hasbeen an argument in favor of investing in the HSR
technology. Ifpassengers freelydecide toshiftoverwhelmingly fromair
torail, itfollowsthat theyarebetteroffwiththechange.Theproblem is
thatapassengerdecidestomovefromairtorailbecausehisgeneralized
costof travel is lower in thenewalternative (certainly, this isnotso for
everybody as air transport maintains some traffic) but this is not a
guaranteethatsocietybenefitswiththechangeasitcaneasilybeshown.
ThedirectbenefitsinthecorridorwheretheHSRlineisbuiltcome
mainlyfromthedeviationoftrafficfromtheexistingmodesoftransport,
railwayincluded.ThesebenefitsareaccountedforinCcand 1 0 0( )v Q in
equation (2), where time savings 1 0( ) should be interpreted as the
averageof thehighestbenefitobtainedby the firstuserafter thechange
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and zero, the value corresponding to the last user, who is indifferent
betweenbothalternatives.
The intermodaleffectsmeasured in theprimarymarketconsistofthecostsavingsintheconventionalmodeandtheproductofthevalueof
time, the average time savings and the number of passengers shifting
from the conventional mode to the new transport alternative. The
interestingpointhereisthattheseaveragevalueshideusefulinformation
regarding user behavior and the understanding of intermodal
competition.Time savings includeaccess,egress,waitingand invehicle
time,withdifferentdisutilityfortheuser.Whenusersshiftfromroadto
HSR they save a substantial amount of invehicle timebut they invest
additionalaccess,waitingandegress time,partiallyoffsetting the initial
traveltimesavings.
The opposite case occurs in the case of air transport,where time
savingsexperiencedfromusersshiftingtoHSRcomefromareductionof
access,waiting and egress time (although this isnot always the case as
already mentioned in Section 2) which hardly offset the substantial
increase in vehicle time.Evenwith anegativebalance in terms of time
savings,theuserbenefitcanbeslightlypositivewhenthedifferentvalues
of time are considered (we do not include the ticket price in this
comparison).
The conclusion is that the case forHSR investment can rarelybejustified by the benefits provided by the deviation of traffic from air
transport. It seems apparent than higher benefits could be harvested
deviatingtrafficfromroadtransport,butthisismoredifficultintherange
ofdistancesconsidered.Thebenefitsofdeviatingtrafficfromroadandair
exceedthedirectbenefitsdiscussedabove,asotherindirectbenefitscould
be obtained in the other transport modes where their traffic volumes
diminish with the project. Let us examine the conditions required for
obtainingadditionalbenefitsinthesecondarymarkets.
Itmustbeemphasized that timesavings in theprimarymarket is
anintermodaleffect:thedirectbenefitobtainedbyusersofothermodeof
transportwhobecomeHSRusers. Inaddition, thereductionof traffic in
the substitutivemodemay affect itsgeneralized cost and so the costof
travelingoftheuserswhoremainintheconventionalmode.
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Theexisting transportmodesarenot theonlymarketsaffectedby
theintroductionofthenewmodeoftransport.Manyothermarketsinthe
economyareaffectedastheirproductsarecomplementsorsubstitutesoftheprimarymarkets.Thetreatmentofthesesocalled`indirecteffectsare
similar for any secondarymarket,be it the air transportmarket or the
restaurantsof thecitiesconnectedby theHSRservices (Harberger,1965;
Mohring,1976).
Which indirect effects or secondarybenefits shouldbe included?
The answer is in the expression 1 0 ( )0
1
( )i i
N Tr g t
i
i
q q e dt
=
, included in
equation (2). There are N markets in the economy, besides the HSR
product,and theequilibriumquantitychanges insomeof thesemarkets1 0( )i i
q q withtheproject.Thechangecanbepositiveornegative.Suppose
thesemarketsarecompetitive,andunaffectedbytaxesorsubsidiesorany
otherdistortion,so 0i = . In thesecircumstances therearenoadditional
benefits. Therefore, for indirect effects to be translated in additional
benefits (or costs) some distortion in the secondary market is needed
(unemployment,externalities,taxes,subsidies,marketpoweroranyother
differencebetweenthemarginalsocialcostandthewillingnesstopay in
theequilibrium).
A similar approach can be used for the analysis of intermodal
effects as secondary benefits. Expression 1 0 ( )0
1
( )i i
N Tr g t
i
i
q q e dt
=
in
equation (2) includesroadandair transportmarkets.For thesakeof the
analysisof intermodaleffects, letus separate from the setofNmarkets
affectedby theHSR investment the air transport (or the road transport
market), and generically called any of these transport options the
alternativemodeA.Thegeneralexpressionthataccountsforthe indirect
effectcanbeslightlymodifiedforthediscussionofintermodaleffects.
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( )
0( )
Tr g tH
A A A AH
H
p p c q e dt
p
, (7)
where:
pA: fullorgeneralizedpriceof thealternativemode (airandroad in this
paper).
cA:marginalcostofthealternativemode.
qA:demandinthealternativemode.
AH: cross elasticityof air (or road)with respect to theHSRgeneralized
cost.
pH:fullorgeneralizedpriceofarailtrip.
According to expression (7), the secondary intermodal effects canbepositiveornegativedependingon the signof thedistortionand the
crosselasticity(pH/pHisalwaysnegativewiththeproject). Thereduction
ofroadcongestionandairportdelayshasbeenidentifiedasanadditional
benefitoftheintroductionofHSR.Expression(7)showsthattheexistence
of thisbenefitrequires thenonexistenceofoptimalpricing.Whereroad
congestionorairportcongestionchargesareoptimallydesigned,thereare
noadditionalbenefitsinthesemarkets.
Moreover,supposethereisnocongestionpricingandsothepriceis
lower thanmarginal cost.Even in this case, the existence of additional
benefitsdependsonthecrosselasticityofdemandinthealternativemode
with respect to the change in thegeneralized costof travelingby train.
Thiscrosselasticitymaybequitelowforroadsandairtraveloutsidethe
mentionedmediumrangedistancesorwhentheproportionofpassenger
tripsinterconnectingflightsishigh.
Finally,itisworthstressingthatthedistortioninairportsandroads
duetocapacityproblemscanbedealtwithbyothereconomicapproaches
(congestionpricingandinvestment)whichshouldbeconsideredintheex
anteevaluationofnewHSR linesaspartof therelevant `dosomething
alternatives.
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ConclusionsThe economic rationale of spending public money on new HSR linesdependsmoreon theircapacity toalleviate roadandairportcongestion,
andtoreleasecapacityforconventionalrailwheresaturationexists,than
inthepuredirectbenefitsoftimeandcostsavingsandthenetwillingness
topayagenerateddemand.Therefore, thejustificationof investment in
HSRishighlydependentonlocalconditionsconcerningairportcapacity,
railand roadnetworks,andexistingvolumesofdemand.Theeconomic
evaluation of a new technology has to compare these local conditions,
reflectedinthebasecase,withthe`dosomething ofintroducingthenew
alternative.
The fundamentalproblemofhigh speed isnot technological,but
economic:thecostofHSRinfrastructureishigh,sunkandassociatedwith
strong indivisibilities (the sizeof the infrastructure isvirtually the same
foralineofagivenlengthregardlessofthevolumeofexistingdemand).
Incorridorswith low trafficdensity, thecostperpassenger isextremely
high, whichmakes the financial stability unfeasible and the economic
justificationoftheinvestmentdoubtful.
ThecaseforHSRinvestmentasasecondbestalternative,basedon
indirect intermodal effects, requires significant effectsofdiverted traffic
on the preexisting traffic conditions in the corridor. This means the
combinationofsignificantdistortion,highdemandvolumeinthecorridor
and sufficiently high crosselasticity ofdemand in the alternativemode
with respect to thechange in thegeneralizedcost.Moreover, itmustbe
stressedthat intermodalcompetition isbasedonthegeneralizedpriceof
travel.Modal choice is affectedby the competitive advantage of each
mode of transport, but the comparative advantage can reflect two
completelydifferentfacts:itmayreflectatechnologicaladvantagebut,on
thecontrary,itmayalsobeexplainedbythechargingpolicy.Theimpact
on market share in mediumdistance corridors may vary dramaticallydependingonwhetherthegovernmentchargesvariablecostsoraimsfor
fullcostrecovery.
HSR trains are electrically powered, and therefore produce air
pollutionandglobalwarmingimpactswhencoal,oilandgasarethemain
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sources togenerate theelectricity.Thenegativeenvironmentaleffectsof
theconstructionofanewHSRhavetobecomparedwiththereductionof
theexternalities inroadandair transportwhenpassengersshift toHSR.The finalbalancedependson several factorsbutbasically, theneteffect
dependsonthemagnitudeofthenegativeexternalitiesinHSRcompared
withthesubstitutedmodeonthevolumeoftrafficdivertedandwhether,
andtowhatdegree,theexternalcostisinternalized.
Wehaveexploredunderwhatconditionsnetwelfaregainscanbe
expected fromnewHSRprojects.Using some simplifyingbutplausible
assumptions, it ispossible toobtainabenchmark: theminimum levelof
demandfromwhichapositivesocialnetpresentvaluecouldbeexpected
when new capacity does not provide additional benefits beyond time
savings fromdivertedandgenerateddemand.With typicalconstruction
costsandtimesavings,andexpecteddemandgrowth,afigureofaround
10millionpassengertripswouldberequiredfora500kmHSRlineinits
firstyearofoperation.
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Journal of Benefit-Cost Analysis, Vol. 2 [2011], Iss. 1, Art. 2
http://www.bepress.com/jbca/vol2/iss1/2
DOI: 10.2202/2152-2812.1058