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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.

1

De Rus: The BCA of High-Speed Rail

Published by Berkeley Electronic Press, 2011


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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

2

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


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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:

14



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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

18



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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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