Is the selection of European Transport Investments efficient?

1. Is the selection of European Transport Investments efficient? Stef Proost, paper with Dunkerley, Van der Loo, Adler, Brocker, Korhnevych

3. Issues • TEN = large transport investment programme (700 billion Euro) with public aid of EU mainly for infrastructure with cross border element (« TransEuropean») • all projects passed the Cost-Benefit test according to the EU Commission • Do the projects actually make sense? • Present 2nd opinions using 3 different models • Whole exercise costed less than 250 thousand €

5. Model 1 :Continent wide Regional GE model • « New Economic Geography » Model: • EU divided into 260 regions that all produce a separate variant – trade (freight) = consumption of variants by different regions • Freight investment: lower trade costs and therefore new consumption opportunities and welfare gain • Passenger benefits added later • Only 10 of the 22 projects studied pass the CBA efficiency test • 9 out of the 22 projects have less than 10% of their benefits outside their own country • So « Transeuropean » character of these projects is very low • The selected projects do not systematically favour the poorer member countries • Interactions between projects are very small

6. Model 2: High Speed Rail and air competition model (Adler, Nash, Pels) • EU divided in 71 zones • Players: • 1 EU rail operator (best case to avoid double marginalization) • 3 hub and spoke airlines • 2 low cost airlines • Business and leisure travellers • 6 players compete in prices and frequencies • Compare equilibria with/without extra HSR lines and with low/high accession charge for use of infra by train operator

7. High-Speed Rail Network (68 arcs)

8. Assessment HSR projects • Pricing of infrastructure use was crucial for the outcome • Break even requirement for capacity makes project less worthwhile • Environmental costs play only a minor role in the assessment!

9. Model 3 Individual project model MOLINO II • EXPERIENCE WITH EXISTING MODELLING for “TEN” Projects • Often there is no Cost Benefit Study available • If there is a study: • Sophisticated network models, but different model for every project, difficult to check by outsiders • Assessments use different methodologies • Often either freight or passenger transport model (no integration) • No strategic interaction between competing modes • No representation of different government levels and their interests • Financial constraints often not integrated • Major risks and uncertainties (demand, costs) often neglected

10. Objectives for MOLINO II • Small policy assessment model to check investment, pricing and revenu use in strategic environment • Same modelling tool for all types of transport investments (canal, rail, road,..) • Not forecasting model but policy assessment model that uses maximum of existing studies and data • Software that allows to check project economics in a few “weeks” • “Net discounted Cash Flow” tool of the transport economist or engineer

11. Model 3 Individual project model • « Molino II » • Can be calibrated on the basis of any existing study • Idea: • Build simple network with OD • For each OD let users (freight, passengers) choose among paths • Calibrate nested CES functions for demand • Analyse different types of equilibria (Nash, optimal pricing, …)

12. Key components MOLINO 1. Network definition 2. Economic agents, their behaviour and the rules of the game 3. Examples 4. Software, Uncertainty and Statistical modules

13. 1. Network representation MOLINO • The objective of the model is to study a particular infrastructure investment project. • The procedure is to start with the investment project and its corridor • This means a physical network generally implying only one mode • This allows to define Origin Destination pairs, links and paths

14. A1 MO R2 R1 T1 R6 T4 A2 MA A3 T2 R4 T3 A5 R3 R5 LI A4 Network representation MOLINO: example Step 1: OD pairs Step 2: add links of potentially competing routes or modes Step 3: Define paths, combining links that bring you from O to D Path is defined Px(link1,link2, ..) Legend Figure: Black= rail Rx Green= air Ax Blue= road Rx BO

15. 2. Economic Agents MOLINO • USERS of different types: choose paths and number of trips • OPERATORS of rail services/roads/air: set prices for users • INFRASTRUCTURE OWNERS: set access charges, can decide investments • DIFFERENT GOVERNMENTS: set taxes

16. Utility Transport Other consumption Peak Off-Peak P1 P2 P6 … P11 … P1 P2 P6 … P11 … Economic Agents: users (2) MOLINO For each type of user and OD we define preferences: e.g. (leisure) Passenger for MO-LI (nested CES) σ1 σ2 σ3a σ3b At lowest level one needs quantities and generalized prices for each path. + elasticities of subst between paths (remember a path also represents modes)

17. Rules of the game MOLINO • Equilibrium requires full specification of • Network • User preferences • Behaviour (objective functions) and constraints on operators, infrastructure managers, governments • Who decides what (prices, investments) under what additional constraints • Including financial constraints (infrastructure fund)

18. Assessment of 4 particular projects with MOLINO-II model • Brenner pass (AU-IT): • Competition with Swiss tunnels • gross benefits are 5 to 10% of investment cost • Betuwe route (NL-D): • Poor economics confirmed • Seine-Scheldt IWW improvement (BE-FR) • Gross benefits are 5 to 10% of investment cost • Gdansk-Vienna / Bratislavia route and rail • Route and Rail are interesting projects

19. Conclusions 1 • There is a need for independent second opinion assessment of EU funded projects • Improvements of assessment methodology necessary (our work is more like handy man work, needs to be professionalized) • There are guidelines but they are sometimes incorrect • NEG models and AIR-RAIL network competition pay attention to new dimensions • MOLINO II is flexible and assesses pricing policies too

20. Conclusions 2 • Projects selected were often not worthwhile: • Of the 22 priority projects, many do not pass the test • Same problem in many federal countries (USA, Belgium…) • Subsidy system need to be restructured to limit pork barrel behaviour (Transp res A paper) • Limit subsidy % to the « transeur » part • Rely more on internal revenues (pricing) – but regulate prices when there is large transeuropean share

21. References • FUNDING research consortium (2005 - dec 2007) • www.econ.kuleuven.be/FUNDING • Deliverables 1,2,3,4,5,6 available as well as task reports • Adler N., Nash C;, Pels E.,(2010), “ High-Speed Rail & Air Transport Competition: Game Engineering as Tool for Cost-Benefit Analysis”, submitted to special issue of Transportation Res. Part B. • Bröcker J., Korhenevych A., Schürmann C.,(2010), “Assessing spatial equity and efficiency impacts of transport infrastructure projects ” , Transportation Res. Part B. • Calthrop E., de Borger B. and Proost S. (2010). Cost-benefit analysis of transport investments in distorted economies. Transportation Res. Part B • De Borger, B., Dunkerley, F., Proost, S. (2007). Strategic investment and pricing decisions in a congested transport corridor. Journal of urban economics, 62(2), 294-316 • De Palma, A., Proost S., Van der Loo S., (2010), “Assessing transport investments – towards a multi-purpose tool”,Transportation Res. Part B • Knight, Brian (2004). “Parochial interests and the centralized provision of local public goods: evidence from congressional voting on transportation projects”. Journal of Public Economics, 88, 845-866. • Proost, S., Dunkerley, F., De Borger, B., Günhneman, A., Koskenoja, P., Mackie, P., Van Der Loo, S. (2011), When are subsidies to Trans European network projects justified?, Transportation Research A, Policy and Practice