CBA and Rail Network Extensions in France: from Schizophrenia to Therapy

1. Stockholm - 16 03 2011 _ Workshop Contemporary Issues in CBA in the Transport Sector CBA and Rail Network Extensions in France: from Schizophrenia to Therapy Pr. Yves Crozet Laboratoire d’Economie des Transports (Institute of Transport Economics) University of Lyon - France yves.crozet@let.ish-lyon.cnrs.fr

2. Contents • 1) Rail network extensions: a “double bind” • The High Speed Train Mania in France • CBA and the “resolute decision maker” • 2) Diagnostic and therapies

3. High Speed Rail: a French Schizophrenia • According to G. Bateson, Schizophrenia emerges when an actor is submitted to two contradictory incentives, i.e. a double bind • About the extension of the High Speed Network, the decision maker is suffering such a double bind • A strong social and political demand to extend the network (equality?) • Some strong rules of CBA aiming to avoid any waste in public investments (efficiency?)

4. The “HST mania” in France (1) • 30 years ago the first HST between Paris and Lyon (500 km, a 2 hours trip, 23 return trips per day, train capacity 500 or 1000, load factor above 80%) • Geography matters: Paris region population = 11 M, Lyon region population = 1,5M. And almost a desert between the two! • The “French model” of TGV is therefore valid for an optimal mix between distance, speed and traffic in relation with a gravity rationale

5. The “HST mania” in France (2) • Between 1981 and 2011, extension of the “Paris-Lyon” model: • North: Paris-London, Paris-Bruxelles (via Lille) 1993, • West and South-West: Paris-Tours, Nantes, Rennes, Bordeaux (1994) • South East: Paris-Marseille (2001) • East: Paris-Strasbourg (2007), Paris-Basel (2011)

6. Only 25 train stations on HS tracks But 200 train stations receiving HS trains. HS trains and HS tracks

7. The “HST mania” in France (3) • Within the new “National Scheme of Transport infrastructures a lot of new HS tracks are planned (2500 km!) • The total cost within 2020 is officially estimated to 75 billions of Euros • Totally inaccessible if we consider the average level of rail new investment during the past ten years, less than 0.5 billion per year!

8. 2500 km of new HS tracks To be compared with the lenght of HS tracks in 2010 = 1875km « Grenelle de l’environnement »

9. CBA and the “resolute decision maker (1) • CBA is an old practice in France in the field of Transport infrastructures • Ex ante appraisal and ex post evaluations are obligatory • To do that, very detailed guidelines are given by the Ministry of Transport • In 2005, those guidelines have been strengthened in order to have a better selection process among all the projects

10. CBA and the “resolute decision maker (2) • The 4 main changes of the guideline were the following • Rate of discount shifted from 8% to 4% • Microeconomic risk has to be officially estimated and introduced in CBA • Macroeconomic risk of public expenses is introduced: opportunity cost of public funds • A new criterion is defined to target the best projects: the ratio Net Present Value/ Invested Public Euro (NPV/IPE)

11. Risk and opportunity cost of public funds Macroeconomic Risk of Public Expenses Opportunity Cost of Public Funds And NPV/IPE Former Rate of Discount 8% New Rate of Discount 4 % SystematicRisk Assessment No Risk No Risk Microeconomic Risk

12. Optimisation : constrained resource = public money

13. Example of two projects Budget Constraint Possibilities area

14. The NPV/IPE rule • The opportunity cost of public funds • Accepted projected • Rejected Projects • Best public decision:

15. CBA and the “resolute decision maker (3) • It is as if the French government tried to apply the Elster’s theory of “resolute decision maker” (Ulysses and the sirens) • CBA and the strong new rules of decision are something like a constraint protecting public actors against their own future weaknesses • A reduction of the rate of discount to have a higher value of future external costs • Opportunity cost of public funds and risk assessment to chose the best projects

16. 2) Diagnostic and therapies • Preference for speed, beyond opportunism and fetishism • Therapies from CBA and from other sources

17. Beyond fetishism and opportunism (1) • Local politicians are considering public expenses as a collective good. Especially if public money is coming from the State. • HST is presented as an economic panacea, a “horn of plenty”, a magic wand! • Contradictory to the data and many research results, they maintain that HST creates automatically more jobs locally and more economic growth nationally!

18. Beyond fetishism and opportunism (2) • There is a systematic confusion between the consumer surplus and the GDP • Gains of speed are very often presented as a condition of economic growth. • There is a misunderstanding of the relationship between economic growth and speed gains • Speed gains are defined as a source of growth instead of a consequence

19. Global mobility (data points : 1960-2000) 100 000 Per Capita Traffic Volume , pkm 10 000 1 000 100 100 000 1 000 10 000 100 GDP / cap, US$ (2000) Source : Schafer and Victor (2000) : economicgrowth rates based on IP CC IS9 2a/e scenario

20. Time budget Road speed High Speed Value of Time Distance Walking Car Revenue High Speed Source: Crozet 2009

21. Beyond fetishism and opportunism (3) • There is a legitimacy of the preference for speed • On long run there is, everywhere, a speed/GDP elasticity • The more you increase the GDP, the more you observe a demand for high speed mode • Therefore, the shift of demand in favour of high speed mode is not a surprise • The correct issue is then to define what kind of speed can be offered

22. Two sources or Therapies • The diagnostic is the following: there is a legitimacy of the preference for speed • But no legitimacy of all the local demand of speed • In order to cure the French schizophrenia about HST, two main ways are suitable • a) CBA to delegitimize the “bad projects” and to target the “good projects” • b) Other sources than CBA to promote alternative options to the “French model of HST”

23. Two sources or Therapies (a) • Budget constraint is the first obvious argument against “bad projects” • Budget constraint at a national level, according to the high level of public deficit and debt • Budget constraint of local government, they have to pay one half of public subsidies! • Budget constraint of RFF (Infrastructure Manager) in relation with the legal rule forbidding any investment without profitability for RFF

25. Institutional Framework RFF (I.M.) • EU Directive 1991-440 • 1997, the split between SNCF (Trains Operator) and RFF (Infrastructure Manager) • But SNCF, as a subcontractor is in charge of Infrastructure maintenance Infr. Maintenance Infr. Charges SNCF (T.O.)

26. CBA and ex post evaluationExpected and observed economic profitability of the first HS lines

27. CBA and ex post evaluationExpected and observed socio-economic profitability of the first HS lines

28. Two sources or Therapies (a) • For instance, the financing structure of the new line between Tours and Bordeaux (300km, 7 billions) is the following • Central government 1.5 billion • 58 different local governments 1.5 billion • Private company 3 billions of Euros • RFF 1 billion

29. Two sources or Therapies (a) • CBA is also a therapy to chose among new projects • Due to the “full cost rule”, RFF can invest only if rail access charges can cover RFF investment • The main consequence is a smart grid of rail access charges, with a wide space and time modulation of rail access charges

30. Two sources or Therapies (b) • Apart from CBA some other therapies are available • A CO2 emissions assessment of building and operating (carbon balance sheet) • Such an assessment has been done for the new “Rhine-Rhone” HS tracks • 12 years of operating are necessary to cover the carbon cost of building. It will be more if we had no nuclear power.

31. Two sources or Therapies (b) • It is also necessary to explain that there is not only one HST model • In Japan or in Germany the speed of HST can be “only” 200 or 250km/h • The French HST model is not convenient for the urban region Marseille – Nice • The French HST model is not convenient when the potential traffic is too low in comparison with the building cost

32. Two sources or Therapies (b) • It is clear that the more we extend the network, the more we reduce the profitability of the new links • There is an optimal size of the HST network • Last but not the least, for some relations, air transport is the cheapest mode, even when taking into account the external costs

33. Conclusion • HST mania is obvious in France (see the National Scheme of Transport Infrastructure) • But do we need 2500 km of new HST? • Or do we need to define different kinds of high speed trains, and different kind of high speed modes, according to different mobility needs • CBA remains an important leverage to convince public decision maker that they have to abandon some too simplistic objectives

34. Modulation of rail access charges 500/100 362/100 Source : SESP