High-Speed Trains and cost-benefit analysis

1. High-Speed Trains and cost-benefit analysis Steinar Strøm, University of Turin 17.11.2010

2. To build or not • In order to decide whether a high-speed train alternative should be build or not one needs a decision function: • Discounted expected future social surplus relative to an alternative say, business as usual • Discounted expected future social surplus is the sum of discounted expected consumer surplus, expected net profit of all transporters minus investment costs relative to the outcome of business as usual. • Costs of taxation has to be accounted for • Build: if discounted expected future social surplus is positive

3. Investment cost • Expected investment costs in the construction periods. • All costs should reflect that resources used have an alternative value in the market, the principle of opportunity cost • Thus, use of labor should be priced according to what the workers can get in the market, in alternative jobs

4. Operating costs • Maintenance costs should be included • All cost should be expected costs and measured in real prices, prices deflated by a price index. • If real prices are expected to increase over time this should be accounted for • Again, all prices should reflect opportunity costs, in particular electricity prices

5. Expected transportation demand • Expected transportation demand is needed to calcuate expected consumer surplus and expected net profit. • To do so one needs information about future probabilities for the choice of transportalternatives • And the population of potential travellers

6. Tranpsportation choice probabilities • One need to specify: • Transport alternatives in each transportcorridor (airplane, bus, private car, rental car, other trains) • Possible future demanders of transport (leisure, work travels, cargo) • Their choice sets • Their preferences ( a function of traveltime,costs of traveling and comfort) • Transport probabilities for all alternatives in all corridors have to be estimated on data: • Stated preference surveys? • Market simulations? • Observations from other countries? • Combinations of types of data

7. Generalised transportation cost • This cost for each transport alternative depend (linearily) on price and time and is a special case of a travel model with choice probabilities • It is often used in transport analysis • The special case occurs if travelers preferences are fully known determinstically by the analyst

8. Market shares • Market shares for the transport alternatives are the observed paralell to the average of the choice probabilities, average taken over the demanders • Note that these market shares depend on prices of all transport alternatives, • and on other alternative specific variables like time and comfort

9. Expected consumer suplus • This surplus can be derived from the estimated choice probalities and the population of potential travellers, which is straightforward if the deterministic part of travellers preferences are linear in price, time and comfort • The surplus is measured in money terms and one should account for the possibility that the willingness to travel may increase over time

10. Expected current profit • Expected current profit for the transporters equals prices set for different type of travellers and corridors times the associated expected demand, and minus operating costs • Expected demand is the product of potential number of travellers and market share • This should be done for all competing transporters (airplanes, other trains, high speed train, buses, cars)

11. Expected social surplus • Expected social surplus is the sum of consumer surplus, aggregated over the relevant type of travellers and corridoors, expected net profit of all tranporters in the relevant corridoors, • minus the investment costs related to the construction of the high speed rail. • Cost of taxation should be accounted for

12. Costs of taxation • This costs reflect the fact that if there is a deficit in running some of the transport alternatives, including the coverage of the investment costs, then taxpayers have to cover the deficit. • The reasons why there is a cost of taxation is that taxes may affect behavior of individuals and firms. • Ministery of Finance has estimates of these costs.

13. Optimal prices • Prices for each mode of transport should be set so that at each point in time expected social surplus is maximized • If costs of taxation is zero, then the prices for using the high speed trains equals marginal operating costs. Taxpayers cover deficits, including the investment costs • If costs of taxation is extremely high, then prices of using the high speed train should be set so that expected profit is maximized, given the prices set by competitors (monopolistic competition, oligopoly) • In reality cost of taxation is positive, but not extremely high

14. Then what? • The derived prices should be used to calculate market shares and should be compared with the market shares that were used in simulating the prices • Of course, to use a full mathematical/econometric model is a complicated exercise (but was used by me to calculate optimal prices of using the rapid speed train to Gardermoen (Flytoget), (”Tilbringertjenesten til Oslo Lufthavn, Gardermoen”, Trond Gabrielsen og Steinar Strøm, Sosialøkonomen nr 7, 10-26, 1999). • But one need to calculate, one way or the other, relationships between prices and market shares in order to assess the economic value of the high speed train alternative.

15. Present value • To calcuate the expected present value of the future expected sosical surplus one needs to specify: • The time horizon (80 years?) • The discount rate, which should reflect the systematic risks involved • The systematic risk reflects the correlation between the expected social surplus of introducing the high speed train alternative and the rate of return on national wealth • A rate of 4% could be ok, but one should consider the possibility that the rate may decrease over time • See ”Kalkulasjonsrenten i en usikker verden”, Dag Morten Dalen og Michael Hoel og Steinar Strøm, Samfunnsøkonomen nr 8, 2009.

16. Other benefits • A high speed train may generate other incomes/benefits which should be included in the calculations • These are productivity gains related to moving labor and other resources from low to high productivity activities. • These effects have to be estimated, but one should not include incomes, or the benefits of increased employment, if this is only due to shifting labor from one location to another without any productivity gains.

17. The alternative(s) • The assessment of having a high speed train should be evaluated against a specific alternative • Above I have assumed business as usual. But what this is for the next 80 years is not easy to say, but it has to be described. • A high speed train is not one single alternative. There could be different high speed alternatives, ranging from 3-4 long range alternatives to high speed trains in the Oslo area only.