High-speed rail: when should governments invest?

 Recent years have seen a surge in investment in high-speed rail (HSR) infrastructure in many parts of the world, led by China where over $100 billion a year is being spent (although there was a slowdown in construction after a fatal crash in July 2011). The UK has so far lagged behind, but today the government looks set to approve plans for a high-speed rail link between London and Birmingham as the first stage of a planned network which will eventually extend to northern cities. With the mainstream media covering the debate in more detail than can be dealt with here, this blog instead features a recent Working Paper by de Rus which examines the economic rationale for government investment in the construction of HSR lines, before looking at the arguments in Britain in the context of this analysis.

Transport corridors between major cities generally already exist, so investments in large projects, such as HSR, can be viewed as a means to reduce the cost of travelling (time and cost savings, reliability, comfort and externalities) with respect to the situation prevailing without the project. As the type of assets invested in HSR infrastructure is essentially irreversible and subject to cost and demand uncertainty, the optimal timing is a key economic issue.

The benefit-cost analysis of infrastructure requires an explicit consideration of pricing. The average fare to be charged is an important component of the generalized cost of travel. Producer costs (infrastructure and operation) are basically included in the generalized cost of traveling by road or air. This is not always the case with HSR. Railways are far from full cost recovery when infrastructure costs are included. Therefore, the decision on which kind of pricing principle is going to be followed for the calculation of railway fares is critical.

The Working Paper by de Rus tries to shed some light on the economic dimension of HSR investment decision, which not only affects the transport sector but has significant effects on the overall allocation of public resources.

The analysis 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 line is built, significant time savings, high average willingness to pay of potential users, and the release of capacity in the conventional rail network and airports.

It is suggested that the economic rationale of spending public money on new HSR lines depends more on its capacity to alleviate road and airport congestion, and to release capacity for conventional rail where saturation exists, than in the pure direct benefits of time and cost savings and the net willingness to pay of generated demand. Therefore, the justification of investment in HSR is highly dependent on local conditions concerning airport capacity, rail and road network, and existing volumes of demand. Net environmental benefits are suggested as being insignificant in influencing the social desirability of HSR investment.

The UK case

In the UK proposal for a link between London and Birmingham, much of the justification comes from the fact that existing rail links are rapidly approaching saturation as rail passenger traffic continues to increase.

An interesting part of the debate is whether time cost savings should be included in economic calculations. Part of the 'benefits' in economic analysis are pricing of time 'saved' by shorter journey times, with the value put on this time saving depending on whether the passenger is a leisure or business traveller, and the seat class they are in.

The case for HS2 depends partly on the idea that time spent on the train is unproductive, so that if you can make the journey shorter there will be big productivity gains for the economy.

The government document setting out the cost/benefit analysis puts the value of that time saving at £7.3bn by 2043 for the section running from London to Birmingham. But as pointed out by columnists on the BBC and Forbes, business travellers can spend any time on a train working on their laptops and smartphones, so that rather than being unproductive the train journey can be as productive as time in the office.

The first phase of the HSR development in the UK will cost £17bn, and cut the journey time from London to Birmingham to 49 minutes by 2026. The entire cost of the project – including a second phase Y-shaped section extending to Manchester and Leeds, by 2033 – is expected to be £32bn.

The government argues the project will generate £44bn of benefits to the economy over 60 years. In future decades, the line could be extended further north to Scotland. Business leaders in Birmingham and Manchester, and a number of trade union leaders have spoken out in favour.

"As representatives of workers across the rail industries, we welcome the thousands of construction and engineering jobs that HS2 will immediately bring to the UK economy, as well as the jobs it will create in the long-term within the rail industry," said union leaders in a letter to the Guardian newspaper. "The creation of one million long-term British jobs outside of the south-east rely on the building of HS2."

Opponents of the scheme claim that HSR will fail to bring the economic benefits promised by the government, and that the money would be better spent on improving existing lines. Network Rail says that alternative proposals to upgrade the existing railways would be too costly and disruptive. See the links below for more information on the arguments, and to access the full Working Paper by de Rus.

Reference

The BCA of HSR: Should the government invest in high speed rail infrastructure? Ginés de Rus, November 2011. Documento de Trabajo 2011-12.

External links

Department for Transport's assessment of the economic case (PDF file)

Institute of Economic Affairs critique of UK's HSR plans

BBC business reporter analysis of cost and benefit debate

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