JOINT TRANSPORT RESEARCH CENTRE

Discussion Paper No. 2009-16
December 2009

When to Invest in HighSpeed Rail Links andNetworks?
Chris NASH
University of Leeds
United Kingdom

1. Introduction

Definitions of high speed rail (HSR) differ, but a common one is rail systems which aredesigned for a maximum speed in excess of 250 kph (UIC, 2008). These speeds invariably
involve the construction of new track, although trains used on them can also use existing
tracks at reduced speeds.
,
A number of countries have upgraded existing track for higher speed, with tilting technology
on routes with a lot of curves. However such trains do not normally run at speeds above 200
km p h. Their rationale is to upgrade services at relatively low cost in countries which havesufficient capacity to cope with increased divergence of speeds on routes shared with allforms of traffic. Most of the countries which adopted this strategy initially, such as Britain and
Sweden, are now considering building HSR.
The only form of totally new technology that has come close to being implemented is maglev.
However, no country yet uses such a system for inter city transport. It was proposed to
introduce such a system between Hamburg and Berlin, but this project has been abandoned;
it is still under discussion for the Tokyo-Nagoya route in Japan. The technology is capable ofvery high speeds, but apart from cost considerations, it has the inflexibility that the trains are
not able to make use of a section of new infrastructure and then to transfer to existing tracks
to finish their journey. The latter mode of operation is a feature of all new high speed railsystems worldwide, even where – as in Japan and Spain – the new lines are built to adifferent track gauge from the existing lines (Spain uses bogies capable of adjustment to thedifferent gauge, whilst Japan has undertaken installation of limited sections of multi gauge
track). Maglev technology has its greatest chance where there is sufficient traffic to justify
both a new self contained route and the existing one, and the most likely corridor to satisfy
that requirement in the near future is the Tokaido corridor in Japan.
Thus the only high speed inter city projects to have been completed to date use conventionalrail technology with purpose built new lines for some but not all of the route network . That istherefore the focus of this paper.
In the next section we consider the motivation behind the introduction of HSR around theword. We then examine evidence on its impact on mode split. Following this consider theapproach to appraisal of HSR followed by some actual examples. We then discuss a modelthat has been constructed to identify the key parameters that determine its social viability.
After this we consider network effects and track access pricing before reaching ourconclusions.

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2. Motivation for the introduction of high speed rail.

The first country in the world to build a dedicated line for new high speed trains (originally at
210 km p h, so not satisfying the above criterion) was Japan. The background to this wasthat the original Tokaido line was narrow gauge (3 feet 6 inches) and unsuitable for highspeeds. It was also at capacity. It was the twin desire for a big increase in capacity in one of
the most densely used corridors in the world, and for a major improvement in journey time tobe competitive with air that led to the approval of the construction of a new high speed line atstandard gauge. The Tokaido Shinkansen started running between Tokyo and Osaka on
October 1, 1964, and was an immediate success, carrying 23m passengers in its first year
and leading to demands for its extension countrywide (Matsuda, in Whitelegg et al 1993).
Wider economic considerations such as regional development and equality led to thedevelopment of Shinkansen investment on progressively less busy and profitable routes.
When Japanese railways were reorganised as a set of separate regional commercialorganisations in 1987, the high speed infrastructure was placed in a separate holding
company (the Shinkansen holding company) and the new operating companies werecharged for its use on the basis of ability to pay, thus permitting cross subsidy between
profitable and unprofitable routes. (Ishikawaka and Imashiro, 1998). Whilst this decision waslater reversed and the Shinkansen sold to the operating companies in order that it should
appear on their balance sheets, the principle of basing the charge on ability to pay rather
than historic construction cost was maintained.
The success of the Japanese high speed system, particularly in gaining market share fromair, was undoubtedly a major factor inspiring European railways to follow the same path. The
next in line was France, where intensive economic and technical research led to the proposal
to build a new high speed line from Paris to Lyons. Again the background was a shortage ofcapacity on the route in question plus the growing threat of competition from air (Beltran, inWhitelegg et al 1993). In 1981 the TGV Sud-Est between Paris and Lyon opened withspeeds up to 270km/h. The name Sud-Est was itself designed to emphasise the network
effects of this line, which as well as serving the Paris-Lyons market carried trains for a large
number of destinations beyond Lyons. From this beginning plans were developed for a
network of lines with the justification being largely in transport cost-benefit analysis terms
although hopes were also raised for wide regional economic impacts (Polino, in Whitelegg etal 1993). The idea that high speed trains should be open to everyone, at reasonable fares(democratisation of speed) was an important part of the philosophy and helped the popularity
of TGV with the general public. Subsequent developments have seen extensions to Marseilleand Nice, the TGV Atlantique Paris-Bordeaux, Paris-Lille-London/Brussels and most recently
Paris-Strasbourg.
The background to the introduction of high speed rail in Germany was somewhat similar; aperceived shortage of capacity in the face of growing demand, accentuated by particularbottlenecks on north-south routes which had become more important following partition.
Again the growing threat of air and car competition also led to a perceived need for highspeed to satisfy the marketing requirement of ‗twice as fast as car; half as fast as plane‘.
(Aberle, in Whitelegg et al 1993). However, the geography of Germany did not lend itself todevelopment of a single key route, but rather of new sections of track where particular
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bottlenecks occurred. These were designed for both freight and passenger traffic, although
their use by freight has been small. Although construction started in 1973, it was held up byenvironmental protests. Not until 1985 was a new design of high speed train (the ICE)
introduced. Gradually these trains were extended to cover the principal inter city routes
throughout Germany, with long stretches of running on conventional track upgraded for 200
km p h. Thus the marketing of the ICE is very different from that of the French TGV; a lot ofshorter journeys are made on it, reservations are not compulsory and load factors averaging
50% as opposed to the French 70% are tolerated.
The geography in Spain is more like that of France, with long distances between the major
cities and even less intermediate population. Given the relatively low quality of the inherited
infrastructure, Spanish Railways were rapidly losing market share to air and car. High speed
was seen as a way of enabling rail to compete, as well as promoting regional economic
development (Gomez-Mendosa, in Whitelegg et al 1993). Whilst construction of the first line,
Madrid-Seville, was hastened to serve the International Exhibition in Seville in 1992,
construction of a whole network of lines was encouraged by Keynesian policies of relieving
large scale unemployment by a major public works programme. The aim is to link Seville—
Madrid—Barcelona to the French TGV system, and for that reason the network is being built
to standard gauge even though other main lines on the Iberian peninsula are broad gauge.
Italy took its first steps towards construction of dedicated high speed lines early with theRome-Florence Direttissima, work on which started in 1966 and the first section of which
opened in 1976 (Giuntini, in Whitelegg et al 1993) but it was not until 1985 that a team was
set up explicitly to study high speed rail, leading ultimately to plans for a network of lines.
The early development of high speed rail in Europe was entirely at the national level, using
domestically produced technology (France, Germany and Italy each produced their own highspeed rolling stock using national manufacturers). However, the advantages of linking lines
into a European inter-operable network were realised, and the concept emerged of a 15,000
km network of high speed routes emerged, linking all the major cities of Europe (CER,1989).. The 1993 Treaty of Maastricht called for a network of Trans-European lines, linking
the existing high speed lines. Of major strategic importance were the new line between
Brussels and Cologne, the extension of TGV Sud-Est to the Spanish border, the planned
Alpine crossing between Lyon and Turin and links between the French and German
networks (TGV Est). Recognition that such lines would benefit not just the countries in which
they were built but the European Union more generally led to their designation as part of theTrans European Network, and a large share of the limited European funds made available fortransport infrastructure has been directed towards them. Peripheral countries have also
received substantial funding for high speed rail from regional and cohesion funds, designed
to reduce economic and social inequality within Europe.
By 2006, high speed trains in Europe were carrying 84b passenger km per annum, of whichmore than half was in France (UIC, 2008a). In the meantime, high speed rail has been
extended to more countries in Asia, including Korea, Taiwan and China.

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3. Impact on mode split

This section will briefly consider impacts on rail market share. Detailed results on market
shares are available for the early impact on mode split of the Paris-Lyon and Madrid-Sevillelines. TGV Sud-Est between Paris and Lyon was opened in two stages between 1981 and1983. The train journey time was first reduced by around 30%, after the opening of theNorthern section, and the implied journey time elasticity was around –1.6. However, the timeelasticity was around –1.1 for a journey time reduction of around 25% on the opening of theSouthern section of the route. The cause of this lower elasticity was because the transferfrom air had been largely completed in the first phase when rail was fast enough to provide
effective competition. The Spanish AVE service introduced in April 1992 reduced rail journey
times between Madrid and Seville from around 6½ hours to 2½ hours, making what was avery unattractive service into one which competes effectively with air.
Table 1 indicates the market shares of plane, train and road before and after the introductionof high speed rail on these two routes. The impact on rail market share is very large,
particularly in Spain where the improvement in rail journey time was larger. Much more traffic
is extracted from air than road. It should be noted that the figures will have been influenced
by a significant amount of newly generated traffic. Wilken (2000) reports that surveys of AVE
passengers indicated that 15% of the additional rail traffic was newly generated, whilst
according to Bonnafous (1987) no less than 49% of the additional traffic on Paris Lyons in
the first four years was generated traffic. In other words, whilst there was indeed asubstantial transfer from air, the reduction in road mode share was largely caused by thegeneration of rail traffic, rather than direct transfer.
Table 1: Before and After High Speed Market Shares

Plane
Train
Car
Bus

TGV Sud-Est
Before
After
31%
7%
40%
72%
and 29%21%

AVE Madrid-Seville
Before
After
40%
13%
16%
51%
44%
36%

Source: COST318 (1996).

More up-to-date figures are quoted by SDG (2006) and Campos and Gagnepain (2007) for
the air-rail mode split, showing that where rail journey times are reduced below 4 hours, rail
share of the rail-air market increases rapidly with further journey time reductions, and rail
tends to have a market share of at least 60% and sometimes effectively drives air out of themarket when rail journey times are below three hours. Future trends are found to depend on
a wide variety of factors including the introduction of environmental charges on air transport
and trends in air and rail costs.

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It should be stressed that this evidence is from countries where for most people a city centre
rail station is more convenient than an airport: where development is low density with weakcity centres and poor public transport this may not be the case.
Kroes (2000) points out that the available evidence concerning modal shift relates to trafficthat is not transferring at the airport to another plane. There is very little evidence on thetransfer market. However, the increasing integration of rail with air with high speed rail
stations at airports such as Paris, Brussels, Frankfurt and Amsterdam offers the prospect ofmuch greater rail penetration into this market, especially if ticketing and baggage handling isbetter integrated.
4. Appraisal of HSR
The process of appraisal requires comparison of a base case with a series of options. It isnecessary to be clear what the base case is and to ensure that a realistic range of options is
examined. A base case that literally assumes a ‗do-nothing‘ situation may be very
unfavourable, particularly in the face of growing traffic, and thus exaggerate the case forundertaking a particular option; on the other hand the base case should not be padded out
with unnecessary investments, as that may have the same effect. In general the base caseshould be a ‗do minimum‘ and other likely investments should be examined as alternative ‗dosomething‘ options. These alternatives should be compared on an incremental basis to see
whether the additional cost of moving to a more expensive option is justified, and the phasing
and timing of options should also be examined. The fact that a particular option is better thanthe base case is thus not in itself evidence that it is desirable.
In the case of high speed rail, the base case should therefore include such investment as isnecessary to keep the existing service running, and consideration should be given to how todeal with any exogenous growth in traffic. This might mean investing in additional rollingstock or revising fares structures and levels. More major changes should be considered asalternative do something options. These might include upgrading existing infrastructure,purchase of a fleet of new tilting trains or indeed construction of additional road or airport
capacity. There will also be options regarding high speed rail – how far to extend the newline; to which alternative points to run the new trains, what service frequency and pricing
policy to adopt. It is essential to examine sufficient alternatives to be confident that the bestalternative has been identified. The range of potential options makes appraisal of high speed
rail a difficult task.
It is also necessary to consider the timing of investment. High speed rail might turn out tohave the highest net present value, but if the demand for HSR and the other benefits from it
are forecast to grow then it might still be better to postpone the investment.
HSR involves construction of new lines, stations, etc. and purchase of new rolling stock, andadditional train operating costs and externalities (mainly noise, air pollution and global
warming effects). The principal benefits from, HSR are:

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-time savings
additional capacity
reduced externalities from other modes
generated traffic
wider economic benefits

Time savings are generally split into business, commuter and leisure. A relatively highproportion of HSR traffic is likely to be travelling on business, although questions have beenraised on whether the full business value of time should be applied in this case on two
grounds:-

many long distance business trips start and end outside normal working hours
when travelling by train it is possible to work on the way (Hensher, 1977 )However, research has shown that firms are willing to pay something like the full businessvalue of time even in these circumstances, presumably because of the benefits they perceivein shortening long working days and having staff less tired (Marks, Fowkes and Nash, 1986 )Additional capacity is obviously only of value if demand is exceeding the capacity of theexisting route. But in those circumstances additional capacity may be of value not just inallowing for growth between the cities served by the high speed line, but also, by relieving
existing lines of traffic, for other types of service such as regional passenger or freight. Of
course, this raises the further option of building new capacity not for high speed passenger
but for regional passenger or freight traffic. If new capacity is to be built anyway, then it is theincremental benefit of high speed versus the incremental cost that has to be considered, acomparison which is likely to make high speed look much more attractive than if the entire
cost of new lines has to be justified on the basis of higher speeds. There is also clear
evidence (Gibson et al. 2002) that running rail infrastructure less close to capacity benefits
reliability; it may also lead to less overcrowding on trains. Both of these features are highly
valued by rail travellers and especially business travellers (Wardman 2001).
Typically as illustrated in the previous section a substantial proportion, but not all, of the newtraffic attracted to rail will be diverted from other modes – mainly car and air. To the extent
that infrastructure charging on these modes does not cover the marginal social cost of thetraffic concerned there will be benefits from such diversion. It is frequently argued that highspeed rail has substantial environmental advantages since it diverts traffic from road and –particularly – air, where greenhouse gas emissions are much greater. On the other hand, as
noted above, a substantial proportion of the traffic is typically newly generated or diverted
from conventional rail, where given lower speeds, one might expect energy consumption to
be lower. Of course high speed rail is invariably electrically powered, which gives thepossibility of using a carbon free source of energy, whereas inter urban road and airtransport are currently tied to oil. Electrically powered trains are also free from local air
pollution, except for small particulate matter from braking, at the point of use, although thevisual intrusion and noise from a new high speed line are often the subject of controversy.
One of the few studies to break down emissions in detail by type of train, as well as type of
air and car transport is C E Delft (2003 ). They produce the following results:

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Table 2 Energy Consumption by Mode 2010
Intercity train
Seating capacity
Load factor
Primary energy(MJ per seat km)(MJ perpassenger km)*At 70% load factor

434
44%
0.22
0.5

High speed
train
377
49%
0.53

Air (500km)
99
70%
1.8

Diesel car on
motorway
5
0.36
0.34

1.08
(0.76*)

2.57

0.94

Source: CE Delft (2003)

In other words, high speed rail has a substantial advantage over air transport, is similar to car
and very much worse than conventional rail. Recent unpublished work for Network Railsuggests that on a heavily used new high speed line from London to Manchester, energy
embodied in the infrastructure might add some 15% to these figures; obviously for a less wellused line the increase could be substantially more. However. whilst the load factor given forhigh speed rail of 0.49 may be typical of Germany, where high speed trains spend a lot of
their time running at conventional speeds on traditional track, and seat reservations are notcompulsory, both the French TGV and Eurostar, with long non stop runs, compulsory seatreservations and sophisticated yield management systems, claim load factors similar to the
70% shown for air. A load factor of 70% reinforces the advantage over air and brings HSR
below car, but it is still 50% higher than conventional rail. Given the sort of combination ofmode switching and generation found above, the savings and costs tend to cancel out andthe introduction of high speed rail cannot lead to a substantial energy saving; where there islittle diversion from air, it will undoubtedly lead to an increase. So the claim of HSR to reducegreenhouse gases must rest on a non fossil fuel source of electricity generation, as iscurrently the case in some countries (e.g. France, with a high share of nuclear andSwitzerland with a lot of hydro) but not others such as Britain.
Diverting traffic from road does not simply affect greenhouse gases, but also reduces roadnoise, accidents, local air pollution and congestion. The following table (Table 3) presents theunit values for these costs for a petroleum car, as estimated for a major European corridor in
the European research project GRACE (GRACE, 2005 Deliverable 7). Whilst the off peakcosts are quite similar between routes, the peak costs are much larger and more variable,
being dominated by congestion costs which vary greatly from route to route.

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Table 3 Marginal social cost and prices for long distance car transport
Car
PetrolMilanoChiasso
Interurban petrol GRACE car petrol EV
OffPeak
Peak
Night
Noise
0.007 0.011
0.035
Congestion
0.147 0.002
0.001
Accident
0.015 0.015
0.015
Air pollution
0.001 0.001
0.001
Climatechange0.005 0.005
0.005
W&T
0.016 0.016
0.016
0.191 0.050
0.073

BaselDuisburg
Interurban petrol GRACE car petrol EV
OffPeak
Peak
Night
Noise
0.005
0.009
0.027
Congestion
0.123
0.002
0.001
Accident
0.008
0.008
0.008
Air
pollution
0.001
0.001
0.001
Climatechange
0.005
0.005
0.005
W&T
0.019
0.019
0.019
0.161
0.044
0.061

Chiasso-Basilea
Interurban petrol GRACE car petrol
EV
OffPeak
Peak
Night
Noise
0.004 0.007 0.021
Congestion
0.194 0.003 0.001
Accident
0.008 0.008 0.008
Air pollution
0.001 0.001 0.001
Climatechange0.005 0.005 0.005
W&T
0.032 0.032 0.032
0.244 0.056 0.068

Duisburg-Rotterdam
Interurban petrol GRACE car petrol
EV
OffPeak Peak
Night
Noise
0.009 0.014 0.043
Congestion
0.122 0.002 0.001
Accident
0.006 0.006 0.006
Air pollution

0.001

0.001 0.001

Climate change
W&T

0.005
0.020
0.163

0.005 0.005
0.020 0.020
0.048 0.076

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Table 4 shows what motorists pay for these routes (it is doubtful whether vehicle excise duty
should be included here, as it is a fixed cost of car ownership and is unlikely to influence thedecision to drive on a particular journey). It is found that in the peak there is a significant
benefit of up to 10 eurocents per kilometre from removing cars from untolled roads, whilst in
the off peak cars pay around their marginal social cost on untolled roads and more than that
where a toll is payable. Of course, a higher shadow price of carbon would affect thiscomparison but as is seen greenhouse gas costs are not a large part of the total. In otherwords for road transport, the biggest issue concerns congestion. But it is unlikely that there
will be a large net benefit from relief of road congestion unless the road is congested in theoff peak as well as the peak.
Table 4 Road transport prices
Road Transport

Corridor segment

Km

Vehicle excise duty
per kmCar Passenger
Fuel tax
gasoline €km

Toll * €km

Total pricecar gasoline

A8-A-9 Milano-Chiasso (I)

50

0.055

0.064

0.013

0.132

E35 Chiasso-Basilea (CH)

279

0.093

0.053

0.010

0.156

A5-E35 Basel-Duisburg (D)E35-A25 DuisburgRotterdam (NL)

584

0.046

0.056

0.012

0.114

0.058

0.020

0.078

204

-

-

Source: GRACE D7.

Table 5 shows similar estimates for social costs of air transport, taken from the IMPACT
study. In the case of air, the absence of fuel tax means that there is normally no charge forenvironmental externalities, although this is crudely allowed for in some countries (including
Britain) by a departure tax. In the absence of a departure tax there is an uncovered cost of
perhaps 1.5 eurocents per passenger km on a 500km flight, or a total of 7.5 euros. In otherwords, diversion of 1 million passengers from air might give a benefit of 7.5m euros. It will beseen in the next section that this is not a very great contribution to the costs of HSR.
The other key issue for air is charging for slots at congested airports. The allocation of slots
by grandfather rights, and charging structures based on average costs of running the airport(or less) means that charges may not reflect the opportunity cost of slots or the costs ofexpanding capacity. Where shortage of capacity is acute and the cost and difficulty of
expanding capacity high, as at Heathrow, this may be a significant factor.

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Table 5Externalities air (eurocents 2000 per passenger km)

Flight Distance(km)<500 km
500 – 1000
1000 – 1500
1500 – 2000
>2000

Air Pollution
Direct Emissions

Climate Change
Direct Emissions
Indirect Emissions

0.21
0.12
0.08
0.06
0.03

0.62
0.46
0.35
0.33
0.35

0.71
0.53
0.40
0.38
0.40

Noise costs per landing or take off (Schiphol)

Fleet averageState of Art

40 seater
180
90

100 seater
300
150

200 seater
600
300

400 seater
1200
600

Source: IMPACT 2008 Handbook.

In other words, the biggest external benefits of HSR are likely to come where road or air are
highly congested and expansion on those modes difficult and expensive, including in termsof environmental costs. Of course, HSR construction has its own external costs in terms ofnoise, land take and visual intrusion which must be set against these benefits. External costs
for air are much higher for the shorter route due to their concentration on take-offs andlandings.
Generated traffic leads directly to benefits to users, which are generally valued at half thebenefit to existing users using a linear approximation to the demand curve. But there has
been much debate as to whether these generated trips reflect wider economic benefits thatare not captured in a traditional cost benefit analysis. Leisure trips may benefit thedestination by bringing in tourist spending, commuter and business trips reflect expansion or
relocation of jobs or homes or additional economic activity. The debate on these issues
centres on whether these changes really are additional economic activity or whether it issimply relocated. In a perfectly competitive economy with no involuntary unemployment,
theory tells us that there would be no net benefit. In practice, there are reasons why there
may be additional benefits. For instance, if the investment relocated jobs to depressed areas,
it may reduce involuntary unemployment. However, it is common for high speed rail to favour
central locations, and if the depressed areas are at the periphery, this is the opposite of whatis desired.
It is generally accepted that reducing transport costs may lead to benefits or costs that are
not reflected in a standard cost-benefit analysis, due to market imperfections such as
uncompetitive labour markets or agglomeration externalities (Graham, 2005). SACTRA(1999) suggested that wider economic benefits of schemes would not generally exceed 1020% of measured benefits, whilst a specific study of the TENS network suggested that it
would not change regional GDP by more than 2% (Brocker, 2004). On the other hand there
may be specific cases where effects are much larger. The impact of HSR on Lille (with its
uniquely favourable location) is often cited, whilst a study of a proposed high speed route in
Nash — Discussion Paper 2009-16 — © OECD/ITF, 200911

the Netherlands found wider economic benefits to add 40% to direct benefits. (Oosterhavenand Elhorst, 2003). Vickerman (2006) concludes that whilst high speed rail may have major
wider economic benefits, the impact varies greatly from case to case and is difficult topredict.

5. Actual Case Studies

There are relatively few published ex post cost-benefit analyses of specific high speed rail
projects, One of the few published studies, for Madrid-Seville, which opened with less than
3m trips per annum and is still carrying only of the order of 5m trips p.a., found the project not
to be justified. (de Rus and Inglada, 1997). A summary of the appraisal is given in Table 6. In
this case, it appears that the social benefits of the line do not even cover the costs ofoperation, so that having built it, it would have been better to have left it unused, initially atleast! Neither shadow pricing labour to allow for relief of unemployment, nor a generalincrease in costs on all modes of transport change this unfavourable result significantly. It will
be seen that no value is given for environmental benefits, although we have seen above that
this is not likely to be large. There is also no benefit given for the capacity released onconventional rail or at airports; perhaps in the circumstances of Spain, this has little
alternative use, although that is not always the case, as will be seen below.

Table 6 Cost benefit analysis of the Madrid-Seville HSR

Source: de Rus and Inglada (1997)

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As commented above, France is one of the countries with the most experience of HSR, and
it is also a country which is systematic in conducting cost benefit analyses of all transport
projects. More recently, an ex post evaluation of French HSR projects has been undertaken
and compared with the ex ante appraisals (Table 7). It will be seen that all the lines
considered were expected to have acceptable financial and social rates of return, and tocarry at least 15m passengers per annum. In practice, the out turn rates of return are
generally lower, mainly because of higher infrastructure costs and lower traffic levels thanforecast in some cases. However, the only line for which the social case turned out to be
marginal was the TGV Nord, where the major shortfall in traffic was mainly due to extreme
over estimation of Eurostar traffic through the Channel Tunnel.
Table 7

Ex post appraisal of French high speed line construction

Length (km)Infrastructurecost(m euros
2003)

Traffic (mpass)

Financial
return (%)

Social return
(%)

Rhone
Alpes

346
2666

Inter
Connection
104
1204

2630

3334

1397

1261

4272

+1

+24

+25

+16

+22

-1

14.7

30.3

38.7

25.3

19.3

21.7

15.8

26.7

19.2

16.6

18.6

19.2

+7.5

-12

-50

-34

-4

-11.5

Ex
ante
Ex
post

15

12

12.9

10.8

10.4

8

15

7

2,9

6.5

n.a.

n.a

Ex
ante
Ex
post

28

23.6

20.3

18.5

15.4

12.2

30

12

5

13.8

n.a.

n.a.

Ex
ante
Ex
post
%
change
Ex
ante
Ex
post
%
changeSud Atlantique
Est
419
291
1662*
2118

Nord

1676

Mediterranean
259
1037
4334

Source: Conseil Général des Pont et Chaussées (2006), Annex 1.

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6. Key parameters influencing the case for HSR

De Rus and Nombela(2007) and de Rus and Nash (2007) have explored the key parameters
determining the social viability of high speed rail, and in particular the breakeven volume oftraffic under alternative scenarios. They built a simple model to compute capital costs,
operating costs and value of time savings for a new self contained 500 km line at different
traffic volumes. Typical costs were estimated using the database compiled by UIC (Table 8).
A range of time savings from half an hour to one and a half hours was taken, and a range of
average values of time from 15 to 30 euros per hour. Other key assumptions are theproportion of traffic that is generated, and the rate of traffic growth.
Table 8. Estimated costs of a 500 km HSR line in Europe (2004)

Cost per unit(€ thousand)

Units

Total cost(€ million)

Capital costs
Infrastructure construction(1)(Km.)
Rolling stock (trains)

12,00040,000
15000 600.0

40

6,00020,000
600.0

65

500

32.5

900

40

36.0

892

40

35.7

36

550

19.8

500

Running costs (p.a.)
Infrastructure maintenance(Km.)
Rolling stock maintenance(Trains)
Energy(Trains)
Labour(Employees)
Source: de Rus and Nash (2007).

Table 9 shows the breakeven volume in terms of millions of passengers per annum in thefirst year, assuming all travel the full length of the line, under a variety of assumptions about
the other factors. Note that benefit growth may occur because of rising real values of time asincomes rise, as well as traffic growth. With exceptionally cheap construction, a low discountrate of 3 %, very valuable time savings and high values both for the proportion of generated
traffic and for benefit growth, it is possible to find a breakeven volume as low as 3m trips perannum, but it is doubtful whether such a favourable combination of circumstances has ever
14

Nash — Discussion Paper 2009-16 — © OECD/ITF, 2009

been found. Construction costs of 30m per km will carry this up to 7m, and a reduction of thevalue of time savings to a more typical level to 4.5m.; lower benefit growth and levels ofgenerated traffic will take the result to 4.3m. An increase in the rate of discount to 5% would
take the value to 4.4m. In other words, it appears to be the construction cost that is the key
determinant of the breakeven volume of traffic; all the other adjustments considered have asimilar smaller impact. All of these adjustments together would raise the breakeven volume
to 19.2m trips per annum, and even worse scenarios can of course be identified. On theother hand a more modest increase of capital costs to £20m, with a high value of timesavings but a discount rate of 5%, 30% generated traffic and a 3% annual growth in benefits
leads to a breakeven volume of 9m. This represents a realistic breakeven volume for acompletely new self contained high speed line in favourable circumstances.

Table 9. Breakeven demand volumes in the first year (m passengers)
under varying assumptions
Construction
Rate ofcost
interest (%)(£k per km)
12
3
12
3
30
3
12
3
12
5
30
5
20
5

Value oftime saved(euros)
45
30
45
45
45
30
45

%
generatedtraffic (%)
50
50
50
30
50
30
30

Rate ofbenefitgrowth (%)
4
4
4
3
4
3
3

Breakeven
Volume(m pass)
3
4.5
7.1
4.3
4.4
19.2
8.8

These representative breakeven volumes ignoring any net environmental benefits, but wehave given reasons above to expect these to be small. What they also ignore is any network
benefits in terms of reduced congestion on road and air, and also within the rail sector, andthat issue will be considered further in the next section.
Construction costs vary enormously from case to case, as can be seen from Table 8, with
Spain having the lowest costs and Britain the highest (Steer, Davis and Gleave, 2004).
Some of these cost differences are inevitable, as a result for instance of land prices, althoughthese do not usually account for more than around 5% of the costs of an HSR project. A very
major contributor to costs is the amount of tunnelling involved, and generally the costs ofentering large cities are high. The British high speed link to the Channel Tunnel is the mostexpensive high speed line ever built, largely because of the lengthy tunnelling at theapproach to the London terminal to avoid environmental objections. If these costs can be
avoided, for instance by using existing under or unutilised rail infrastructure, then the casecan be considerably improved, even if this means a compromise regarding speeds (Whilst it
may be thought unlikely that such infrastructure exists in the neighbourhood of large cities,
this is not necessarily so; for instance British cities do often have such infrastructure as aresult of rationalisation of rival lines built by competing companies in the early days ofdevelopment of the rail system).

Nash — Discussion Paper 2009-16 — © OECD/ITF, 200915

7. Network effects

Laird, Mackie and Nellthorp (2005) demonstrate how network effects may take place within
the transport sector, leading to costs and benefits beyond the project being considered, as aresult of the presence of one or more of the properties of economies of scale, scope ordensity, congestibility and consumption externalities. How far do such benefits improve thecase for high speed rail?
We have already considered network effects on road and air infrastructure, but are there also
network effects within the rail sector? Essentially the argument is that once one stretch ofhigh speed rail has been built, extending it further will add to traffic on the existing stretch,
reducing unit costs and increasing unit revenues and benefits. At the same time, by relieving
conventional lines of fast passenger trains, capacity may be released which enables otherservices, passenger or freight, to be improved, although their finance may be seriously
weakened by taking away their most profitable traffic.
The point may be illustrated with a study for Britain which examined a whole range ofalternative routes, from a short new line from London to Birmingham (under 200km), withtrains continuing to other destinations over conventional lines, to a route continuing via Leeds
and Newcastle to Edinburgh and Glasgow (around 750km).
Britain only first began considering HSR, except for the link to the Channel Tunnel, in 2002,
with a study undertaken by Atkins for the Strategic Rail Authority (Atkins, 2003). The Atkins
study took place in a context of rapid growth in both passenger and freight traffic in recent
years, leading to forecasts of severe overcrowding on both long distance services andLondon commuter services, and a lack of capacity for further growth in freight. Thus a major
objective of the scheme was to relieve existing routes, as well as providing faster morecompetitive services between the major cities. This rather general remit led to the need togenerate and study a wide range of options. Altogether some fourteen options were studied
in depth, the main issues being whether to have a single route north from London whichmight split further north to serve cities up the east and west sides of the country, or two have
two separate routes, and how far north to go. The obvious starting point would be a newroute from London to the heavily populated West Midlands (the initial section of route would
carry no fewer than 12 trains per hour in each direction in 2016 for much of the day). The
further north the line was extended, the less heavily used the new sections would be, but thiseffect might be offset by the fact that these extensions attract additional traffic on to the core
part of the network. It is a feature of British geography that most of the main cities in Britain
could be served by a single line or a short branch off it.
It was forecast that the new line if built to its extremities would attract nearly 50m passenger
trips per year in 2015, although most of these would only use part of the route. This highfigure reflects the high population density of Great Britain and the large number of origindestination pairs that the line would serve. Of these passengers around two thirds would bediverted from existing rail routes and the remainder split almost equally between diversion
from other modes and newly generated trips. Most of the forecast diversion occurred fromcar – the forecast of diversion from air was surprisingly low given experience of the impact of
HSR on air traffic elsewhere.

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Nash — Discussion Paper 2009-16 — © OECD/ITF, 2009

Results of the appraisal of two options are shown in Table 11. Option 1 is the line from
London to the West Midlands. which is the obvious first phase of any high speed rail
programme in Great Britain, and is seen to be well justified in its own right. But option 8, theextension through to both Manchester on the West Coast and right through to Scotland via
the East Coast are also shown to be justified. It is obviously important, however, to examine
the issue of timing and phasing. The study showed that, if feasible, immediate constructionof the whole line was the best option.
Although net revenue more or less covers operating costs for both options, the capital cost
can only be justified by non financial benefits and released capacity. Some 75% of the non
financial benefits take the form of time savings or reduced overcrowding with the remainder
mainly taking the form of reduced road congestion and accidents. On balance it was thoughtthat the non quantified environmental benefits were slight. It is an interesting question
whether more of the user benefits could be captured as revenue by more sophisticated yield
management techniques than the simple fare structure modelled. Such yield management
methods are already in use on other high speed services, including Eurostar services
between London, Paris and Brussels.

Table 11 Appraisal of Options 1 and 8 (£bn PV)

Net revenue
Non financial benefits
Released capacity
Total benefits
Capital costs
Net operating costs
Total costs
NPV
B/a

Option 1
4.9
22.7
2.0
29.6
8.6
5.7
14.4
15.3
2.07

Option 8
20.6
64.6
4.8
89.8
27.7
16.3
44.0
45.7
2.04

Source: Atkins 2003) Summary report, addendum Table 2.1 with errors corrected.

Table 12 compares unit costs and unit incremental revenues. The capital cost per train km of
the larger option is somewhat higher than for option 1, for the obvious reason that the densityof trains on the route diminishes once the junction with the branch to Birmingham is reached(train km per route km would fall from around 300 per day to nearer 200 when we move from
option 1 to option 8). However, the incremental revenue per train km also rises quite
substantially, even though on average the additional route is less intensively used than theinitial stretch. The reason for this is clearly that the longer route attracts more traffic raisingboth mean fares and load factors on the first section of the route. Thus the more extensive
network covers a much greater share of its costs from incremental revenue than the more
limited network.
Table 11 also shows the estimated value of the improvements in services and increased
traffic that could be carried on existing lines as a result of the construction of the new HSR
line. These improvements would mainly affect London commuter services and freight traffic,
where, in the absence of new capacity, severe constraints on capacity would apply.
Nash — Discussion Paper 2009-16 — © OECD/ITF, 200917

Naturally, these benefits are assessed to cover a much greater share of the capital cost of
option 1, which duplicates the heavily used West Coast Main Line into London, than further
north.
Table 12 Unit costs and revenues
Option1

HSR trainkm(2016)55474

8162067

Capital cost per trainkm
2.58

Net revenue per train km

2.85

2.12

1.47

8. Pricing policy

To the extent that HSR is built with government funding, the opportunity cost of that funding
should be taken into account by use of a shadow price of public funds, or by requiring abenefit-cost ratio well in access of one. Where private financing is involved, this will need to
be serviced, and the most obvious source of income for this is via track access charges.
The method of financing high speed rail can also be significant in determining the outcome.
UIC (2008) find that the access charges levied on train operators vary substantially, butabsorb between 25 and 45% of the revenue of high speed rail operators. As such, theysignificantly affect the competitive position of rail as opposed to other modes.
Some typical track access charges for HSR are illustrated in Fig 1
Fig 1 Typical Access Charges for high speed passenger trains € per train-km in 2008

Source: ITF (2008), based on the approach of ECMT (2005)
18

Nash — Discussion Paper 2009-16 — © OECD/ITF, 2009

In Britain, variable track access charges are based on estimated short run marginal wear andtear cost, and for a class 390 pendolino tilting train, running at 200km p h on conventional
track, the current charge is around 14p per vehicle mile. This amounts to roughly 1 euro per
train km or 2 euros per 1000 gross tonne km. This figure is based on a cost allocation model
resting on engineering judgement. The only econometric study of rail infrastructure costs
which produces separate figures for high speed passenger services is the .Quinet andGaudry work for France (Gaudry and Quinet, 2003). They find a value of around 2 euros per
train km for high speed and other inter city services, and of 3 euros per train km for otherpassenger trains. To this must be added a small amount of external cost; where track
capacity is scarce, a more substantial scarcity charge may be justified. Nevertheless, it
therefore appears that charges in Belgium, Germany and particularly France (as well as
through the Channel Tunnel and to London) may substantially exceed marginal cost, even if
environmental costs are charged for.
Of course, marginal social cost pricing in the rail sector is only optimal to the extent that it isadopted on competing modes as well. To the extent that air transport is not charged
appropriately for scarce runway capacity and for environmental costs, there may be a casefor charging rail below marginal cost on routes that are competitive with air.
The impact of high track access charges may be minimised by means of Ramsey-Boiteux
pricing (Ramsey, 1927; Boiteux, 1956). Essentially this means pricing up more in thosemarket segments which are least sensitive to price. This is permitted under the EU Directiveon track access charges (2001/14), provided there is no discrimination between different
operators competing for the same market segment.
Crozet (2007) calculates the value of the optimum mark up, assuming that the shadow priceof public funds is 1.3 (Crozet, 2007). For the French high speed network, the optimal markup would range between 3.2 and not more than twice the marginal cost, for elasticities of 0.7(Paris-Lyon) and 1.5 (Paris-Nice), respectively. That is, even allowing for the opportunity costof government funds, infrastructure charges for high speed lines should not be higher than
6.4 €/train-km taking 2 €/train-km as an upper limit to the marginal infrastructure cost per
train km for high speed rail and a price elasticity of 0.7 and if there is no environmental
charge (which arguably should be the case given the general absence of environmental
charges in air transport). As seen from Fig 1, the typical mark ups for access to high speedlines in France greatly exceed these levels. The impact of high track access charges on the
new route could be even more problematic if open access competition is permitted on theexisting lines at much lower charges.
Adler, Pels and Nash ( 2008 ) modelled competition between rail and air on a number ofTrans European Network corridors where investment in high speed rail is either underway or
proposed, using a game theory model to compute Nash equilibria. They assumed
competition between low cost and conventional airlines but no within mode competition on
rail.
Where high speed rail was introduced with a low track access charge of 2 euros per train km,
they found high speed rail to be socially worthwhile, even though a profit maximisingmonopoly rail operator would use much of the benefit to raise price rather than increase
market share (although, as noted above, a sophisticated yield management system might beable to achieve both of these aims simultaneously). However, when access charges wereraised to 10 euros per train km, services ceased to be profitable and would not operate
Nash — Discussion Paper 2009-16 — © OECD/ITF, 200919

without subsidy. In general, a high access charge will limit the frequency of service offered
below the optimal level, and thus also limit the benefits.
On the other hand, a fixed charge as part of a two part tariff could make a major contribution
towards the costs of building the network. However, such a charge is problematic if open
access competition is to be introduced. What contribution should new entrants make to the
fixed charge? The answer provided by the literature is that the new entrant should pay for the
reduction in profitability of the existing operator (Baumol, 1983), but such a system is hard toadminister. On the other hand, a franchising system – including a cap on the fares to be
charged – can reconcile the desire to make a contribution to fixed costs with a wish to charge
for track access at marginal cost; in this case the contribution could come from thewillingness of the franchisee to pay for the franchise

9. Conclusions

Most successful applications of high speed rail seem to arise when there is both a need formore rail capacity and a commercial need for higher speeds. It seems difficult to justify
building a new line solely for purposes of increased speed unless traffic volumes are verylarge, but when a new line is to be built, the marginal cost of higher speed may be justified;conversely the benefits of higher speed may help to make the case for more capacity. It
follows from the above that appraisal of HSR will need to include assessment of the released
capacity benefits for freight, local and regional passenger services and the changes inservice levels on the conventional lines. It also follows that the case for HSR is heavily
dependent both on future economic growth and on the assumption that demand for long
distance passenger and freight transport will continue to increase. If long run economic
recession, or environmental constraints prevent this from occurring then far less new HSR
will be justified than in a ‗business as usual‘ scenario. Already the current recession will haveat least delayed the case for some new lines, although increased government spending to
reflate the economy may have the opposite effect.
High speed rail is more successful at competing with air than car, and there is evidence forthe widely quoted 3 hour rail journey time threshold (although this evidence predates theincreased security and congestion at airports which is believed to have increased thisthreshold). Where rail journey times can be brought close to or below 3 hours HSR can be
expected to take a major share of origin-destination aviation markets.
Of the measured indirect benefits of HSR investment, congestion is the most significant.
Relief of road congestion is, however, unlikely to be a major part of the case for high speed
rail except where chronic congestion is spread throughout the day along much of the route.
Relief of airport capacity through transfer of domestic legs from air to rail is potentially more
important where capacity is scarce and expansion is difficult, costly and has a serious
environmental impact, as in the case of Heathrow.
Environmental benefits are unlikely to be a significant part of the case for high speed railwhen all relevant factors are considered, but nor are they a strong argument against it
provided that high load factors can be achieved and the infrastructure itself can beaccommodated without excessive environmental damage. A key factor here is the approach20

Nash — Discussion Paper 2009-16 — © OECD/ITF, 2009to cities, where the choice may be between use of conventional tracks at reduced speed or
expensive tunnelling.
The issue of wider economic benefits remains one of the hardest to tackle; such benefits
could be significant, but vary significantly from case to case, so an in depth study of eachcase is required.
The breakeven volume of passengers to justify a new high speed line is very variable,
ranging from 3m to 17m in the first year of operation under possible assumptions examined,
but typically even under favourable conditions at least 9m passengers per annum will beneeded. Whilst it appears that all the French high speed lines comfortably exceeded thisvolume, it is clear that some proposals are being developed where traffic is very much lessdense (the Madrid-Seville line, for instance, carried less than 3m passengers in its second
year of operation and is still only at around the 5m level). The most important variable indetermining the breakeven volume is the construction cost, which varies enormously
according to circumstances.
It is important to consider network effects. The benefits of a high speed line may be
maximised by locating it where it may carry traffic to a wide number of destinations using
existing tracks beyond the end of the high speed line, whilst extensions to an existing
network lead to greater benefits than isolated new lines by attracting increased traffic to the
network as a whole. Obviously this implies technical compatibility between HSR and existingrail as a prime requirement.

Acknowledgements

I wish to acknowledge helpful comments on an earlier draft by Peter Mackie, Stephen
Perkins, Emile Quinet, Gines de Rus and Tom Worsley. Responsibility for the final version isof course solely my own.

Nash — Discussion Paper 2009-16 — © OECD/ITF, 200921

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