Submitted by: Trevis Harrold
In California, stakeholders have expressed interest in investing resources into the construction and implementation of a high-speed rail. Dr. Kara Kockelman, professor within the University of Texas, evaluates the comprehensive benefits and costs associated with creating a high-speed railin a paper entitled High-Speed Rail in California: A Cost-Benefit Analysis (CBA). Overall, Kockelman concludes that the project has the potential for self-financing and thus warrants“serious consideration” from state officials.
Overview of Policy Option, Standing, Time Horizon, and Discount Rate
Kockelman compares the potential cost and benefits of a very high-speed rail (VHSR) againsttwo preexisting options: automobiles and air transportation. Alternatively, California could do nothing and instead invest the estimated VHSR cost ($11.8 billion dollars) in federal treasury bills that yield a nominal rate of 7.8%. Kockelman provides a time horizon of 30 years because “no major innovations in transportation are projected significantly to reduce any of the costs previously discussed during the next 20 or 30 years.”1 The estimated discount rates that Kockelman uses of 4% and 7% to account for both liberal and conservative projections.
The choice of a discount rate can be controversial because low interest rates tend to yield higher present values for projects that provide benefits in the future. Kockelman chooses to value the very high-speed rail (VHSR) benefits conservatively by setting a higher discount rate. She arrives at this discount rate by looking at the return on a federal Treasury bill bond the nominal interest rate (7.8%), and accounting for the inflation rate (3.8%), which leads her to a real interest rate of 4%, the discount rate used in the study. She also allows for a “conservative” discount rate of 7%.
Kockelman states that the majority of Californians would receive at least minor benefits from the project (cleaner air, less highway congestion, greater tourism, etc.), but not in proportion to their costs–especially if general-obligation (GO) bonds were sold. Thus, to avoid substantial bias in project impacts and much of the inequitable distribution of costs and benefits that would result from financing, revenue bonds should be used to finance the project. Revenue bonds could probably be sold at real interest of about 5 percent which is more than GO bonds would have to pay because of an added risk of repayment.
This study employs a 30-year time horizon. Kockelman estimates that the time horizon accords well with the projected 15-20 year useful life estimate for the trainsets. This time horizon implies that all future benefits and costs for the project will need to be discounted back to the start datebecause money has a time value. This value is derived from its alternative uses such as an investment in medical innovations or education.
In the article, Kockelman values non-monetary costs and benefits such as reduction in noise, comparison to highways/airports land takings, congestion considerations, and utility from having additional transport mode choice options. Predominantly she refers to estimates in other studies such as Bondada and Wayson, 1993 and Envitrak, 1992) in all the cases above.
Monetary Costs and Benefits Table
The table below lists the cost and benefits taken into account by Kockelman’s CBA.
|Description of Cost||Amount, Time Horizon & Measurement||Description of Benefit||Amount, Time Horizon & Measurement|
|Whole system fixed capital cost (laying down rails, acquiring land, etc.)||$11.8 billion 30 years [estimates taken from Hall et al, 1992]||Direct Revenue [calculated based on expected total yearly fare = appropriate fares x number of trips after accounting for trip routings||$1,080 million ($10 inconvenience penalty)$869 million ($20 inconvenience penalty)|
|Six train sets and two power cars||$35.3 million 15 to 20 years [estimates taken from Hall et al, 1992]||Salvage value||Most important return rates to consider assume a zero salvage value|
|Operation cost||1st year: $320 million (low ridership scenario) or $239 million (high ridership scenario) [estimates taken from Sands, 1992]||Consumer Surplus||$25.7 million annually [x30 with discounting to get total over full project time horizon]|
|Safety (lives saved)||$198 million annually ($10 scenario) $152million ($20 million) [x30 with discounting to get total over full project time horizon]|
|Pollution||$120 million annually [x30 with discounting to get total over full project time horizon]|
Critique of CBA
Spillover effects to the automobile and air travel markets (demand for cars and flights might decline) are not taken into account in Kockelman’s analysis. The airline and automobile companies could be very unhappy with the result of a high-speed railroad because cars will be more elastic with the creation of the railway system. This could potentially cause auto companies (Honda Motor Co. and Toyota Motor Co.) to relocate their U.S. departments outside of California.
This would be a huge infrastructure project that would take time to finance and complete. Kockelman looks at what the rail system could look like 30 years in the future yet it remains unclear how citizens of California will actually benefit from a high speed rail system. She fails to make mention of any of the cost or benefits in the short term and greatly underestimates the VHSR’s impact on Californians in the immediate time frame.
Although, Kockelman does in fact acknowledge that a portion of Californians might not experience any benefit from this high-speed rail system, she fails to outline that at least one third of the state would not stand to benefit. In the study’s model, residents in areas north of the Sacramento Metropolitan Area and along the border of Nevada would not likely use high speed rail because they would have to travel significant distance just to get to a rail-station.
The net present value (NPV) is calculated with a constant rate, Kockelman assumes consistent time preferences (not hyperbolic discounting). This could be an issue because as residents get accustomed to the rail system their likelihood of use could change. This would attract more customers in the long term.
Kockelman also does not incorporate equity considerations. She could conduct a survey to determine which income brackets people who would be most willing to use the train, and could take into account diminishing marginal utility of income.
Alternatively, her analysis should take account of the neighborhood effects of where train stations are placed. Kockelman does not even discuss the impact of this project on low-income communities. High-speed rail accessibility would inevitably increase property values in regions near the stations. Property values would increase, causing an inevitable increase in taxes and the overall cost of living. This could be worth mentioning in her CBA.
Although, all CBAs have some shortcomings, I agree with Kockelman’s final analysis that this rail system could benefit California. At the same time, a more thorough analysis of the situation is required before moving forward with enacting any policy recommendation.
1Kockelman, Kara. (1994). High-Speed Rail in California: A Cost-Benefit Analysis. Berkeley Planning Journal, 9(1).4