Agglomeration economies and rail investment: Prospects for Asian

development Cameron Gordon, PhD

Associate Professor, Economics, University of Canberra

Senior Visiting Fellow, UNSW-Canberra (ADFA) – Business School

Principal Investigator, University Transportation Research

Center Region 2, City University of New York

Presentation for the Crawford School of Public Policy | Arndt-Corden Department of Economics

November 19 2013

Presentation Outline •  1. A brief appetiser from economic history •  2. Transport investment and benefit: travel

time, accessibility, agglomeration and productivity

•  3. What is HSR? •  4. HSR in Asia – a brief history •  5. HSR in Asia – its current impacts •  6. HSR benefits – Asian Agglomerations. •  7. An Asian Century for HSR?

1. A brief appetiser from economic history: rails and the development of the US West

•  Economic historians have extensively studied an earlier epoch of rail, mainly the building of railways throughout the world in the 19th century.

•  One very well studied phenomenon has been the role that the building of the Intercontinental railway had on the development of the US economy.

Basic findings •  Transport infrastructure is usually assessed

according to the 'Value of Travel Time Saved' (VTTS).

•  The advent of railway technology certainly increased the speed of travel and thus notionally reduced the amount of time spent traveling from point to point.

•  But the historical evidence shows that VTTS may not have been the main benefit of the railways.

•  Changes in accessibility to markets may have been as or more important.

Did these travel technologies primarily deliver 'VTTS’?

2. A typology of rail investment benefits

•  Consider an economy characterised by the following two functions:

•  (1) Y = f(K,L) •  (2) U = f(c1,c2..cn ) This, of course is a simple depiction of an

economy with a production function (1) and a consumption/utility function (2).

VTTS as the major transport benefit

•  Transport is generally seen as a 'derived' demand, i.e. in the quest for getting things we really want we have to 'consume' a certain amount of transport.

•  We don't want the transport itself but consume it as a means to the end of getting the things that give us utility.

•  Hence reducing travel time is a consumption 'good'. This is the major basis of VTTS: as a consumption benefit.

Productivity benefits – a VTTS perspective

•  Productivity benefits primarily come, however, through the production side of the economy. VTTS 'productivity' benefits could be acting in this way:

•  Y = f(0.X*L, K), Y = some fixed quantity ‘N’ •  In other words, VTTS could be allowing for the same

Y to be delivered for a fraction of L that was used prior to the rail investment. For example, perhaps workers are less tired with new shorter commutes or have worked during their commutes.

•  This is not easy to measure and not typically used in VTTS analysis.

Productivity benefits – non VTTS •  More typically transport productivity

benefits would look like the following: •  N*Y=f(K,L), where N>1 •  Here N represents some increase in Y per

unit of input that is activated by changes in production that are enabled by a transport investment.

•  These must be considered completely separately from VTTS benefits, although reduced travel time is often the channel for creating 'N'.

Sources of 'N' •  Accessibility: the shape of the market expands and

allows for greater potential demand which drives greater supply which in turn drives things like greater division of labour and economies of scale.

•  Agglomerations: people can increase their density at key points because density has positive 'returns'.

•  Two points: (1) accessibility and agglomeration are closely related and (2) they only become 'economies' if there is increase in net productivity on the production side.

•  If there are just transfers but not net gains these may have social value but are not productivity benefits.

Types of agglomeration benefits •  Agglomeration benefits (i.e. true productivity

increases) are varied but Hensher et al (2013) notes three main types:

•  input/output linkages between intermediate and final goods

•  Labour market interactions •  Knowledge spillovers Agglomerations might have any or all of these features and actually more and the lines between these might be fuzzy. •  Y = f(K,L) ← f, K and/or L might all be affected.

3. What is ‘High Speed Rail’? •  Of course conventional rail has been

around for over a century and a half. •  What is the difference between this and

‘High Speed’ Rail (HSR)? •  There is actually not a firm definition in

the literature but the basic difference boils down to maximum speeds that HSR can achieve. These are now 300 kph or more, a good 100-150kph more than maximum speeds on ‘regular’ rail.

Speed and technology •  Top speed is one thing but average rail speed is a

function of a number of things, one of which is technology. Some technologies, e.g. ‘maglev’, are basically new rail technologies, but most HSR systems are variations on traditional ‘steel on steel’ rail modes, emphasising improvements in track, vehicles and, especially, signalling.

•  ‘Non-technological’ factors are often just as important to speed, especially alignments (long straight rail lines above ground are best for speed), minimisation of stops along corridors, and overall system capacity (sharing rail with slower traffic such as freight slows overall speeds).

4. Asian HSR -- history •  Interestingly, Asia (a very broad region indeed) was

the birthplace of ‘High Speed Rail’ (HSR). •  Japan began construction of the world first HSR with

its ‘bullet trains’ in 1959, with first service opening in 1964 to coincide with the Tokyo Olympics.

•  This first line along the Tokyo-Osaka corridor was dubbed ‘new trunk line’ (‘shin kan sen’ in Japanese) and the whole network ultimately became known as Shinkansen.

•  Japan was the first country to build a dedicated high speed network, separate from the regular rail network. This model became the direct inspiration for the French high speed AVE network.

Japanese Rail Financing •  The Shinkansen was built by government

through the auspices of Japanese National Rail (JNR).

•  Financing was obtained from Japanese Treasury loans using superannuation and other savings funds (e.g. those accumulated through the Postal Savings System etc.). Huge debt was accumulated, despite profitable operation on main lines, through mandated cross-subsidies for regional service.

•  In 1987, JNR was privatised and became the Japan Railway (JR) companies, with the huge debt separated into the public sector.

Japan’s network today (source: Nakagawa and Hatoko, 2007)

Taiwan’s HSR •  In 1989 the Taiwan government decided to

proceed with its own HSR system, separate, as in Japan, from the conventional rail system.

•  As in Japan, capacity constraints, combined with a concentred dense population, made the project relatively easy to justify economically.

•  In 1993, it was decided to privatise the project using a BOT model with a 35 year concession to the successful private bidder.

•  In 2000 a concession was awarded, financed through a bank loan consortium. Service commenced in 2007.

Taiwan’s ‘North-South’ network (source: Kao, Lai and Shih, 2010)

South Korea HSR •  South Korea began studying the prospect of

HSR in 1972, commencing a more formal study in 1978-81.

•  Approval for proceeding came in 1989 and construction planning began in 1992 under a special government authority.

•  A BOT was rejected as too risky and the project was largely government run and financed through conventional sovereign appropriations and debt finance.

•  Commercial service commenced in 2004.

South Korea’s HSR (source: Lee and Chang, 2006)

China’s HSR •  China, the region’s largest economy,

came to the HSR game relatively late. •  A large increase in conventional rail

expansion began in 1978 as part of the Deng reforms and the Ministry of Railways began five rounds of ‘speed up’ campaigns from 1997-2004 to improve operational performance (e.g. double-tracking).

•  Construction of the first HSR line began in 1999.

A great leap forward •  China’s progress in building an HSR network

has been phenomenal. •  The first HSR line between Qinhaungdoa and

Shenyang commenced service in October 2003 and by 2011 the country had built 7500 km of HSR in total, the largest HSR network in the world.

•  Current plans are to double that network by 2020 to 16000 km.

•  Financing arrangements are somewhat obscure but it appears that roughly half of the capital comes from domestic bank loans, bonds and a surcharge on freight.

China HSR by 2020 (source: Tang, Savy and Doulet, 2011).

5. Asian HSR impacts •  Economic and ridership experiences

across the Asian countries which currently have HSR systems is broadly consistent with experience of other countries.

•  HSR tends to dominate as a mode choice in the 200km to 500 km trip range on a downtown to downtown basis, and competes with air in the 500 km to 600 km trip range. Above that amount of distance other modes, especially air, are preferred. This seems to hold in Asia.

Day returns •  A key reason for these modal splits are travel time. At an

average speed of say 250 km per hour, a 500 km trip can be considered a day return (at the outside) and hence allow for a wider geographic set of commuting and business travel choices.

•  HSR also limits the need for modal shifts that travel to airports in particular require.

•  Ningbo-Shanghai HSR, for example, has a roughly 2 hour journey time so downtown returns could conceivably now be day-trips rather than overnight trips with (a) single-mode rather than mode switching (as with airplane travel) and (b) potentially higher productivity 'work-time' during the trip.

Maturity cycles •  The four Asian countries mentioned also seem

to experience a cycle common to HSR – rapid growth in usage over the first 20 years with a moderating near the end of that cycle and a relative flattening after that.

•  In that sense HSR is like any other product in which maturity of service is met with declining patronage growth. What it does say is that most HSR investments, if well planned and priced, will cover their operating costs fairly early on (though South Korea overestimated initial ridership figures by roughly 50%).

The ridership cycle (source: Kao, Lai and Shih 2010)

The Asian maturity cycle (source: Campos and Rus 2009)

Opex versus Capex •  The Asian experience is consistent with almost

all other HSR systems in the sense of having high capital expense (capex) that are very likely to be unrecovered over the life of the system and hence will need high initial public investment. There are wide variations in this, and one set of authors has found Asia to have somewhat higher capex per km that other countries (though some of this has to do with very high land acquisition costs for ROW in places like Japan).

•  Operating expense (opex) as already mentioned is generally recoverable.

Capital costs of HSR worldwide (source: Campos and Rus 2009)

Development stages and finance •  The history of Asian HSR thus far does say a lot about

the links between stage of development and ability to finance and operate HSR.

•  Being capital intensive, HSR requires sufficient capital through either domestic savings and/or foreign investment to be feasible to build.

•  Since capex is generally going to be unrecoverable in full, PPP mechanisms and traditional inward FDI are generally not going to be an option for new project finance (though Taiwan did manage to use a PPP).

•  Also there have to be enough potential travellers with sufficient disposable incomes to pay HSR fares and have a high enough VTTS to want the service.

•  Japan, Taiwan, South Korea and now China all reached a sufficient development level for HSR.

Densities and Geographies •  It is perhaps no surprise that Japan was the world

pioneer in HSR. •  75% of Japanese GDP is concentrated along the

two Shinkansen corridors of Sanyo and Tokaido and the system was built in the context of a narrow island corridor with a dense, road, conventional rail and air traffic network at capacity (and with dense cities with scarce automobile parking). Economic growth was also very rapid during the system’s initial phases.

•  South Korea and Taiwan have similar operating conditions. China, though much larger as a country, is not dissimilar in its historical settlement patterns.

6. What’s next? Asian agglomerations •  There are two basic benefit channels: •  (1) HSR → VTTS → u(c) •  (2) HSR → accessibility → agglomeration →

Y = f(K,L) •  With respect to (1) all we are concerned with

is that it takes travellers less time to get to and from major capital city downtowns and time is money/value.

•  But (2) may be the more important element with Asian HSR (and some argue with HSR generally)

Compressing China by rail (source: Tang, Savy and Doulet 2011)

Asian Urban Hierarchies •  The Asian countries with HSR and many of

the landmass ones currently without it (large archipelago nations such as Indonesia and the Philippines are obviously not candidates for HSR networks, though perhaps some key trunk lines) have dense and well-ordered urban hierarchies that HSR has substantial influence over.

•  Opportunities for net agglomeration gains via urban specialisation are quite high in this region particularly.

7. The Asian Century of HSR? •  China is in the current vanguard of

investing its own domestic HSR network. •  It is also in the vanguard of making

strategic investments in a potential Asia-wide HSR network.

•  For example, China is having discussions with the Turkish government for joint finance of a Kars-Edirne line that would reduce travel time across Turkey from 36 hours to 12 hours.

A future Asian web?

Development bottlenecks •  Of course, HSR investments, as noted

earlier, require lots of money. •  The subcontinent, home to half of the

region’s population, is much poorer overall than North and even Southeast Asia, despite rapid growth.

•  India has a rail network that is one of the world’s largest but it is in decrepit condition. The Indian Railways Minister announced a $9 billion investment plan in 2010 to increase travel times but this is far below the necessary funding for true HSR.

Potential Indian HSR corridors

Conclusions •  HSR in Asia is expensive but potentially

transformative. •  Worth it? Governments there have put money on

the proposition generally with impressive results. However the capital investment is ‘strategic’ in the sense that they are unlikely to be fully recovered.

•  A key element is to have productivity gains lead the analysis/design project design horse rather than just VTTS since these may be the main changes that an HSR will deliver.

•  Financing is critical. Query: is there enough region-wide payoff for some multilateral aid to lagging areas to make HSR investments?