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The economics and financing of high speed rail and MAGLEV systems in Europe

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Title:
The economics and financing of high speed rail and MAGLEV systems in Europe an assessment of financing methods and results with the growing importance of public private partnerships and implications for the U.S.
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Book
Language:
English
Creator:
Lynch, Thomas A ( Thomas Anthony )
United States -- Dept. of Transportation. -- University Research Program
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Center for Economic Forecasting and Analysis, Florida State University
Place of Publication:
Tallahassee, Fla
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Subjects / Keywords:
High speed trains -- Finance -- Europe   ( lcsh )
High speed trains -- Economic aspects -- Europe   ( lcsh )
Magnetic levitation vehicles -- Finance -- Europe   ( lcsh )
Magnetic levitation vehicles -- Economic aspects -- Europe   ( lcsh )

Notes

Statement of Responsibility:
Tim Lynch.
General Note:
"March 15, 1995."
General Note:
"This project is made possible through a grant from the U.S. Dept. of Transportation, University Research Institute Program"--Acknowledgments.

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University of South Florida Library
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aleph - 32484830
usfldc doi - C01-00285
usfldc handle - c1.285
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SFS0032367:00001


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. THE ECONOMICS AND FINANCING OF HIGH SPEED RAIL AND MAGLEV SYSTEMS IN EUROPE An Assessment of Financing Methods and Results With The Growing Importance of Public Private Partnerships and Implications for the U.S. Dr. Tim Lynch Principal Investigator Florida State University March 15, 1995 Cenler for Economic F orecasting and Analysis Flori da Slate University 904-644-341 0 2035 E. Paul Oirac Olive Morgan Building Talla hassee Florida

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TECH NtcAL RPORT STANDARD mLE PAGE ..... .... .... 1 Ropott N'o. NUTI-FSU Projec1112 2. 3. C:!QI.cg No. NUTI-93FSU2. 1 c. Tltlo ;and SIIWSo 5 Rport OMt THE ECONOMICS AND fiNANCING Of HIGH SPEED RAIL AND MAGLEV SYSTEMS I N March 1995 EUROPE, A n Auessmenf of Financing Methods and Results With the Growing Importance of PUblic Pri\lste Pannershlps and t.mptlcatlon s for the u s e Orpiirtmon Code 1 Autllor3) T i m Lynch, Ph. D D irecl o r CEFA, F lorida Slate University 8. 9. 10. Florida Institute o f Science and Public Affairs Florida Stale Unlvenily, 2035 E. Paul Dirac Drive, Morgan Buildi ng, Tallahassee, Florida 32306, }1, OTRS 1Z. Nomo AM 1 $ o1 RePOrt Mit Piod Office of Research and Special Programs Oclob 1993 December 1994 U.S. Department of Transportation, Washington, D.C. 20690 t 4. AaonayCOCio S\!pplem.ent:Ny Supported by a grant from the U.S. Department of Transportation, University Research Institute Program 18. Abelnoo;t This report evaluates the principal economi c and fiscal models and methods in use to finance High Speed Rail and Magnetic Levitation transportation systems completed and under deve l opment In western and eastern Europe. Thi s study also develops a profile of the historic deve lopmenl, the current efforts and future p lans for expans io n of HSR systems across Europe. A specific focus examines the methods of public, quas i private-public and private joint ventures used to develop these systems across the var ious nations of europe. For example: Each nati o n is pursuing an exami n ation of the relationship of government support and prospects for privatizat ion of conventional and HSR systems. The swedish m o del of privatizatio n receives special attention for ns earliest efforts, innovation and emerging success. evaluation of similar privalizalion or quasi public-private Initiatives under deve lopment In France, Germany, Spain Italy and elsewhere In Europe are also explored in each Chapter as appropriate. Important differences i n t ransportalion public policy among the various nations of Europe and the U .S. are also examined in detail in Chapter 8. The growing importance of implementing private seclor evaluation methods and efficiency cr it eria are I ncreasingly Imp o rtant in planning HSR systems anywhere In the world. This study provides the Interested reader with an ov ervlaw of these method s resul ts from the use of these techn iq ues. a guide t o quantitalive models and a comprehensive list of technical terms compiled by the author. Specia l focus on dep loyment of the HSR system I n Lllle France (or Euro-LIIIe) Is provided In a case study i n Chapter 7 The study examines the join t venture partnership between the (Internat ional) private s ector and l ocal, regi onal and federal government agencies working together to facllitale the Integrated a n d seamless dep loyment of the HSR system in the northern France Thi s case study is a mode l for HSR plan ners everywhere In the with special importance to u.s. p lanners and policy makers. 17 Kt)'WOAI,;n 18. s:w.moM High Speed Rail, Magnetic Levila(ion, Available to the public through the Nationat Technlcallnfocmation SeJVIce {NTIS). F inance, Planning, Economics, Socio-5285 Port Royal Road, Springfield, VA 22181, ph (703) 487-4650 economics, Externalities, Partnef'Shi p 1?. S0fyQn$'1, 20. l O ll,... PIJ) l 1 NG, ol P>IIJU n PI"..: Unclassified Undassified Form DOT F 1700.7 {8-88)

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Acknowledgments Abstract TABLE OF CONTENTS Executive Summary Chapter 1 Financing High Speed Rail I nvestments in the New Europe--Vision for the Year 2000 and Beyond European HSR Rail System Financing-The Growing Role of the Private Sector Findings Introduction 1. The European VIew of Financing Infrastructure Investments in the New Europe 2. F uture Capital Requirements and the Need for New Public Private Re l ationships for Financing Infrastructure Across Europe 3. Models for Organization of the Public-Private Relationship Summary 4. The Multinationa l European Experience of Financing High Speed Explored in This Report How Will These High Speed Rail Developments be Financing in Europe? Chapter 2 Results of the Trans-European High Speed Rail Financial and Economic Analysis Findings Introduction 1. Alternative Construction Options Evaluated 2. Methodology 3. Study Results Baselrne Traffic Forecasts European Passenger Travel Forecast Results for 2000 with Initial HSR Investments European Passenger Travel Forecast Results for 2010 with Initial HSR Investments 4. Results of the High Speed System Financial Model and Key Rail Unks Chapter 3 The Financ ing and economics of the T GV High Speed Rail System in France Findings 1. The Economic and Financial Success of the TGV System in F rance Growth in Rail Ridership with Introduction of the Southeast TGV Effects on Air Traffic Effects on Road Traffic v Page viii 1 3 15 29 45

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2 Initial Estimates and Final Construction Costs Expenditures 3 French TGV Government Funded Subventions Awarded to the SNCF in Support of the TGV Operation 4 Financing the AUantic TGV Chapter 4 The Financing and Economics of the ICE High Speed Rail and Transrapid Maglev Systems in Germany Findings 1. The I ntercity Express High Speed Rail System in Germany A. Origins of the New German Conventional and High Speed Rail Systems B Finances of the DB AG and Implicat ion s for ICE High Speed Rail Services DB A G Reorgan i zat ion Structure Combined DB and DR Debt C Intercity Express High Speed Rail Service Across the United Germany ICE Passenger Service Summa/}' of IC E Rail Passenger Service Levels 2 New and Upgraded ICE Travel Corridors and Projected Travel Time Im provements New and Upgraded ICE Service 3 The Financing of Maglev on the Berlin-Hamburg Alignment Rick Dis t ribution Between Private and Public Sectors Financing th& Guld&way Financing through the Public Sector Profitability of Proposed Operations Corporation Chapter 5 Financing the X2 000 High Speed Rail in Sweden with Links to the Nordic Nations F indings 1 Swedish High Speed and Conventional Rail F inancing-An Innova tiv e Public-Private Partnership Swedish Rail Financing The Swedish Ral7road Financing E xample The Need to Include Environmental Extemalities in the Development of Transportation Systems Internalizing Air Pollut ion Damages in Transportation Policy Decisions 2 Expansion of the Swedish X -2 000 HSR Service through 2000 and Beyond Sweden's X2000 Ridership Nordic Group of Nations to be Linked by Way of the Great Belt v i Page 65 79

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Chapter 6 Financing HSR in Italy and Spain Findings . . ". : .. 1 . Financing HSR in Italy Introduction Systema Ad Alta Velocita Public-Private Financing of the Italian HSR Milan-Bologna and Bologna-Florence High Cost HSR Infrastructure Considerations Rolling Stock lntemational HSR Linkages 2. High Speed Rail Service in Spain The Spanish HSR System Financing Spain's HSR System The Future of HSR Expansion in Spain Linking to France Chapter 7 Implementing High Speed Rallln Europe with Local Government and the Private Sector Cooperation A Case Study Lessons from Lille Findings 1. The Evolution of Local Authority and Responsibility in France Background to Lilla HSR Project Development 2. Case Study of Lille France Blueprint for Local Government in Securing HSR Services Develqpment of Private/Public Joint Venture Local Urban Leadership Forges Public/Private and High Speed Rail Financing Relationships Development of a Metro Infrastructure to Assist TG V Multi-Modal Capabilities Eura U/le Public/Private Joint Venture Financing Arrangements Eura U/le the Company The TG V Rail Network and Lille Europe Station Chapter 8 Comparison of European and American Public Transportation Financing Policies Findings Introduction Explanations for Differences in Modal Share Distribution Decline In the Cost of Gasoline in the U.S. Trends in Public Transport Service and Ridership Public Subsidies by Transportation Mode In the United Stales Summary Bibliography Appendix 1 Glossary of Financ i a l Definitions vii 91 101 115 127 133 143

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ACKNOWLEDGMENTS This project is made possible through a grant from the U S. Department of Transportation, University Research Institute Program. Thei r support i s gra t efully acknowledged Project Team: Principal I nvestigato r : Dr. nm Lynch Director Center for Economic Forecasting and Ana l ysis Florida State University Much thanks and appreciation go to many individuals that contributed time, materials and effort i n the completion of this study. First to the U.S. Department of Transportat ion for fund ing this initiative and to the dedicated staff of the Center for Urban Transportat ion Research, University of South Florida for their leadership and guidance in establishm ent of the National Urban Transit Institute. Next I would like to provide spec i al thanks to the following indiv i duals for their personal t i me, technical support tour of facilities, presentations, provision of materials and general logistical efforts during a very busy site v i sits across Europe. Dr. L ars Hansson R esearch Leader Lund Universi ty Department of Industrial Environmental Econom i cs V. Martensgatan 1, Dr. lng Wolfgang Henn Deutsche E i senbahn Consulting GmbH (DE Consult) Dr. Reinhard F. Luerken Thyssen Henschel America. Project Manager Transrapid Gera r d Mathieu Department Director SNCF High Speed Rail and New Infrastructures Department Mr. U SURACE F.S. SpA Area Trasporto Uffic i o Piani de Sv il uppo Herrn Dr. Eberhard Jansch Deutsche Bahn AG Luc Aliadiere SNCF Deputy Director High Speed Ra i l and New Infrastructures Department Mr Gunther Ellwanger Internationa l Union of Railways High Speed Env i ronment Mr Peter Haf ner Deutsche Bahn Vorstandsbereich Konzementwicklung International Beziehungen Patrice Beuren SNCF High Speed Rail and New Infrastructures Department Thanks also go to my colleagues within the Federa l Ra i lway Adm i nistration for provis ion of materials for this report Special thanks go to Char1es H. Sm i th and Naz i h Haddad staff of the Florida Department of Transportation, H i gh Speed Transportation Program Office (former Director and Assistant Director of the Florida High Speed Rail Comm i ss i on) for the i r encouragement and support for this effort with special thanks to Char1ie for ongoing r eview, council and sage advise. And final thanks go to my children Thomas (9) and Kate l yn (11 ) who tolerated long weekends nights and holiday afternoons and evenings with daddy working on vii i

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the computer filled with vis ions of their future riding U.S HSR systems in a cleaner more efficient world. lx

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Abstract This report evaluates the principal economic and fiscal models and methods in use to finance High Speed Rail and Magnetic Levitation transportation systems completed and under development in western and eastern Europe. This study also develops a profi l e of the historic deve l opment, the current efforts and future plans for expansion of HSR systems across Europe A specific focus examines the methods of public quasi private-public and private joint ventures used to develop these systems across the various nations of Europe. For example: Each nation is pursuing an examination of the relationship of government support and prospects for privatization of conventional and HSR systems. The Swedish model of privatization receives special attention for it's earliest efforts, innovation and emerging success. Evaluation of similar privatization o r quasi public-private initiatives under development in Franoe, Germany, Spain, Italy and elsewhere in Europe are also explored In each Chapter as appropriate. Important differences in transportat i on public policy among the various nations of Europe and the U.S. are also examined in detail in Chapter 8. The growing importance of implementing private sector eva l uation methods and efficiency Cfiteria are increasingly important in planning HSR systems anywhere in the This study provides the interested reader with an overview of these methods results from the use of these techniques, a guide to quantitative models and a comprehensive l i st of technical terms compiled by the author. Special focus on deployment of the HSR system In (Euro)-LIIIe, France is provided in a case study in Chapter 7. The study examines the joint venture partnership between the Onternational) private sector and local, regional and federal government agencies working together to facilitate the Integrated and seamless deployment of the HSR system in the northern France This case study is a model for HSR planners everywhere in the world with special importance to U S planners and policy makers.

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Executive Summary EUROPEAN HSR RAIL SYSTEM FINANCING--THE GROWING ROLE OF THE PR/VATff, SECTOR Historically public transit and HSR have been publicly funded in Europe end are generally associated with provision of an essential public function-providing efficient and effective public transportation services. There is a growing need for a newly defined cooperative private-public relationship to finance needed European infraStnicture.inCJuding proposed massive HSR infrastructure investments. The European view of financing HSR infrastructure across the EC recognizes that ridership fees and othar user charges on HSR and related infrastructure will not be sufficient to finanei'> the full cost of development of these systems. Increasingly private sector principals of management and operation are being incorporated into the structure and operation of Western European national rail systems. The convention is to separate the responsibilities and functions of national rail systems between public and quasi-private areas of specialization based on the areas each sector is most capable of performing. Generally the public sector retains ownership and responsibility of maintenance of the rail infrastructure. This tends to be the most expensive and resowt:e intensive end of the system and the segment that will not be e x pected to make a "profit" or cover it's costs. The private or quasi-private sector retains ownership and operalional responsibilities of rolling stock, system scheduling marketing and passenger and in some cases freight operation across the system. THE TRANS-EUROPEAN HIGH SPEED RAIL FINANCIAL AND ECONOMIC ANALYSIS The conventional rail mode (base) case begins with the European rail system transporting 14% of all passengers and between 16% and 17% of all interzonal passenger traffic With the limited link HSR system in place for the year 2000 interzonal rail ridership rises to about 22.5% (a 41% increase) while rail's share of total/raffle rises to about 17.5% (a 24% increase). With the advanced HSR linkages completed interzonal rail ridership increases by as much as 46% with a modal split of as much as 24% of Europe's interzonal passenger travel 3

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With the introduction of limited HSR linkages the share of passengers using automobile declines from 81% to 79% of total trips and from 67% to 63% of all interzonal traffic Introduction of the advanced HSR l i nks results in a further decline i n auto use to 78. 5% of total trips and 62.5% of interzonal/rips The airplane modal split also drops from an average of 16.5% of interzonal travel to just over 14% under the limited HSR case and to less than 14% under the advanced HSR case The European system wide 19951RR of 9.4% exceeds the noted minimum threshold of 8% to make these investments viable financ ial endeavors The system IRR rates expand considerably with additional 2005 HSR expansions to 9.8% and again with the projected 2015 expansions to 10.8% These European HSR system investments IRR values almost doubles when the socio economic values are added to the financial values the IRR The 1995 network expands to almos/18% and up to 24.1% ten years after completion. The 2015 HSR investments yield a 20.1% IRR and that value increases to 28 .1% with the passage of ten years of in service use. THE FINANCING AND ECONOMIC$ OF THE TGV HIGH SPEED RAIL SYSTEM IN FRANCE In the early 1970's, the SNCF had established the technolog i cal feasibility of developing a 160-185 mph HSR speed system and major segments of the 242 mile Paris-Lyon rail network was experiencing substantial saturation Over 43% of the French population live within this corridor. Development of the new TGV would be more expensive than conventional rail systems, its construction would result in savings on expenditures for conventional roll ing stock of 3. 14 billion francs (1985), or $688 million (1994$) and infrastructure development of 3.35 billion 1985 francs (or $733 million 1994$). Initial construction cost for developing /he 242 mile HSR line was estimated at 8,200 billion francs (1984) or almost $1.9 billion 1994 dollars The introduction of the TGV system on the Paris southeast routes resulted in an 86% increase in overall rail ridership along this corridor with total ridership rising from 12. 2 to 22.2 over the 1980 to 1991 time period. The pos/1981 introduction of high speed rail service led to a dramatic decline in air service on the Paris to Leon route falling from almost 185% ofits 19721evel down to and staying at the base 1972 level throughout the next full decade of service. 4

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The Paris to Leon A6 highway shows a dramatic decline in passenger travel after the 1981 introduction of the TG V service Thereafter a gradual but very much slowed recovery and Increase to only 120% ofthe 19721evels was achieved by the end of 1986 Cash flow analysis of the TGV South-East indicates that passenger revenues exceeded $1 Billion in 1991 with operating costs at slightly under $434 million. This left a reserve gross operating surplus .of $660 million. After interest and depreciation of rolling stock of $127 million were removed a gross balance of $533 million remains After subtracting out financial chaff}es and depreciation of the new line a net TGV contribution to profitability in 1991 of approximately $424 million remained TGV Southeast was operating at a substantial profitability, with and IRR in excess of 15% throughout estimated 1994 returns The socio-economic IRR by comparison for implementation of the SNCF southeast TGV is in excess of 30% after all time and other economic savings over other alternative modes aro netted out. A variety of French national government SUBVENTIONS (awards of revenue) critical to the current and future financial success of the TGV Southeast and Atlantic and all other TGV new and expanded alignments. The first form of public support stems from the realization that other modes, such as the truck and automobile motor vehicle modes receive substantial public sector subsidies to operate over public roads. The French federal government annually provides the SNCF funds to equalize these imbalances and thereby allows the rail system to operate on a "competitive" basis with the more highly subsidized motor vehicle m o de. A second source of federal government funds granted the rail system stems from environmental-economic externality reimbursements Motor vehicle modes impose incromentaltY higher pollut ion loading on the publicly owned 'environmental infrastructure than comparable rail related transport creates These differences are often paid to the HSR system to equalize the differences between the transport modes Thirdly, high speed rail passenger movements result in socio-economic savings such as time savings to passengers. If an elignment cannot financially justify TGV service and the social rate of return is sufficienUy high the public sector will reimburse the TGV SNCF for the amount necessaty to bring the financial rate of return up to the necessary level to make the project a go. Fourth, regional and local authorities frequently invest in TGV expansion programs to entice the SNCF to complete links to their regions that would otherwise not be financially attractive 5

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The fifth scurce of federal government grant and award stems from the federal governments reimbursement" for public services provided for deeply discounted travel fares provided by the TG V system to a variety of public employees and, ret/1'96s, students, militaty and others traveling on business or pleasure A sixth form of International governmental financing Is drawing from the international governmental investment frost fund established in Europe for national sites deemed to be "lntemati ona r in nature and thereby warranting funding from sources far broader than just the nation within wh ich the HSR facility or system i s constructed The TGV Atlantic was commissioned in two stages The western branch ( 180 k i lometers) towards Rennes Nantes and Britanny in September 1989 and the southwest branch (101 kilometers) towards Bordeau, Toulouse and Spain in Septembe r 1990. On the Paris Nantes route the airline share of marl
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The aim was to be an attempt to bring private sector Interests and practices and regional government responsibility to influence the future of the West German DB (and now the DB AG) The thrust of the reorganization Is to divide the rail system into two functional areas with separate budge/ary and accounting responsibilities. The first will be an entrepreneurial area comprising transport and related business activities as well as infrastructure management including construction, operation and maintenance; and the following business sectors, Passenger traffic, Freight traffic, Traction and workshop bus iness. This will be a public limited company with shared capital. The second functional area w ill be public comprising all of the stale tasks formerly handled by the DB and such as the administration of debt, the administration of land holdings not required for railway operations and maintaining the federal railway property Between 1985 and 1992 the DB experienced a modest 5 .1% increase in passenger travel closing 1992 at 1,101 million passenger journeys. Much of this gain is attributable to the expansion of ICE HSR services across Germany. During the same period remnants of the old East German DR experienced a 50% decline in passenger traffic w i th only 215 million passenger trips in 1992. The drain associated w i th the merging of the two railroads has escalated to an unsustainable point with 19931osses exceeding DM 14. 3 billion ($9 11 billion US) alone. One estimate suggests t hat without these reforms total rail drains from the federal budget over the period from 1994 to 2003 could exceed DM 569 billion ( $362.4 billion US). Given these substantial joint debts, the federal government will absorb responsibility for all historic debt from the liabilities of both systems stemming from excessive staff and environmental mitigation ini tiatives incurred over the last four decades. Additionally, the federal government has accepted responsibility for financing the DM 100 billion ($63 7 billion US) in investments essential for reconstruction of the East German DR rail system. In 1971, the German interoity high speed rail network began operation, scheduling 250 intercity (/C) or Eurocity (EC) trains per day with trains operating at a maximum of 200 km per hour (120 mph) on a total of 525 kilometers of track. Currently ten or more freight trains travel between Hamburg and Munich at 120 km per hour (72 mph) evety night over the new high speed rail lines. On June 2, 1991, the line from Mun i ch to Hamburg by way of Stuttgart Mannheim Frankfurt/ Maine, Fulda, Kassel and Hanover went into operation with 25 ICE trainsels available. It operates along a 948 km alignment (568 miles) 7

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The first year of full operation resulted in 10 million passengers traveling by ICE over an average distance of 343 km. The system sustained an occupancy rate of 51% which is a 9% increase from the inten;ity train ICE operation between Hanover and Zurich Switzerland by way of Dorfman, Cologne, Mantz, Mannheim and Basset bagan on May 31 1993. The ICE's daily average was 37 ICE trains canying 25,000 passenger. During this first year of operation, the rail transportation regained 11% of the traveling public and is yielding a net profit. Since its inception, ICE seNice has increased passenger use and revenues by more than 30% .1 ICE expects to double its number of high speed rail lines in Germany to 2 000 km by the year 2000 and eventually operate as many as 200 ICE trainsets. Construction of the Hanover-Berlin high speed rail line which will tie /East and West Germany together for the first time since the end of World War II will reduce travel times from four hours to one hour and 45 minutes by 1997 MAGLEV In Germany In 1994, the German magnetic levitation Transrapid system between Berlin and Hamburg, known as the Magnetschnelfbahn received government authorization A consortium of public and private interests are developing the financing of the construction and operation of this system. The alignment is 284 km (170 miles) and trip time is expected to be less than 60 minutes Initial investment costs are expected to be OM 8.91 billion ($5 7 billion) Forecasts suggest that 14.5 million passengers per year will travel. The private sector will be responsible for the financing of the Operations Corporation. and will raise OM 1. 5 billion ($. 96 billion) i n equity risk capital The remaining financial resources requiring OM 3.3 billion ($2. 1 Billion), will be provided by the banking and credit institutions without any public collateral securities provided. A public-private joint venture will be responsible for co-financing the guideway but it will belong to the Guideway Corporation which is directly and so/ely held by the government. The private sector will, however, co-finance OM 2.4 billion ($1 53 Billion) of the total of OM 5.6 billion ($3.57 Billion) costs of guideway construction. The guideway will be provided by a general contractor under contract to the public sector Guideway Corporation 1 Spee4tlnes Speed Rail Maglev A$SOClation, Volume 2 No S 1994. 8

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The public sector will be additionally responsible for the acquisition and procurement of the land and property for planning and approval processes, for legal and public processes and all of the expenses related to these functions The project internal rate ofretum over/he project life through the year 2043 is 16.93% before taxes and 12.41% after/axes. The equity interest, equal to 13.51% I s the sum of taxes over the life of the project FINANCING THE X-2000 HIGH SPEED RAIL IN SWEDEN WITH LINKS TO THE NORDIC NATIONS Sweden was the first nation to achieve a separation of infrastructure from rolling stock as part of its explicit transit policy. This effective quasi-private, public structure for HSR development offers a model that is being emulated across Europe Sweden HSR plan's Initial cost was set at SKR 32 bn (U .S. $4.5 billion). The first component of this proposal was to increase maximum speeds on alignments between Sweden's main urban areas to accommodate the X2000 lilting train set and increase running speeds to the north. The second part was to Increase freight alignments running north and south to avoid the Stockholm reg ion. Priority has been set to run between Stockholm to Goteborg at speeds ranging from 200 to 250 kmlh. Proposals for investment in high speed rail in Sweden are anticipated to exceed SKR 40 billion ($5. 6 B i llion) over the decade of 1994-2003 This represents a substantial increase over the expenditures invested in conventional Swedish rai l over the preceding decade Denmark has a high speed railway master plan to ultimately construct over 200 km (120 miles) of high speed rail crossing their small, but dense nation. In 1987 the Danish government decided that it would construct a 19 km (11 mil e) fixed link bridge and tunnel across the Great Belt which separates Denmark into three equivalent population geograph i c groups Germany and Denmark have agreed to the electrification of the line between Odense in Denmark and Hamburg in Germany to be completed at the same lime as the Great Belt link expected to open in 1996-97 Additionally, the Swedish and Danish governments have agreed to a link between Copenhagen and Malmo expected to be completed by the year 2000 This will mean an uninterrupted rail/ink between Scandinavia and the continent of Europe 9

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The Italian national HSR system is referred to as the Systema Ad Alta Velocita (SA V), founded in the 1960s and 1970s. There is expectation of a final national commitment of over$ 7 billion for constructfon of the SA V. The Treno Alta Velocita (TAV) Societa Per Azioni (S.P.A.) is a joint private-public company created specifically to build and operate the TAV. Currently 60% of the Italian railways capital is held by private capital while the remaining 40% is held by the public Italian railways The Direttissima line has been in operation between Rome and Firenze-Rovezzano south of Florence only recently. The entire length, 236 km (142 miles), operat ing a t top speeds of250 kmlhr (150 mph) was opened for service on May 31, 1992. Other HSR alignments radiate out from this system as it serves the backbone of the Italian peninsula. It is anticipated that the Direttissima may ultimately handle between 350 to 400 trains in both directions Spain The first Spanish HSR system operating between Seville (home town of Spain's Prime Minister Felipe Gonzalez Marquez) and Madrid, the nations Capital on a 471 km (283 mile) system on April 20, 1992 on the opening day of the Columbus Exposition. The 1987 HSR Plan forecast a total outlay of 2 029 billion pesetas ($19 billion) for expansion and modernization of the Spanish railway system including modernization of the lines between Madrid-Zaragoza-Barr:elona, Madrid-Valencia. Barr:elona-Velencia and others. The Minister of Transport projects that the expansion of the HSR system outward from Madrid along the Zaragoza-Lerida alignment to Barr:elona will cost 500 billion pesatas ($4. 7 billion) The Spanish expect to have completed the line between Madrid and Barr:e/ona and the French border by the year 20 00 The line will/ink up French connections to the Perpignan and Montpellier and an /nterr:onnection to be established with the South-East TGV. This will fully integrate the Spanish HSR system to Europe Important Attributes of European public-private HSR ventures : Broad based Federal, state and local government financing is essential to implement HSR infrastructure systems in Europe and elsewhere. 10

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Bipartisan (or multi-party) political. support across a wide spectrum of municipal governments affected by HSR Is Cl!hlral to implementation of HSR systems. Robust and mutually beneficial public-private partnerships are essential for successful deployment of HSR systems. Private sector in volvement is increasingly essential In financing and planning the integration of the HSR system into tha commercial fabric of the urban areas. Each of the public-private partners performs the functions most appropriate to their unique strength to accomplish final HSR implementation success. Success of the HSR system ridership is Increasingly lied to the system's mullimodal linkages for efficient passenger transfers and mode share transfers National Regional and Local Government Partnership Responsibilities Include: Overall planning and systems design and integration with national mullimodal transportation network. Lead responsibility for environmental planning design and mitigation strategies Primary responsibility for financing, planning and implementing and maintaining rail infrastructure, including corridor alignment purchase, design and construction. Facilitate administrative processes that authorize and encourage successful public/private partnerships essential to implement HSR systems within and across the nation. This may include: authorization for unjque and favorable trading and seNice provision status including ownership of a sole HSR francise award; favorable government contracting authority (e.g., special indemnity, protection, transport of public cargo, etc.); access to preferred lower cost public sector financing; provision of credit for environmental offsets resu/ling from HSR deployment over the alternative modes; and Facilitate research and design projects that are most appropriate to accomplish the needed tasks. ll

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Private and Quasi Private Sector Partnership Responsibilities Include: Establishment and methods to operate within well developed "business l i ke" practices such as establishment of minimum investment criteria {like the SNCF 8% investment threshold) before a HSR Investment is committed Assisting "traditionally government" institutions to function in much more efficient quasi private "market responsive fashion as a quasi-private entity operator of the rail system In a profit driven (including social profitability) framework. Assisting government in reducing governmental excess and waste that has traditionally accompanied public rail development. Efficiently securing and integrating the terms and conditions of financing (as a facilitator but not a fully responsible debtor for repayment of debt) Assisting government in providing a vision ownership and a plan for initial land use design and urban integration. COMPARISON OF EUROPEAN AND AMERICAN PUBLIC TRANSPORTATION FINANCING POLICIES Public sector explicit and implicit policies decisively dominate the decisions about which modes will dominate that nations transporiation infrastructure. Public sector policies will dominate the decisions of the amount of subsid i es each transporiation mode will 19Ceive. Every transporiation mode, including high speed rail systems. in each country examined are publicly subsidized. The size and persistence of these subsidies vary widely across modes and nations and is dominated by internal and external cultural and environmental factors. Public subsidies for suppori of the automobile exist in each country examined (except historically across former Eastern Europe) but highest in the U .S. In viriually all of Europe all income levels use public transporiation services. Public subsidies in Europa are considered good investments for provision of an important public services high quality person and goods movements and are broadly supporied by all income groups With the exception of several major cit i es public transportation use in the U.S is dominated by low to moderate income travelers. Subsidies for public transpolfalion in the U S are often considered welfare suppori for public "transporiation dependent lower income segments of urban society. 12

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Public transportation and high speed rail subsidies are most favored across former Eastern and Was/em Europe. Public subsidies for mass transit in the U .S. are considerable but public subsidies for rail are vety modest compared to European standards. Tile United States subsidizes the automobile well beyond any other nation in the developed world Over the past five decades the United States powerful private sector industrial interests have re i nforced cultural b ias to influence public poiicies and subsidies to advance the automobile mode and to de-emphasize support for public transit and (conventional and high speed) rail modes Tllese dominant interests have comb i ned to under value public transportation and under price automobile ownership and operation costs. For example the real price of gasoline in the U .S. is less expensive in 1995 than any time since the end of World War II Decades of under investment in public trans i t and rail in the U.S. and massive subsidies for the automobile which has resulted in the dominance of pre-committed land use decisions have developed into an almost intractable situation and in many cases undermines the viability of deploying high volume public transportation fixed rail systems 13

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CHAPTER 1 FINANCING HIGH SPEED RAIL INVESTMENTS I N THE NEW EUROPEVISION FOR 2000 AND BEYOND FINDINGS EUROPEAN HSR RAIL SYSTEM FINANCING-THE GROWING ROLE OF THF; PRIVATE SECTOR Historically public transit and HSR have been publicly funded in Europe and are generally associated with provision of an essential public function-providing efficient and effective public transportation services. Ther& is a growing need for a newly defined cooperative private-public relationship to finance needed European infrastructure--Including proposed massive HSR infrastructure investments. Financing new transportation and HSR infrastructure in the future will increasingly require private sector participation as equity investors. The European view of financing HSR infrastructure across the EC recognizes that ridership fees and other user charges on HSR and related infrastruclur& will not be sufficient to finance the full cost of development of these systems Increasingly private sector principals of management and operation are being incorporated into the structure and operation of Western European national rail systems examined in this study. The convention is to separate the responsibilities and functions of national rail systems between public and quasi-private areas of specialization based on the areas each sector is most capable of performing. Generally the public sector retains ownership and responsibility of maintenance of the rail infrastructure This tends to be the most expensive and resource intensive end of the system and the segment that will not be expected to make a "profit" or cover it's costs. 15

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The private or quasi-private sector retains ownership and operational responsibilities of rolling stock, system scheduling and passenger and in some cases freight operation across the system. Across most of Western Europe national governments have pledged to absorb and repay most of the national rail systems' historic debts. This allows the "new" restructured public-private ventures to start financially with a clean slate and improves their prospects for securing lower interest loans for needed upgrades and infrastructure improvements. 16

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Introduction Western, Central and Eastern Europe are in tha midst of ona of the greatest economic transitions in their collective history The : major shifts in the expanding European Community include responding to: the economic and social integration of Western European economies and cultures and resulting disappearance of "artific i al" economic trade borders and barriers; the recent crumbling of Communism ; the opening of Central and Eastern Europe ; the opening of RuS'sian, Asian and Middle-eastern markets ; the implod ing g l obalization of the world economy and the fierce international competitiveness of the booming U.S., Canadian and Mexican North American Free Trade Agreement (NAFTA) economies; expansion of the economies of the Asian tigers led by Japan; international expansion of world markets and competition driven by the General Agreement on Tariffs and Trade (GATT) ; recent demographic shifts including the aging of European populations; and the emergence and growing dominance of service-sector driven high technology markets for the distribution of goods and services including the deployment of advanced high speed rail (HSR) systems across the continent and high spee d communication technolog i es across the world. All of these factors are contributing to the unification of the continent by playing into a dynamic socio-political revaluation of conventional balance of political and economic powers. These shifts are also influential in the r evaluation of how the Europeans finance HSR and other infrastructure. This section will r eview some of the shifts at hand and present a framework of future needs and how the European's HSR financial analysis process evaluates development of infrastructure investments. 1. The European Vtew Qf Financing I nfrastructure I nvestments In The New Europe The f i nancing of HSR in Europa has evolved during the past decade from a purely public sector enterprise to one with increasing levels of support and long-term commitment from the private sector. National companies and direct public sector investment remain the primary Instruments of HSR and other related transportation investment; however private sector responsibilities are becoming more wall defined. The Director General for the Lend i ng European Investment Bank states: 17

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In this post-ideological era, after the collapse of communism and the triumph of western civilization and free enterprise, there is one rearguard battle fought between interventionists and planners on one side and the already victorious advocates of free markets, and lesser-faire on the other The battle is about the role of government in in frastructure investments (In England and elsewhere) the incorrect impression is that th is duel will be woo by the protagonists of the private sector. I say incorrect because in most countries of continental Western Europe it is accepted and deemed necessary that the public sector keeps on playing a major role .... The impressi o n one gets is tha t the triumph of capitalism over state-run, centrally-planned communism Is only definitive when all infrastructure will be privatized.1 General Treumann identified three interrelated points drawn from Europe's economic reality : 1) The European Economies are facing serious investment shortfall difficulties in financing new infrastructure: 2) The need for major infrastructure investment will require governments and the private sector to complement each others li mited resources: and 3) New forms of in ves tment co-operation are needed such as the European Investment Fund currently under development. The new Cohesion Fund, and other Community funds used for joint European inves tment i nitiat ives have been created to help the emerging peripheral countries (Spain, Greece etc.} and to assist with the development of Eastern Europe. Even with this there is insufficient investment in Europe for needed infrastructure expansion. The solution to resolve this problem, to quote Director Treumann is "to change how the private and public sectors split their responsibility for inves t ment in infrastructure in a co-operative way to co-finance these investments." The absence of an integrated (but not nationally based) infrastru cture plan for all of Europe precludes the Single Market from collectively benefiting from macro-investments. The trans European HSR alignments are one of the primary beneficiaries of the Cohesion fund established by the Maastricht summit, to finance transport infrastructure i n the less develo ped EC countries. This fund was established for the promotion of trans-European networks of transport, such as the Internat ion a l High Speed Rail plan, te lecommunications and energy infrastructure 18

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To achieve these ends with their associated massive capital infusions greater amounts of private sector moneys must be mobilized. Increasingly, the national governments of Europe will be responsible for: creating clear and sound economic conditions to ensure the attractiveness of private capital i nvestments; creating sound instiMionaJ and planning conditions th at will ensure the success of these investments; and providing initial capital investments to ensure the financial soundness of these activities to the public and private sectors. Additionally, users of the infrastructure such as HSR riders will incre asingly be required to pay directly for the increased costs of the services that these i nfrastructure provide. However, In a typically European view of financing infrastructure, financia l institut ions across the EC recognize that ridership fees and other user charges on HSR and related infrastructure will no t be sufficient to finance the full cost of development of the HSR systems. Director General Treumann described the central European tenant underpinning the development of European HSR and other transit investments: A transport service (unlike CD p layers, telephone services energy supply and restaurants, for instance) cannot in most cases be supplied on a profitable or even cost covering basis. Conventional capitalistic wisdom would dictate tha t the HSR or transport system should be li qui date d or phased out as happens with restaurants and manufacturers of CD players if they cannot break even. Only those services and goods are produced which can cover their costs The benefits perceived by the consumer is least equal to the cost of producing those products. However (In the European view) most transport services, especia lly those which need to modernize due to outdated infrastructure, rolling stock or those that need to expand, show huge losses In some rare cases revenue is barely enough just to cover operating costs. (Sometimes achieved after some creative cost allocations, tor which authorities are quite famous, i s applied). Why then does society not stop the functioning of these transport services? The answer is clear, the services provided by the HSR and other public transport systems provide important economic and public service values that exceed the charges levie d for transporting individuals, goods and services. These positive effects on the economy captured by non-using individua l s are called externality benefits. They include a cleaner and aesthetically valuab l e environment time and energy savings over use of other modes, Improved accessibility across our urban centers and increas ed economic activity and generation of employment that exceed th e increases from similar expansions of other modes of transport. For example, Chapter 6 Results of the Financia l Analysis of the High Speed Train Network Across Westem and Eastern Europe focuses on alternative HSR and other transportation 19

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mode ridership forecasts for the year 2000 and 2010 across Europe. These models predict that investment in moderate or basic HSR system will result In an increase in overall European population movements between 1.85 and 2.2% by 2010 The deployment of the full HSR train network would result in a 3% increase in interzonal mobility of European passengers across the continent. This reflects an expansion of the European economy with concomitant increases in flows of goods and services that otherwise would not occur without this investment in HSR. This i n it's simplest form is economic expansion and diversity across the European markets. These benefrts to non-system users result in transfers of economic value to private individuals from In vestments typically financed by the public sector that exceed the revenues collected by the HSR and other transport services. The benefits of a cleaner environment or increased economic activity accrue to private ind ividuals or across the general economy (i.e.. to all citizens). These nonuser beneficiaries are said to experience the "free rider effect", they can benefit without paying unless assigned a user fee or tax Economic theory suggests then that the prime source of financing these be n efits should rest with the general (national) economy and its citizens through publicly-funded taxes. Director General Treumann emphasizes this point: There is only one institution that can imp l ement such transfers (back to the public sector from the genera l economy), and that is a government, be it local or national. The contribution of the users can be coaxed out of them in exchange for the ticket for the non -users who benefit anyway whether they pay or not, enforcement, that is to say taxation to get their contributions, is essential. The basic thrust of this argument is that irrespective of what mixture of public and private HSR (or transit) financing and ownersh i p is proposed there is always a need for a basic agreement between all participants on the desired level of service to be provided Operation of a HSR or transit system must also include an explicit agreement and willingness to accept a public subsidy for the system to be fi n anced out of taxes or user fees to capture the value of the free rider effect. 2 Future Capital Requirements And The Need For New Public-Private Relationsh ips For Financing lnfrastNcture Across Europe Recent data suggest that total infrastructure investments in transport have r anged from between 60 to 70 billion ECU per year across the European Community. Future forecasts suggest new demands over the next 15 years exceeding 100 billion ECU of which 80 b ill ion will be for transport. The highest priorities include : 20

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creating a European network of high-speed trains to carry passengers and goods, within the framework of an overall policy boosting rail for environmental reasons (and to reduce and roadway congestion with their enormous costs; i nvesting in airport enlargement and improving connections between airports and major urban centers (with HSR and other modes) ; and developing intermodal facilities with efficient infrastructure linking capacl t y among the various transport modes T hese investment demands will command 20 billion ECU per year or approximately 20% of the forecast aggregate European transport investment requirements. During the 1960s, 1970s and 1980s almost all huge infrastructure investments were financed exclusively by the public sector across Europe. The European economies of the 1990s face a very different setting, beset by substantial additional demands on public budgets for health care education, welfare and the new needs of financ ing the well-being of Eastern Europe investments These needs combined with h igh public sector debt, slower rates of growth and savings and generally higher real interest rates result in insufficient pub lic revenues to finance all future European HSR and other infrastructure needs The realization of l arge-scale i nfrastructure projects has traditionally been guaranteed in Europe except for sporadic cases by the financial intervention of the public sector both at national and local leve ls. T here is a new widespread awareness across Europe that the private sector will be increasingly essential in financing and mo r e efficient operation of a variety of infrastructure investments across Europa. These new public-private relationships will be i ncreasingly important since ( i rrespect i ve of the amount owned by the private sector) the public sector is respons i ble for managing all of the permitting and r egulatory settings withi n which all of t hese projects are planned, designed and implemented. 3. Models For Omanlzation Of The Public-Private Relationship One model for this new organization is where a corporation Is div i ded as a private co m pany whose shares are held by the government This model allows the company to b orrow capita l with government backing at very competitive rates. A second mode l would be where a company i s organized with mixed private and pub lic ownership This is a model that has often been used in France with considerable success (See for example Chapter 7 The Critical Role of Local Government-Private Sector Cooperation in Financing Planning and I mplementing High Speed Rail in Europe) This mode l allows each sector partner to complete respective Infrastructure tasks in an effic i ent manner. Efficient private management comes from the private side while efficient management of government public policy (environmental permitt i ng, review etc.) and preferred interest rates come from the 21

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government side. These realigned priorities are a l so Increasingly emerging as critical to successful development of any plan proposed in the United States. A sound performance and Investment contract is needed if the private sector i nvestors are to be attracted and retained within this partnership As happened with the Eurotunne l and as if often done i n France and elsewhere private sector l arge scale construction firms are seduced into this form of partnersh i p as a point of l everage to capture a considerable profit on the large infrastructu r e construction contract (See Chapter 7). Sometimes this model may make the banking industry somewhat uneasy where they become squeezed between the large share holding construction company as both management and performing contractor on a project with government as a vested interest partner But th i s form of private-public partnership has advantages for transportation projects since it sets up an integrated management team where clear communications on matters of finance and efficient private management evolve with the public shareholders with permitting and planning functions and l i nkages to low interest loans and public sector backing. As the European Investment Bank Director General stated: I'm not very positive about the 'pure' private firm main l y because the involvement of the (public) authorities Is too low Pub li c transport is very i ntegrated in the basic functions of government so that it is very difficult to invest and run a transport system without constant involvement by the authorities In case of problems cost overruns extra environmental o r safety requirements and integration with other transport systems, the coordinating presence of government (as a full fledged partner in the project with vested financial and other interests) is a must .. sitting next to the promoter rather than opposite (emphasis added) 2 $ummarv In summary, massive future HSR infrastructure investment needs in Europe will require, often for the first time vast infusions of private capital. Secondly, these new investments will r equire new and expanded jo i nt public-private partnerships with each partner playing an increasing l y important rol e: the publ i c sector as the infrastructure fund i ng foundation, public policy guardian and facilitator and the private sector as the eff i cient manager and new source of capital with increas i ngly longer (e.g., 20 year plus) retum horizons. One potentially feasible option would involve the public sector covering much of the rail's short run operationa l losses (covering the hole) and thereby allow the private sector partners the ability to eam shorter run retums on the construction of the facilities and some initial operational profits. These two streams of earnings could allow the private sector to retain an ongoing interest and await the higher long run profits from operation (above operation costs 2/bld Treumann. 1993. 22

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only). This combination of profitable earning streams may make these projects attractive to the large scale long range visionary contractor-operator and bankable by the private sector. In the U.S. fledgling efforts focusing on similar private-public alignments have evolved but with less spectacular results to date on HSR project development. In every major corridor within the U S. where HSR has been proposed, from California, Ohio and Pennsylvania to Nevada, Texas, Florida and New York, a number of the nation's largest construction firms have been very active as team members in proposed public/private partnership consortiums.3 To date, however this membership has not produced conclusive leadership that has resulted in a single successful project To date, the strengths of the partnerships In tha U .S are not as cohesive or inclusive as those formed in Europe. There is less of a history of working together and less of an established trust in these relationships in the U.S. than in Europe. 4 In other sectors of transportation. such as airport, shipping and waterway cooperation, these private-public partnerships have been f a r more successful with the public sector serving as the foundation of fundi ng and support for the infrastructure construction and the various parts of the private sector serving as the contractor and operational manager of commerce profiting from these larg e scale infras tructure investments. There are valuable lessons that the U.S. HSR community can gather from these European experiences for successful deployment i n the U.S. Among those lessons is the need to forge new models of cooperation between banks, project sponsors, Federal, state and l ocal governments and international sources of finance in new forms of partnerships. Such partnerships will maximize needed capital investment, bring each segment of the partnership Into "ownership status" within the project, emphasize private sector operat i onal efficiencies while mini mizing unnecessary wasted resources expenditures on compliance with unneeded or multiple overlapping and duplicative governmental demands. 4 The Multinational European Experience Of Financing High Speed Explored in This Report Now that the basics of the financial and institutiona l needs for future HS R expansions in Europe are established there is a need to understand how financially and economically sound these HSR investments will be in operation. How are these assessments completed? The 3 QW!fY!f'O' gf lbt fj!l1Jlela1 Puuai J for the Aori!i1 Hjgh Speed Bail and Maglev Itaospodation Systems. Ptmnjng erocass foe High Spetcl Ground DJnsPOdjl!ion' Ltuons LRI'DRSIID flpridJ ancl Catif(!aXa. Lynch. Thomas A., Ph.D., Prepared for the lnstiul e of Transportation Studies and the California Department of Transportation, Assisfant Director, Florida High Speed Rail Commission, Callfomla, January 31, 1991. fnanc!ng Hiah Speed Rail and Magley Svstems k! Eyrgce Japan and !be Uniltd S!otu,; lmo!jgat!ona (Qr fQaQcling iO fiQda. Lynch. Thomas A Ph.D., Center tor Economic Foroeasting and Analysis, Florida State University for the Florida Oep311mont ol Transpoltallon. 1992 23

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remaining chapters of this report w ill e x amine these i ssues in cons i derab l e detai l fo r most of the nations within the E u r opean Commun ity. Europe is the most recen t site where HSR has ach i eved phenomenal success in the past decade Th i s proven record is propell i ng Eur ope towards even bolde r plans for binding the c o ntinent together i n the future Th i s HSR ground tra n sport web will integrate the continen t s diverse economies. This cont i nent with a projected pop u lation of 1995 popu l ation of 385 million is uni t ed a n d constitutes the s i ng l e largest integrated market i n the developed world HSR will serve as a v ital backbone for accelerat i ng this mega-eco n omy I n to ll!2 principal global com p etitor in the incre a sing l y compet i tive glo b a l market. I t w i ll he l p define the European economy as one integrated w hole The centra l entity tor p lann i ng deployment of a "S i ng l e and HSR system across a united Europe" is t he Com munity of European Railways (COER) CO E R p r epa r ed and distributed the most wide l y respected summary of the Eur opean p l ans for the financing and dep l oying of H SR across the European continentS I n that plan they assert: As the first h ighspeed projects i mplemented (Shi nkansen i n Japan a n d South East TGV in F r ance) have shown high speed rail services are especially appropriate in the medium-d i stance (130 to 700 mil e d i stance) bracket for links betwee n heavily populated urban ce n ters with h ighl y mob il e popu l at i ons Europe fits th i s p r ofi l e particu l arly well and will do so i ncreasingly with the prospects of the single market. (emphasis added) Across the continent "national" and continental H SR p l ans are under deve l opment. Current short run plans are t o expand from the 1 700 linear m i les in p l ace in 1992 to over 2 500 by the end of 1 995 alone The continent will spend i n excess of $60 billio n to un i te Europe with high speed rail by the end of th i s year (1995) and i n excess of $40 to $65 billion add i t iona l is projected to be spent between 1995 and 2005 Prospects are growi n g for a very ambitious i ntegrat ion of the entire c o nt i nent of Euro p e with a ribbon of 5,6 0 0 miles of very h igh speed rail l inkages with speed i n excess of 155 miles per hour and 9,300 miles of upgraded track capable of speeds of 124 miles per hour trave l.6 Costs for this t ransportation i nitiat ive for all EC co u ntries cou l d exceed $120 b i llion by the year 2010 for a ll the nat i ons of the EC The financial and socioeconomi c prof i ta b i l ity of these 5 propota!J for a E uropean Hk:fl.Speed Nefwot1(, Community ot European Railways, British R a ilways Soat d {BR), Chemins de fer 1--s uisoeo (CFFS) SC
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investments is explored in Chapter 2 Results of the Financial Analysis of the High Speed Train Networ1< ACfoss Western and Eastem Europe The French (and n ow other regions of Western Europe) have experienced phenomenally successful operation of the TGV in revenue service for almost 14 years of operation since the first section between Paris and Lyon opened In September, 1981. The success of the southeast line is well established technically commercially, economically fina nc ially and operationally. The first TGV line has done so well that it will pay off its investment in less than ten years subventions (see Chapter 3 T he Economic and Financial Success of the TGV Svstem jn France.7 In Germany the Federal Infrastructure Plans makes provision for a lmost 3,000 linear m iles of h ig h-speed line. The first main north-south link consists of the Hanover-Wur:zburg new line (206 miles), seventy miles of which came into se rvice in May, 1988. By the end of 1995 the Germans had planned to have a ll internal passenger movements within the country made by ground transport to relieve the insatiable demands of an increasingly mobile population for air and auto travel. That goal has been some what delayed with the reunification of East and West Germany (see Chapter 4 Success of the Intercity Express and Maglev Deployment in Germany). Chapter 5 examines the successful deployment and operation of the X 2000 across Sweden and the unique HSR public-quasi-private ownership and operational relationship that exists in that country A number of other European nations are beginning to emulate the Swedish national rail realignment plan and socio-economic assessment techniques. This successful experience warrants deta i led evaluation and holds great promise for gu iding HSR!Maglev development in the United States. Chapter 6 explores, in some detail the deployment of HSR across the remainder of Europe includi ng Spain's proposed construction of 900 miles of new high speed rail track and prospects of n arrowing the gauge of their entire existing network by 9.5 inches to conform to the European standard gauge. RENFE, the Spanish national railroad company completed the $2.8 bi llion, 186 mile TGV high speed rail system between Madrid and Seville d uring 1992, in time for the World's Fair in Seville RENFE is also studying the Madrid Barcelona li ne, a northwestern route from Madrid over the Sierra, the Guadarrma mountains to Baladolid and to connect to France and Europe generally as well. Italy and the remaining Scandinavian nations also have ambitious financial HSR plans described In detail i n Chapter 4 of this report 7 Address of Joh n A. Harrfscn to the TRB Executb'e Commjltu. January 9 1 990, Transportation Research Board Executive Comroittse M@eting, Washington, D.C. (Unpublished) 8 (BVWP 'SS.94) 25

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How Will These Hiqh Spee
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. -.. among the EC members. Some publicly-owned rail systems however, are opposed to private equity partners The Director of Land T r ansportation of the French Ministry 1 2 said, "SNCF would resent i t bitterly and there wou l d probably be a general strike if a (private) company wer e involved . That is a politica l or social question Generally the EC is opposed to g i ving any kind of public guarantees to private financ i ng however major public subs i dies are prov i ded in various forms to all systems. The one exception to this general rule is the Eurotunnel which serves as a prime example of potential private sector limited financing for high speed rail systems of this sort. Genera ll y comple t e pri vate sector f i nancing will be cons i dered only in limited sett i ngs where the projects can be i so l ated such as those of tunnels General prospects for infrastructure financing of high speed rails syste m s across Europe will continue to fall predominantly with i n the pub l ic sector as they h i st o rically have, w ith growing interest i n private sector partic i pation in efficient operations and other lim i ted private joint venture activities. Chapter 7 The C r itical Role of Local Government and P r ivate Sector Cooperntioo In Floanciog Planning and lmpl e mentjng High Speed Rail in Europe focuses o n the growing importance of local government and the private sector In successful plann i ng, financing and Implementation of HSR in Europe Thi s section prov i des an important set of conclusions that are equally important for successful depl oyment of HSR anywhere in the United States as well Finally Chapter 8 (Comparison of European and American Public Transportation Financing Policies) prov i des an overview of major public policy differences between Europe and U.S on th e financing and use of national transportation systems These i mportant differences conclude in very different mode mixes and ridership patterns as a conscious result of explicit public policy direction Th i s broader transportation policy discussion should help frame the nationa l context within whi ch the HSR policy decisions are f ormed The Technical Appendices IThe EyroDean High Speed Rail Financial and Economic Analysis Mode l $) are summaries of HSR ridership modeling processes and technica l results of model applications They are i ntended to provide backg r ound mater i als for the i nterested reader They examine the basic models used in Europe to eva l uate the ridership and financia l and economic viability of d i fferent corridors across the continent. These are abstracted from excellent publications that report on European experiences and should be of i nterest to American resea r chers that use similar modeling techn i ques. 1 2 quote of C laude G r enier 27

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CHAPTER2 RESULTS OF THE TRANS-EUROPEAN HIGH SPEED RAIL FINANCIAL AND ECONOMIC ANALYSIS 1 3 FINDINGS A comprehensive transE uropean HSR ridership study was completed in 1993 evaluating the financial, economic and modal distribution impacts proposed new and upgraded HSR confdors The OpUons evaluated included: The Base or Reference case: II considers socio-economic developments planned lnfrasltr.Jcture in both air and road transportation systems as well as all proposed convenU onal railway nelworl< improvements The Contemporary High Speed RaU Network: This option adds all proposed HSR key links to the European system that are 2 000 and 2010. The High Speed Rail Delayed Scenario ; This scenario assumes a ten year lag on consttr.Jctlon of key HSR /Inks to evaluate the impacts on traffic of deferring consttr.Jctlon across the system. The conventional rail mode (base) case begins with the European rail system transporting 14% of all passengers and be/ween 16% and 17% of all interzonal passenger traffic With the fimiled link HSR system in place for the year 2000 interzona l rail ridership rises to about 22.5% (a 41% increase) while rail's share of total traffic rises to about 17.5% (a 24% increase). With the advanced HSR linkages completed Interzonal rail ridership increases by as much as 46"16 with a modal split of as much as 24% of Europe's Interzonal passenger travel. ,:l This MgtMnt of the report is fh:lm Dltrja tod Pyolltablily or tl'!e HjQb Spe:ed fujn Wahtm C!WO!)MO Nl!y>lidt. '"Tile Ccmmunly or e.._, Railways; Aprll29, 1m. 29

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With the introduction of limited HSR linkages the share of passengers using automobile declines from 81% to 79% of total trips and from 67% to 63% of all interzonal traffic Introduction of the advanced HSR links results in a further decline in auto use to 78. 5% of total/rips and 62 5% of interzonal trips The airplane modal split als o drops from an averoge of 16 .5% of interzonal trove/ to just over 14% under the limited HSR case and to less than 14% under the advanced HSR case For total troffic the percentage declines in a i r trove/ are more dromatic, 16.9% for the limi t ed HSR link system and 18.4% for the advanced link system With year 2010 basic HSR system with limited rail linkages in place, automobile passenger percent of total declines from the reference case from 81% to 79% of total trips and from 66% to 63% of all introzonal troffic With the full HSR system in place the auto mode declines to 60% Thi s represents a full 6% interzonal modal shift away from the automobile in a time when automobile ownership is assumed to continue to rise The European system wide 1995 IRR of 9.4% exceeds /he noted minimum threshold of 8% to make these investments viable financial endeavors The system IRR rates expand considerobly with additional 2005 HSR expansions to 9 8% and aga i n with the projected 2015 expansions to 10.8% Ten years after entry into service the IRR for each Scenario expands the HSR investment values by between 4% to 5% on average These European HSR system investments IRR values almost doubles when the socio economic values are added to the financial values the IRR The 1995 network expands to almost 18% and up to 24 1% ten years after comp l etion The 2015 HSR investments yield a 20 1% IRR and that value increases to 28 1% with the passage of ten years of in service use. The Brussels-Luxembourg upgrode has the highest IRR i n Scenario A of 8. 8% and a reasonable 6. 8% i n Scenario B. The Viens Tarvi s io via Bruck a d M HSR link is estimated to yield an IRR of 7 .4% and 7 8% respectively for Scenario A and B respectively The Lyon Montmelian alignment scores the third highest and wi l l yield a 7% and 7. 6% IRR respectively for Scenarios A and B 30

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lntro
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1. Alterna tive Construction Options Evaluated Each a l temative eva l uated assumes that a certain number of HSR projects w ill be in operation by the forecast years 2000 and 2010 All future HSR scenar i os were compa r ed to a baseline o r reference evaluat ion that assu m ed conventional rail and HSR only as it existed i n the pre 1990 sett i ng. The ease or Refe[!!nfe C!se (Rf, R2) : This baseline case cons i ders soc i o econom i c developments planned infrastructure i n both a i r and road transportation systems as well as a ll proposed convent i ona l rai l way networl< i mprovements For examp l e what wo u l d traffic be like i n 2 010 if H SR improvements through the year 2000 only were i ncluded in the analys i s The mode l a l so assumes reduced border crossing de l ays and i t incl udes all of the EU Sw i tzerland and Austria The Contemporary High Speed Rail Network (Sf, 52) : This network adds a ll key l i n ks to the European system th at a r e p roposed for completion i n the time period evaluated For example, t he traffic forecasts assume a ll proposed HSR li nks env i sioned for the year 2010 a r e comp l eted by that time. The High Speed Rail pelaved Scenario (V22): This scenario assumes a ten yea r lag on construction of key HSR l inks to evaluate the impacts on traffic of deferring co n struction across the sys t em. 2 Methodology The EU and CCFE d i rected the researchers to cond u ct a sensitivity ana lysi s us i ng two different sets of forecasts us i ng a variation of the methodo l ogy described i n detail i n Append i x I. Tr affic forecasts for the re f erence time periods, fo r the years 2000 and 2010 we r e completed for both Scenarios A and 8 using the INTRAPLAN model. Scenario 8 includes slight l y h i gher mobi l ity rates o ver Scenario A to acc o unt for r egional differences in n at i ona l forecasts o f EU. Member States and capture presu med increased i nteg r ation o f nationa l economies across Europe. The impacts of reducing the magnitude of the de l ays attributab l e to cross i ng national borders is also captured i n this h i gher mobility scenario Eva l uation o f passenger and fre i ght costs of these i nfrastructure investments were comp l eted separately and in an i ntegrated frameworl<. Again, in conforma n ce with the mode li ng methodology described above researchers est i mated traffic by distinguishing 1 97 origin dest i nation zones (183 zone s with i n the European Commun ity, Switzerland, Austria and 14 other zones for the r est of Europe) Zona l boundaries w ere consistent with po l itical or adm i nistrative boundaries where possib l e The soc i o econom i c factors used in the analys i s include population, employment gross domestic product and vehicle ownership These factors are e n umerated in T able 2 1 32

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I . ... ,, Lignes nouvelles en service mi 7994 New lines in revenue service mid-1994 -Neubaustrecken in Betrieb Mitte 1994 . 1111'0' nouvelles en sefYioo rri 1994 l'leotousiJeckan in 6a1Aeb Mlte 1994 I'" "-. ru cdcr Ausboo5ttecf.en ,. tigu(!( de nuillagt Uurchhindungro liuk l ines 0 i\Uillt.lll'> dl:seur nens I rur11'1 k e y llnlts ::::.. t ,_ ,ll'
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TABLE 2-1. Baseline European Community High Speed Rail Study Characteristics 1988 2000 2010 Inhabitants in EC Member Nations 335,851,000 348,240,000 350,717,000 Employment Levels in Member Nations 132,750,000 142,122,000 147,608,000 Gross Domestic Product in Billion ECU 4,297 5,759 7,099 Private Cars/1000 Inhabitants 378 533 590 Traffic forecasts were specified for the various modes (auto, plane, and train) and by primary purpose {business, vacation or other). Bus modal share was not considered explicitly in this model because insuffici en t and Inaccurate data exist for that mode. All nationa l and intemational movements longer than 80 km among the 183 European Master Plan zones were included. Other factors that may influence long dis tance HSR transport such as socio economic development and other general transport conditions were also factored into the analysis. These other factors included in the analysis are identifie d in Table 2-2. TABLE 2-2. Baseline HSR Study Factors in Europe Mode Factor Rail Convergence of Tariff Leve ls Rail Price and Speed tradeoffs are factored into analysis Road Reduction by 5% of average speed on the road network Road Increasing time and cost of entering and exiting of agglomerations Road Increases by 10% the cost per km of using a car Air Price stability of travel charges in constant values These factors were tested In a sensitivity analysis framework within the model and the evaluation concluded that declines in airline prices and unconstrained roadwa y transport conditions had little effect on the final results However the analysis a lso indicat e d that if HSR systems do not integrate their respective tariff structures and thereby facilitate easy passenger access and use then the profitability of the overall network will be significantly affected. 35

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3. Study Results Study results include Baseline Traffic forecasts and passenger travel forecasts for the years 2000 and 2010 with initial HSR investments. Baseline Traffic Forecasts The traffic forecasting models allowed analysts to evaluate different combinations of factors to be tested separately and together. The factors included shifts in: Demographic and employment trends; Numbers of automobiles available; Economic growth; Development of overall transport conditions ; Infrastructure improvements and extension of networks, and; Differing levels of Eastem Europe integration into Westem Europe markets. The baseline traffic forecasts of billions of travelers per kilometer was developed as a basis for evaluation Tab le 2-3 describes the modal split in terms of the predicted numbers of passe ngers and their distribution under the two forecasts described above In both scenarios the total number of passengers incre ases over time. Scenario B predicts roughly 11% more passengers than does Scenario A in the year 2000; this difference increases to more than 24% by 2010. Scenario B includes a smaller share of passengers using auto and train (especially by 2010) and a larger share using planes. While the modal shares decline between 2000 and 2010 for air travel in Scenario A and for auto and train in Scenario 8, only for air travel under Scenario A does the expected numbers of passenger decline. 36

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TABLE 2-3. Baseline Passenger Traffic Forecast Conventional Train/ Umited High Speed Private Automobile Rail Airplane Year Travelers Percent Travelers Percent Trav e lers Percent Total 1988 585 71% 133 16% 1 06 13% 824 REFE RENCE SCENARIO A 2000 710 67% 180 17% 171 16% 1061 2010 816 72% 186 17% 135 12% 1139 REFERENCE SCENARIO B 2000 795 67% 190 16% 196 17% 1181 2010 934 66% 197 14% 284 20% 1415 European Passenger Travel Forecast Results For 2000 With Initial HSR Investments Table 2-4 describes the changes in modal behavior expecte d to occur with the int roductio n of key HSR system components. First, with the limited HSR l i nks in p l ace a 0.7% to 0.8% incre ase in total European passenger mobility (intraand interzona l) was predicted to occur (Scen arios A and B respectively). Interzonal passenger movem ent was more pronounced rising by a n a v erage of 1.9%. With the advanced HS R links in place total passengers I ncreased by 6.0% above the ba.se case a lthough interzonal traffic was predicted to incre ase by an average of only 2 15% While these modest increases in genera l European mobility seem small, they are noteworthy expansions of aggregate economic ac tivity associated with deployment of these HSR system investments exclusively and will accelerat e general economi c growth across European economies With the introduction of limited HSR linkages the share of passengers using autom o b ile declines from 81% t o 79% of total trips and from 67% to 63% of all interzonal traffic. Introduction of the advanced HSR links resuHs in a further decline in auto use to 78.5% of total trips and 62 5 % of in terzonal trips. Thus for interzonal traffic. where HSR use represents a more meaningful mode option, there i s an expected average declin e in auto use from the base case of 4 35% in the limited HSR link scenario and a 4 .7% declin e in the advanced HSR linkage The airplane modal split also drops from an average (of Scenari os A & B) of 16.5% of Interzona l travel to just over 14% under the ll m"ed HSR cas e (an 11.65% decrease) an d to 37

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less than 14% under the advanced HSR case ( a 12.75% decrease) For total traffic the percentage declines in air travel are more dramat ic, 16.9% for the limited HSR link system and 18 4% for the advanced link system With either HSR option, air travel represents just 4% of total traffic. Clearly the major b ene fic iary of these shifts is the ra i l mode in all cases. The conventional rail mode (base) case begins with the European rail system transporting 14% of all passengers and between 16% and 17% of all i nterzonal passenger traffic. With the lim ited link HSR system in place for the year 2000 interzonal rail ridersh i p rises to about 22.5% (a 41% i ncrease) while rail's share of total traffic rises to about 17.5% (a 24% increase ). With the advanced HSR linkages completed in terzona l rai l ridership i ncreases by as much as 46% with a m o dal split of as much as 24% of Europe s in terzonal passenger travel. Sens itivity analysis demonstrates that HSR upgrades and development of key HSR linkages will dramatically shift the balance of interzonal European passenger travel between air and rail modes by 2000 38

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TABLE 2-4. European Modal Split for the Year 2000 Conwntion a l reference aOCOWit for Soc:io-eoonomlo devefopments, future planned l nft'nb'uotwe in both air and rotd traMPQI1 and proposed lmprovtments in conventional rail and (19881ewl) HSR servloe. Basic 1111 n-rl< incW*G toy-campled lot 1M yoar 2000 ... -High Sf*d Rill SjOCom .. '*""pl.,_ far 2010 lnWditog .. po.,-kty-. 39

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European Passenger Travel Forecast Results For 2010 With Initial HSR Investments With the introduction of limited HSR system in place for the year 2010 an additional, modest 0. 7% increase in tota l Europ ean passenger intraand interzonal mobility is predicted to occur Interzonal passenger movement again is more prominent rising by 1 85% with introduction of the limited HSR network and 2.2% with the advance HSR system linkage variant and a growth in general mobility of almost 3% with introduction of the full HSR train network in place Again while these modest increases in general European mobility seem small they are noteworthy expansions of aggregate economic activity resulting from deployment of these HSR system investments exclusively With year 20 1 0 basic HSR system with limited rail linkages in place, automobi le passenger percent of total declines from the reference case from 81% to 79% of total trips and f rom 66% to 63% of all intrazonal traffic. With the full HSR system in place the auto mode travel share declines to 60% This represents a full 6% interzonal modal shift away from the automobile in a time when automobile ownership is assumed to continue to rise across Europe from 533 to 590 autos per 1,000 inhabitants. The airplane mode intrazonal average also drops a significant amount (between Scenarios A & B) from 19.5% to 14% with the in i t i al introduction of the Basic HSR system with l imit ed l in kages. Total air i nterzonal travel drops by 1 0% to 11% with introduction of base case with l imited rail l i nkage options Finally with the fully developed H SR linkages in place the air mode drops by between 1 5.6% to 16.9% over the COflventional rail mode opt i ons. Again the HSR and conventiona l rai l systems are the major beneficiary of these shifts The conventional rail mode case begins with the European rail system transporting 14% to 15% of all year 2010 interzonal passenger traffic in this base case scenario With a basic year 20 1 0 HSR system in place and limited HSR linkages developed rail ridersh ip rises between by 44.6% to 47% to an annual moda l share of approx i mately 22%. With the advanced HSR linkages completed rails ridership increases by as much as 67.8% to 72.3% and capture between 23% to 25% mode share split of Europe s interzonal passenger t ravels This ana l ysis again demonstrates that HSR upgrades and deve l opment of key HSR linkages will dramatica ll y shift the baJance of in terzona l European passenger travel between auto, air and rai l modes by 20 1 0 if proposed infrastructure investments completed. 40

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TABLE2-5. Modal ror the Year 2010. Roil/Auto/Air Bask High Sf'Hd" HSRI Bask High SpHd' AdVonced HSR Rail Um/ted Unlco ,;.;,;;.;;;,;;;...;..;...__-+-:-Ref01'9nce Rail Advanced Unks Modo Percent Per Year of Total 4 1

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4. Results Of The High Speed System Financial Model And Key Rail Links The results of the HSR financial model analysis also are instructive. The Community of European Railways estimated that as much as $120 billion investment in 5,600 miles of very high speed (155-200 mph) rail corridor, and 9,200 m iles of intermediate speed (up to 130 mph) HSR service will be developed by 2010. They have estimated that this European HSR network will yield immediate and longer run economic and financial returns to the rail companies and economic and socio-economic returns to the localit ies. Tables 2-6 and 2-7 summarize these estimated returns. TABLE 2-6". European High Speed Rail Network Financial Economic Viability F inanc ial Investments Internal Rate of Return 15 Network Service At Date of Entry Into Service 10 Years After Entry i nto Service (1995) 9.4% in 1995 13 .3 % in 2005 (2005 9.8% in 2005 14.1% in 2015 (2015) 10.8% in 2015 15.5% in 2025 TABLE 2-7. European High Speed Rail Network Financi al Socioeconomic Internal Rate of Return 10 Network Service At Date of Entry Into Service 10 Years After Entry into Service (1995) 17.7% i n 1995 24 1% in 2005 (2005) 19.3% in 2005 26 4% in 2015 (2015) 20 .1% in 2015 28. 1 o/o in 2025 I t is clear that the European system wide 1995 IRR of 9.4% exceeds th e noted minimum thresho ld of 8% to make these invest ments v i able i nvestments. These rates expand considerably with add i tiona l 2005 HSR expansions to 9 .8% and again with the projected 2015 expansions to 1 0.8%. With the passage of time ( te n years after entry i nto service) the IRR expands considerably by between 4% to 5% on average. When the socio-economic values are added to the financial values the IRR the system in each year almost doubles In va lue. The 1995 network expands to almost 18% and up to 24 1% ten years after completion The 2015 HSR investments yield a 20.1% IRR and that value increases to 28.1% with the passage of ten years of i n service use 14 SOurce: Ewopean Rail Community. u Gerardin, B., "Financing the Eu1opean High Speed Ttain Netwcn"." Planning JOd TQ05RO(\ R tJ.tarch nd ComoytaJjon. Vol. P320 1989. pp. 1, Seminar E. PTRC. Summer Annual Meeting. 16 Ibid. Gerardin. 42

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Table 2 summarizes the expected costs and related IRR for selected HSR li nks The profitability of each kay link or crillcal ke y link section (phase) compared to the basic network (V12) is shown Note that the Brussels-Luxembourg upgrade has the highest IRR in Scenario A of 8 8% and a reasonable 6.8% in Scenario B. This alignment Is current ly under active development. The next highest key link is the Vlena-Tarvisio via Bruck a d M with an IRR of 7.4% and 7 8% respectively for Scenario A and B respectively The Lyon-Montmenan alignment scores the th i rd highest link with a 7% and 7.6% respectively IRR for Scenarios A and B While the IRR for each key link may be important, each segmenfs ultimate contribution to the entire HSR rail system Is often far more important and results In highe r overall system IRR performance. This is attributable to through passengers and key linkages to other parts of the European HSR system and linking other modes of transport (such as regional and Internat ional airports). These factors wi ll further expand both the sys tems overall ridership, the systems IRR and the socio-economic IRR far more than the limited HSR link assessments presented in these key link assessments TABLE 2-8. Comparison Of The 2010 High Speed Rail Key Unks Key Links Studied 1) lnfra&tructure &hare attrlbuled to Ptuenger AetMI.y 2) Internal Rate of Retum 3) lns9'ificant Rate of Return 4) Two hy'Jlothests ot costt wtre t')Camfntd 43

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CHAPTER3 THE FINANCING AND ECONOMICS OF THE TGV HIGH SPEED RAIL SYSTEM IN FRANCE FINDINGS In the early 1970's, the SNCF had established the technological feasibility of developing a 160-185 mph HSR speed system and major segments of the 242 mile Paris-Lyon rail network was eX{Jeriencing substantial saturation. Over 43% of the French population live within this corridor. Development of the new TG V would be more expensive than conventional rail systems, its construction would result In savings on expenditures for conventional rolling stock of 3.14 billion francs (1985), or $688 million (1994$) and infrastructure development of 3.35 billion 1985 francs (or $733 million 1994$). Initial construction cost for developing the 242 mHe HSR line was estimated at 8,200 billion francs (1984) or almost $1.9 billion 1994 dollars The introduction of the TG V system on the Paris southeast routes resulted in an 86".16 increase In overall rail ridership along this corridor with total ridership rising from 12.2 to 22. 2 over the 1980 to 1991 time period. The post 1981 introduction of high speed rail service led to a dramatic decline in air service on the Paris to Leon route falling from almost 185% of its 1972 level down to and staying at the base 1972/evel throughout the next full decade of service. The Paris to Leon A6 highway shows a dramatic decline in passenger travel after the 1981 introduction of the TGV service. Thereafter a gradual but vel)! much stowed recovel)l and increase to only 120% of the 1972/evels was achieved by the end of 1986. Cash flow analysis indicates that passenger revenues exceeded 5 billion francs ($769 million) in 1989 with operating costs at slightly under 2 billion francs $317 million) This left a reserve gross operating surplus of 3 billion francs ($462 million). After interest and depreciation of rolling stock of 584 million francs ($90 million) were removed a gross balance of 2.447 billion francs ($376 million) remains 45 ...

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After subtracting out financial charges and depreciation of the new line, a net TGV contribution to proftlability in 1991 of approximately 1.944 billion francs ($300 million) remained TGV Southeast was operating at a substantial profitability, with and IRR in excess of 15%. throughout estimated 1994 returns yielded a substantial net profit. The socio-economic IRR by comparison for implementation of the SNCF southeast TGV is in excess of 30% after all time and other economic savings over other alternative modes are netted out. A variety of French national government SUBVENTIONS (awards of revenue) critical to the current and future financial success of the TGV Southeast and Atlantic and all other TGV new and expanded alignments. The first form of public support stems from the realization that other modes such as the truck and automobile motor vehicle modes receive substantial public sector subsidies to operate over public roads. The French fe
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.,.:. : , sources far broader than just the nation within which the HSR facility or system is constructed The TGV Atlantic was commissioned in two stages The western branch (180 kilometers) towards Rennes Nantes and Britanny in September 1989 and the southwest branch (101 kilometers) towards Bordeau, Toulouse and Spain In September 1990 On the Paris Nantes route the airline share of marl
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1. The Economic and Financial Success of the TGV System i n France Over the last 12 years, the TGV system in France has proved a resounding success, from the South-East to the Atlantic and North European TGV. The South-East TGV has been highly successful in technical, commercial, economic and financial terms and its success has been bome out by the Atlantic TGV, the second generation of the TGV system. The North European TGV placed in service in May 1993 mar1
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......... ... , ... :.By these planners reco gnized that with the in troduction of the higher speed rai l service the TGV system could capture 68% of the future marl
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Effects on Air Traffic Figure 3-2 provides a profile on the air traffic passenger movement along competing routes and other domestic routes as a baseline for comparison of HSR travel impacts on the air mode after introduction of the TGV 1981 high speed rail service. The post 1981 introduction of high seed rail service led to a dramatic decline in air service on the Paris to Leon route falling from almost 185% of its 1972 level down to and staying at the base 1972 level throughout the next full decade of service. The Paris-Nice and Paris-Marseilles alignment shows substantial slumps after the 1981 introduction of TGV service with gradual recovery thereafter increasing to 313%-366% respectively of their 197 2 levels. All other domestic routes g rew far more dramatically to 473% of 1972 levels thereby demonstrating the dramatic effect of the competitive service of the high speed rail alignment along these southeast corridors. Traffic planners estimate that the TGV Leon -Paris alignment would have achieved a 300% increase by 1984 if the TGV service ha d not been introduced. This represents a shift of approximately 70% of traffic from ai r lines on this alignment alone. Effects on Road Traffir; Figure 3-3 provides a profile of the effects of the automobile traffic growth as a result of introduction of high speed rail TGV service between Paris and Leon. The Paris to Leon A6 highway shows a dramatic decline in passenger travel after the 1981 introduction of the TGV service. Thereafter a gradual but very much slowed recovery and increase to only 120% of the 1g72 levels was achieved by the end of 1986. In comparison, other h i ghways north and the west of Paris (not in competition with the TGV alignment) demonstrate n o similar levels of dedine. A 13 Paris to Caen, and Paris to Metz, incre ased to 227% and 263%, respectively during the period when the Paris to Leon route experienced only a 56% Increase. zt :ulbJd. Service des Nouwllea infrastructures, t9 94 51

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500 100 Figure 3 Air Traffic Passenger Trends Along TGV Atlantic Corridor Route* _.,...Paris/Nantes ._..All western radial routes --Other domestic radial rou tes -.Paris/Rennes ::! ;! ease 1 oo in 1972 ... ... ... ... N .. .. .. ... .. .. .. ... .. .. ... -.. N ...

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3 .3 2 8 2 3 1.8 1 3 ..... ... I . "" .. 0.8 .. I Y 1977 ease of 1.0 in 1977 1979 1981 Figure 3-3 Motorway Traffic Growth* 1983 1985 1987 1989 1991 1993

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2. Initial Estimates And Final Construction Costs Expenditures Table 3-2 provides baseline financial and economic Information on the cost of constructing and operating the TGV Southeasf'. Initial 1975 economic estimates were closely adhered to and construction of the infrastructure and superstructure were achieved at only 1% above initial budget estimates. Table 3 indicates that infrastructure costs were estimate
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TABLE 3-2. TGV REVENUE GROWTH mean mean new traffic (1) ="'venue -operating costs (2) revenue -operating costs financial and depreciation of roiJing stock (3) = revenue -operating costs -financial charges and depreciation ol roUing stock and infrastructure (4) Inflation rate between 1989 and 1994 average= 4.5% (5) Franc to US doUar Exchange rate= 6 55

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I I I I 1 I I I THE TGV SOUTHEASET (PARIS-LYON) CASH FLOW ANALYSIS (MILLIONS OF 1991 Dollars) I 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992' 1993 '_j PASSENGER REVENUE $40 $2 19 $368 $559 $676 $678 $774 $828 $881 $912 $942 $972 $972 TGV MA I L CARRING REVENUE $0 $0 $0 $1 $6 $6 $7 $7 $7 $8 $9 $9 $10 TOTAL REVENUE $40 $219 $368 $560 $682 $685 $781 $835 $889 $920 $951 $98 1 $ 982 TECHNICAL COST ON BOARD TRAINS ENERGY $2 $15 $27 $42 $50 $40 $48 $52 $55 $59 $59 $59 $59 DRIVERS $ 1 $6 $10 $12 $14 $17 $18 $19 $20 $21 $23 $24 $25 TRAIN CREWS $1 $6 $10 $13 $15 $16 $19 $20 $22 $23 $25 $26 $28 ROLLING STOCK MAINTENANCE $6 $26 $51 $48 $79 $75 $76 $81 $87 $98 $98 $98 $98 SUBTOTAL $10 $53 $98 $114 $158 $148 $161 $172 $184 $192 $202 $202 $202 TRACK MAINTENANCE COSTS $4 $17 $22 $22 $15 $20 $22 $24 S26 $26 $27 fsALES $RESERVATIONS ETC $5 $23 $40 $50 $61 $82 $82 $82 $83 $83 $86 $88 $1 EMPLOYERS TAX $3 $4 $6 $8 $6 $6 $6 $6 $7 $7 $7 $120 $122 $124 SUBTOTAL $12 $43 $67 $81 $83 $108 $110 $112 $115 $116 I TOTAL OPERATING COSTS $22 $96 $165 $195 $241 S $256 $271 $284 $299 -1. $308 $322 $324 $325 I s2o3 I s365 $442 $429 S5 1o $551 ssgo $6 12 $629 T s6s7 T $656 --- -1URPLUS $18 $123 . I >CK ,.--.,r::I'AYMENT $22 $33 $54 $74 $84 $90 $93 $97 $100 $102 $109 .l $110 I $111 I I I I GIN ($4) $90 $149 $291 $356 $340 $417 $453J $490 j $510 j $519 $547 $545 I 3ES FOR THE NEW LINE (DEPR) $22 $135 $158 $215 $178 $160 $118 $114 $109 $102 $94 $0 I $0 ;;. ;.;:. :;-;. _.. ;-. U)IUN ($27) ($45) ($8) $76 I $180 I $179 $298 $340 $381 $409 $425 $547 -1. I I i54s 'not pro v ided In different peri I --------------P rice Adjustment 4.0 0% o U.S. Dollar Exchange rate I 6 1tes ar e a composite assembled by the author drawn from a variely of SNCF !)L M i d poi nt projections and trend estimates were provided where specific values weo I I I I

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Figure 3-4 TGV SOUTH-EAST CASH FLOW ANALYSIS 1991 $1,200 $1,000 $800 $600 $400 $200 $0 ($200) ($400) ($600) ,. .. .,, ,.,

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3. French TGV Government Funded Subventions Awarded to the SNCF in Support of the TGV Operation One of the least exp l ored but most critical factors explaining the f i nancial success of the French TGV HSR system is the intricate federal, state and local governmental sources of financial support that enable the TGV to draw revenues for expanding construction and operation of existing and new HSR lines This set of complex financial support relationships are very much like specialized awards of franchise for spec i al service to provide access to the TGV and function to level the playing field between rail and other transport modes. These specialized sources of public financial support a r e indispensable to the financial success of the TGV system The SNCF asserts that the TGV Southeast h i gh speed rail system was funded internally without grants or subsidies or by raising loans on the financia l marl
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A second source of federal govell)ment )unds granted the rail system stems from environmental-economic externality reiriiburi;ements. It is recognized in France (as it is elsewhere in Europe ) that motor vehicles impose incrementally higher pollution load i ng on the publicly owned environmental infrastructure" than does comparable rail-related transportation. These "environmental externalities" result in additional economic costs beyond those Imposed for similar person and freight moved by rail. Third, high speed rail passenger movements result in socio-economic savings, such as time savings to passe ngers. These savings can be valued in terms of the economic cost savings to the traveling public across France. This "social economic value" or socio-economic rate of return along proposed new HSR routes is important in evaluating the feasibility of a particular route. Often, if the social rate of return is sufficienUy high the public sector will reimburse the TGV SNCF sys tem for the amount necessary to bring the financial rate of return up to the necessary level to make the project viable. Sometimes the soc ial rate of return can exceed the financial rat e of return. Such was the case on the Paris to Strasbourg TGV alignment. The strictly financial rate of return from this p rojec t was estimated to be only 4%, well below the TGV financial project minimum threshold of 8%. However, the social internal rate of return was over 9%. In such cases if the government wants a project with this low a financial return to be completed they will provide the additional monetary resources to raise the financial IRR to equal or exceed the minimum project rate to entice the SNCF to complete this project. They often do this based on the greater public benefit received from completing these financial inves tments Fifth, regional and local authorities frequently invest in TGV expansion programs to entice the SNCF to complete links to their regions that would otherwise not be financially attractive. An example of this was the completion of improved electrification expenditures for the TGV alignment between Poitiers and La Rochelle. Electrificat i on of this alignment did not achieve the minimum 8% investment threshold so the residents of Charente-Maritime department agreed to provide the additional needed francs to defray the operating expense losses. Th i s brought the inve stment up to the needed 8% threshold and the project was completed. The same is true of the Euralille investments described in much greater detail in the case study examined in this Chapter 7. The sixth source of federal government grant and award stems from the federal governments "reimbursement" for public services provided for deeply discounted travel fares provided by the TGV system to public employees retirees, students, military and others traveling on business or pleasure during any part of the year. For example, the TGV allows members of the French armed forces to trave l on the TGV for 25% of the commercial fee. A seventh f orm of international governmental financing is drawing from the international governmental investment trust fund established in Europe for national sites deemed to be "Internationa l in nature and thereby warranting funding from sources far broader than just the 59

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nation withi n which the HSR facility or system is constructed. Such was the case financing the TGV Nord, which has service implications for Belg i um, British and French HSR systems The cost of completing thi s HSR alignment, its stations and other fiXed facilities will exceed 16 billion French francs. The rolling stock costs between 70 and 90 million francs per TGV ttainset. A shared financial arrangement between the Belg i an, British and French railway systems will be completed to hel p finance the purchase l ease and operation of thi s rolling stock in accord with each nation's level of benefit Comparably, as mentioned in the Ulle case study completion of the lille metro system that extends Into Belgium also received international financing support since it CfOSses internati onal borders deemed appropriately important to receive international EC funding to help faci litate the integration of the European economy 4. Financing the Atlantic TGV The TGV Atlantic was commissioned in two stages. The westem branch (180 kilometers) towards Rennes, Nantes and Brittany in September 1989 and the southwest branch (101 k i lometers) towards Bor deaux, Toulouse and Spain in September 1990. Figure 3 6 provides a profile of the growth in traffic from September 1990 on the TGV Atlantic As the Figure 3-6 demonstrates ridersh i p expanded from 1.48 million during part of 1989 to over 18 mill i on by 1992 The growth in between 1991 and 1992 alone constitutes a 9% real increase with that trend continuing into the 1993 t ime period." Passenger Shifts from Airline Routes Resulting from Introduction of the TGV Atlantic As can be seen in Figure 3-5 a substantial downtum in air traffic travel resulted in the post-1989 introduction of the TGV Atlantic along westem routes. An example is the dramatic decline i n the Paris to Nantes alignment which dropped from a pre-1989 growth of 450% from the 1972 base period to 284% or an increase of 184% by 1992. This demonstrates a decline of almost 200% points after introduction of the TGV Atlantic service. S imilar but less dramatic trends were experienced in the Paris to Brieuc alignment, the Paris to Rennes alignment, and other directly competing western and southwestern branches effected by the TGV Atlantic. On the Paris-Nantes route, the alrtine share of marl
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Figure 3-5 Air Traffic Trends on South-West Routes Served by the Tgv Atlantic 600 500 400 300 200 100 0 r , .,=r, " . F J ( t .. ; .. .. --" r:.-N ,.. .... ,.. ;:! "' ,.. :e 1:: co ,.. "' ,.. 0 co ... ... .... ... .... co to "' "' co ... ... ... Toulouse !ad ial Routes . Ol 0 N G) Q) CJ) CD

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136.5% over the same peliod This represents a full 50 percentage points difference between the direct competitor roadway alignment to non-competitive alignment due prlndpally to the TGV introduction over that perlod. The TGV Atlantic 1991 cash flow analyses (1994 dollars) provided in Figure 3-6 indicates that TGV passenger revenues for 1991 were $684.5 million dollars while operating costs were almost $300 million, resulting In a gross operating surplus of $384 million. After interest and depreciation of rolling stock of $100 million were removed a gross balance of $284 million remained. Finally, after rail line financial charges and depreciation ($135 million) are accounted for, a net profit of $149 million dollars were produced by the TGV Atlantic HSR system duling 1991. This suggests for every dollar spent on the TGV Atlantic, 44 cents were expended to cover operating costS, 34 cents paid for the capital costs of I nfrastructure and rolling stock, and the remaining 22 cents constituted a net profit. The overall financial rate of return on the entire Atlantic TGV system is calculated to be 12% and the socio-economic rate of return is 23%.'" The conclusion to be drawn from these operational profiles of the TGV alignments In France Is that these HSR systems have been h ighly successful financially and economically when put in place. To achieve this level of success however it is essential that planning, development, and operation of the system must be embraced with the full cooperation from all levels of government and be in full partnership with the private sector where appropriate. u Ibid, Mattlllu. 1993 62

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CHAPTER4 THE FINANCING AND ECONOM I CS OF THE ICE H I GH SPEED RAIL AND TRANSRAPID MAGLEV SYSTEMS IN GERMANY FINDINGS Thi s chapter summarizes the experiences of deve l oping and financing the ICE HSR system and the Transrapld Maglev System in Gennany over the past decade and the economic value of those developments 1994 marked the beginning of a new German rail system that brings together the Deutsche Bundesbahn (DB) and Deutsche Re l chsbahn (DR) Beg i nning January 1 1994, these two organizations were merged into an i ndependent stale enterprise officially defined as tl)e Federal Railway Properties or Deutsche Bahn AG. The aim was t o be an attempt to bring private sector interests and practices and reg i onal government respons i bility to influence the future of the West German DB (and now the DB AG). The thrust of the reorganization Is to divide the rai l system into two functional areas with separate budgetary and accounting responsibilities. The first will be an entrepreneurial area comprising transport and related business activities as well as infrastructure management including construction, operation and maintenance; and the following business sectors Passenger traffic, Freight traffic, Traction and workshop business This will be a public limited company with shared capital The second functional area will be public, compris i ng all of the state tasks formerly handled by the DB and such as the administration of debt, the administration of land hold i ngs not required for railway operations and maintaining the federal railway property. Between 1985 and 1992 the DB experienced a modest 5.1% increase in passenger travel closing 1992 at 1 ,101 million passenger journeys. Much of this gain is attributable to the expansion of ICE HSR seNices across Germany. During the same period remnants of the o l d East German DR experienced a 50% decline in passenger traffic with only 215 million passenger trips in 1992 65

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Freight tonnage experienced dramatic declines in both the DB and DR over the 1985-92 time period declining by almost 16% in DB with movements of 256 million tons in 1992 and a decline of 71% on the DR declining to 96 million tons in 1992. The drain associated with the merging of the two railroads has escalated to an unsustainable point with 1993 losses exceeding OM 14.3 billion ($9. 11 billion US) alone. One estimate suggests that without these reforms total rail drains from the federal budget over the period from 1994 to 2003 could exceed OM 569 billion ($362.4 billion US) Given these subs1antial joint debts, the federal government will absorb responsibility for all hls1oric debt from the liabilities of both systems stemming from excessive staff and environmental mitigation initiatives incurred over the last four decades. Additionally, the federal government has accepted respons i bility for financing the OM 100 billion ($63. 7 bill i on US) In investments essential for reconstruction of the East German DR rail system In 1971, the German intercity high speed rail networl< began operation, scheduling 250 intercity (/C) or Eurocity (EC) trains per day with trains operating at a maximum of 200 km per hour (120 mph) on a total of 525 kilometers of track Currently ten or more freight trains travel between Hamburg and Munich at 120 km per hour (72 mph) every night over the new high speed rail lines. On June 2, 1991, the line from Mun i ch to Hamburg by way of Stuttgart, Mannheim, Frankfurt/ Maine Fulda, Kassel and Hanover went into operation with 25 ICE trainsets available It operates along a 948 km alignment (568 miles) The first year of full operation resulted in 10 million passengers traveling by ICE over an average distance of 343 km. The system sus1alned an occupancy rate of 51% which is a 9% increase from the intercity train. ICE operation between Hanover and Zurich, Switzerland by way of Dortman, Cologne, Mantz, Mannheim and Basse/ began on May 31, 1993. The ICE's daily average was 37 ICE trains carrying 25 000 passenger. During this first year of operation, the rail transportation regained 11% of the traveling public and is yielding a net profit. Since its inception, ICE service has increased passenger use and revenues by more than 30% .29 ICE expects to double its number of high speed rail lines in 29 Speedllnes High Speed Rail Maglev Association, Vobne 2, No.5, S eptember 1994. 66

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Germany to 2,000 km by the year 2000 and. eventually operate as many as 200 ICE trainsets. Construction of the Hanover-Berlin high speed rail line which will lie East and West Getmany together for the first lime since the end of World War II will reduce travel limes from four hours to one hour and 45 minutes by 1997. Maglev in Germany In 1994, the German magnetic levitation Transrapid system between Berlin and Hamburg, kn o wn as the Magnetschnellbahn received government authorization A consortium of public and private interests are developing the financing of the construction and operation of this system. The alignment is 284 km (170 miles) and trip time is expected to be less than 60 minutes Initial investment costs are expected to be DM 8.91 billion ($5 7 billion). Forecasts suggest that 14.5 million passengers per year will travel. The private sector will be responsible for the financing of the Operations Corporation. and will raise OM 1 5 billion ($.96 billion) in equity risk capital The remaining financial resources, requiring DM 3.3 billion ($ 2 1 Billion), will be provided by the banking and credit institutions without any publi c collateral securities provided. A public-private joint venture will be responsible for co-financing the guideway but it will belong to the Guideway Corporation which is directly and solely held by the government. The private sector will, however, cofinance OM 2.4 billi o n ($1.53 Billion) of the total of DM 5.6 billion ($3.57 Billion) costs of guideway construction. The guideway will be provided by a general contractor under contract to the public sector Guideway Corporation. The public sector will additionally responsible for the acquisition and procurement of the land and property for planning and approval processes, for legal and public processes, and all of the expenses related to these functions The project internal rate of retum over the project life through the year 2043 is 16.93% before taxes and 12.41% after taxes The equity interest equal to 13.51%, Is the sum of taxes over the life of the project. 67

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1. The Intercity Express High Speed Rail System In Germany A Origins of the New German ConyentJonal and High Speed Rail Systems 1 994 marked the beginn i ng of a new German rail system that brings together the Deutsche Bundesbahn (DB) and Deutsche Rel chsbahn (DR) Beginning January 1 1994 these two organizations we r e merged into an independent state enterprise officially defined as the Federal Railway Properties or Deutsche Bahn AG (German Rai l) The federal constitution in Germany sets forth i n the railway and air transport provisions (Artide 73 (6)) that these systems shall operate under the jurisdict ion of the federal government. 30 However, prior to the 1989 90 reunification of East and West Germany. far reaching del i berations on the future of the German rai l system were a l ready underway. The genera l intent of these changes was to begin to alter th i s tota l dom ination and direction of the German ra il system exclusively away from the Federa l government. The aim was to be an attempt to br i ng priva t e sector interests and practices and regional government responsibil ity to influence the future of the West German DB (and now the DB AG) A German Commission had been set up to consider t he future of the DB beginning In 1989 I n part the Commission was established to deal with the growing sh ift In DB's share of transport and freight markets However, with the fall of the Berlin Wall and reunification serious consideration of the DR and the comp l exity of integrat i ng these two very d i fferent ra i lway networks which had evolved under very different political and economic c i rcumstances was essential and a m ajor task i n its own right. 31 The final report of the governmental ra i l way comm i ss i on was presented in December 1991 The Commission noted that between 1950 and 1 990, the rail share had dropped f r o m 66% to 29% of Germany freight market and from 36% to 6% of the passenger market. During the years 1970-86 when Germany's economy was e xpanding DB freight dropped by 22.8% in terms of carload movements and 57 .5% in express traffic (although i t increased 129% i n container traffic and 301.5% in various types of i ntermodal traffic) 32 Between 1985 and 1992 the DB experienced a modest 5. 1 % increase in passenger travel closing 1992 at 1 101 million passenge r journeys. T h i s upturn was in p a rt associated w ith increased I CE trave l only recenUy availab le. During the same period remnants of the old Eas t German DR experienced a 50% decl i ne in passenger traffic with only 215 mill i on passenge r trips in 1992 A simi l ar pattern was evident among other parameters of use As of 1992, 30 Michele P Strohl, Europe'$ High Speed Tt3ihs A Stul1y i'l Geoeoonomics, Ptaeger, Westpoft, CN and london, 1 993 Chapter 7 Gennany and .,. ...,cily E-. 3 1 Restructuring Gennany's Railways Facing a Oeeade of Reform, Of. Frani< Maehlt Heed ot Transport and Company Polley Department, Germ1n RailwaY'$. RaltNty Gazettel nt emttional July 1994. 32 Ibid Strohl 1 993 68

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passenger-kilometers traveled increase d by 46.5 b i llion on the DB, up 9% from 1985 but declined by almost 57% on the DR Freight tonnage by comparison experienced dramatic declines in both the DB and DR o ve r the 1985-92 time period, declining by almost 16% in DB with movements of 256 million tons in 1992 and a decline of 71% on the DR dec lining to 96 million tons in 1992.33 The d ec li nes i n freight movement and passenger trave l and modest increases only over the seven year time period on the DB for passengers i s attributab l e to the phenomenal growth in automobile use across Germany and the increased expansion of automotive traffic accessible to the fonner East German region after the fall of the Berlin Wall and unification (for more details on this issue see Chapter 8 A Comparison of European and American Transportation Financing Policies). 34 B. Finances of the DB AG and Implications (or ICE High Speed Rail Services The merg i ng of East and West Gennany in to a single nation has had both positive and negative effects on the efforts to expand the ICE HSR systems The positive effect is the emergence of even greate r distances and larger populations to serve in eme r ging East Gennan corridors. The negative effects result from the tremendous financ ia l drains required by the antiquated East Gennan conventional rail system wi t h its inherent inef ficienci es excessiv e manpower levels and related high levels of debt. This sect i on will briefly exam i ne these issues to establish a perspective for evaluation of their Implications on expanded ICE deployment In Gennany. Historically the Deutsche Bundesbahn existed as an organ of government, established by decree in September 1949.35 The DB and current DB AG have been managed by a Board of Ministers f or Transportation who are a state appointed board of directors and who in tum appoint a president of the company. The DB has existed i n deficH operation, with financing stemming from public sector exclusively, during all of its existence With the merger of the East and West Gennan r ail systems. a substantial under-investment i n the fonner East German rail system means substa nt ia l dra ins on West Gennan revenues. H is torical lack of inve stment in the GDR means that as much as DM 100 billion ( $63 .7 bill i on US)36 may have to be spend over the next ten years to restore the DR network to reasonable condit i ons this is during a time of decl i ning revenues and increasing costs 37 The d r ain associated with the merging of the two railroads has escalated to an unsustainable point with 1 993 losses exceeding DM 14 3 billion ($9.11 billion US) alo ne. This Intolerable 33 Passenger Traffic Holds Up as Freight Cclrapses, Gazette I nternational, July 1 993 34/bid. Railway Gazette International, July 1993, ss,bld. s11o111 1993. 36 A I U.S, dollar conwrsions are expressed In 1994dollara and is based on U S to German exchange rate is OM 1.57 = $1.00Wal Street JCM.r'nal, November 1 8, 1994. 3 7 Ibid. l.udiWQ 1994 69

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situation has dictate
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Separation of Infrastructure management and transport operations; Opening of the rail network to third parties; Introduction of the "contract principle" for provision of public services; and Freedom from restriction of public sector financial obligations; Reglonalizatlon or transfers of responsibilities for tasks expenditures for passengers transport to Lander40 Essentially, the transfer of responsibility with a prlliate sector business orientation to regional administrators frees the rail system from central control. Four separate entities within the DB AG, each with a broad degree of autonomy, will result 1) A passenger traffic unit incl uding 800 ICE, IC, EC and Inter-regional trainsets alongside express trains, night trains, daily monorail service and short haul traffic. This area will be responsible for the 1.3 billion passengers carried each year on nearly 30,000 trains a day and will generate almost OM 9 billion per year. 2) A freight unit covering fre ight movement across the entire country. This area will operate autonomously with local offices negotiating product and price move ments for their customers. This new decentralized focus will result in greater coordination with other modes of transport. 3) An infrastructure development unit with network and railway construction responsible for operation of the 41,000 km of rail lines across Germany. 4) A traction and workshop area which will be responsible for locomotives and hauled stock. This will include approximately 22,000 drivers In more than 14,000 loco motives and power units for use by passenger and freight. Central offices will cover planning, management and develo p ment tasks for the entire DB, corporate development, rese arch and technology, finance and management auditing supplies, stock manage staff and social matters. Combined DB and OR Debt One of the largest concerns is that of continued accumulation of debt across the DB AG. Historically, the DB and DR joint debts have accumulated to more than DM 70 billion ($44.6 billion 199441) at th e end of 1993. A major portion of this debt stems from excessive manpower on the staff of both rail systems and inherited by the combined systems. Given these substantial joint debts, the federal government has decided to absorb responsibility for all his toric debt from the liabilities of both systems stemming from excessive staff and environmental mitigation initiatives incurred over the last four decades. Additionally, the 40 European Rail, Community of European Railways, NeWSletter N22, August, 1994. 4 1 All ettlmate$ a r o in 1994 U.S. Dollars. 71

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federal government has accepted respons ib i lity for financing the OM 100 billion ($63.7 b illi on 1994) In investments essential for reconstruction of the East German DR. 42 ihese r evisions will result in a new company with assets revalued at 22% of their current level. DB AG will be a new corporation free from past capital debt. One estimate suggests that without these reforms total rail drains from the federal budget over the period from 1994 to 2003 could exceed DM 569 billion ($362.4 billion ) With reform that number drops by OM 141 billion (almost $90 b illi on ) to DM 428 bill ion ($272.6 billion ) over the ten year period. A variety of new proposals would have the DB AG substantially reorganized into freight, short distance, long distance (including the I CE high speed rail systems) and a variety of territorial regional authorities which would run regional trains on DB AG lines. DB AG would continue to finance lines which it regards as indispensable by borrowing on the capital markets. Access to the ra i l related infrastructure by third parties i s also possib le with sufficient remuneration At this point, very few private sector interests have stepped forward requesting access to operate over the nat i onal ra il Infrastructure. The federal government would retain the financial responsibilities for all investmerrts and the maintenance of the national rail network, and it would retain ownership of the infrastructure. Rolling stock and financial decisions for l ong distance and short run freight and passenger service would be div i sib l e within the separate authorities. C. Intercity Express High Speed Rail SetV/ce Across the United Germany What are the implications of this period of reorganization and substantial debt for the future funding of the I CE high speed rail system across Germany? Fortunately, this is also a period of substantial growth and economic vibrance across Germany. Germany's strong and sustained recovery from its worst postwa r recession is overtaking even the most optimistic forecasts .43 Expansion of real domestic produc t ion, led by export demands jumped at an annual rate of 5.3% in the third quarter of 1994. Both domestic and foreign demand fueled manufacturing growth, and unemployment decl i ned by 11,000 in November 1994 the third consecutive monthly declines in the unemployment rate this year. Wh il e the economy is hot inftation is under contro l with inflation rates between 2% to 2. 7% in 1994. In this environment of an expanding economy demand for HSR services appear even stronger In 1971 the German intercity high speed rail network began operation, scheduling 250 intercity (IC) or Eurocity (EC) trains per day Trains operate at a maximum of 200 km per hour (120 mph) on a total of 525 kilometers of track. The purpose behind the German IC express was a desire to remove pressure from the day-time freight congestion along the north-south corridors li nking the ports in the north to i ndustry i n southern Germany. Fr eight movement slowed passenger services and resulted in a d ive rsion of passengers from rail to other modes along many corridors Current ly, ten or more freight trains travel between Hamburg and Munich at 4 2 /lid. Ludwig, 1 993 43 is Kicking Up Oust'. Busineu WHk. McGrtW Hill Publications, Oeeembel26, 1 994 -January 2, 199$. 72

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" 120 km per hour (72 mph) very night over the new h i gh speed rallllnes.44 The new alignments have eased considerably these freight corridor saturation problems in these areas. ICE: Passenger Service On June 2, 1991, the line from Munich to Hamburg by way of Stuttgart, Mannheim, Frankfurt/ Maine, Fulda, Kassel and Hanover went into operation with 25 ICE trainsets available. It operates along a 948 km alignment (568 miles) referred to as the IC Net Line Six. Sixteen additional tralnsets were delivered at the end of 1991. Line 6 offers hourly ICE service in both directions every day between Hamburg and Altona and Munich. The first year of full operation of line 6 resulted in 10 million passengers traveling by ICE over an average distance of 343 km. The system sustained an occupancy rate of 51% which is a 9% increas e from the interc i ty train Line 5 began ICE operation between Hanover and Zurich, Switzerland by way of Dortman, Cologne, Mantz, Mannheim and Bassel began on May 31, 1993 The ICE's daily average was 37 ICE trains carrying 25,000 passenger, 26% of which t rave l ed first class. Seventy percent were men and women on business trips. Dur ing this f irst year of operation the rai l transportation regained 11% of the trave li ng public Similar advances are expected as the ICE refurbishes a number of its existing train corridors for h i gh speed rail service. Summary of ICE Rail Passenger Service Levels On September 1994, the ICE celebrated 1,000 days of ICE train operation having p ro vided service to 66 million passengers. ICE tra in service now links Frankfort with Hamburg, Hanover, Stuttgart, Munich and Zurich. Since its inception IC E service has increased passenger use and revenues by m o re than 30%.45 ICE expects to double its number of high speed rail lines in Germany to 2 000 km by the year 2000 and eventually operate as many as 200 ICE trainsats. 46 Construction of the Hanover-Berlin high speed rail li ne which will tie East and West Germany together for the f irst t ime since the end of World War II will reduce trave l times from four hours to one hou r and 45 minutes by 1997. No other detailed information Is currently available on specifics and financial results associated with the ICE, bu t the conclusions of successful deployment of high speed rail passenger service across much of Germany (as well as the former Eastern Germany) is a reality. ICE service has generated growth in productivity and increased expected revenues on both the passenger and freight sides once in revenue serv ic e. 47 44 As reported in Strohl, Michell, 1993. 4S Speedlinea High Sp&ed Rail Maglev Assoeialion, Volume 2, No.5, September 1994 46 Hafner, Peter. International vtce President Genera1 Federal September 1994. 47 Ibid, Railway Gantt, 1993. 73

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2. New and Upgraded ICE T ravel Corridors and Projected Travel Time Improvements As Table 4-1 demonstrates, distances of 220 km (132 miles) currently require 2 hours and 18 minutes for travel. With proposed new high speed rail l ink in place. limes will fall to one hour. These improvements will substantially reduce time delays and rail freight and passenger corridor saturation as well as air and road diversions as HSR dep lo yment has done in France and within existing ICE corridor alignments. TABLE 4-143 Journey Times ln:Hours .ICE HSR LINE. Distance and.Minutes km 1985 1991 2000 DortmundMunich 750 7:14 5:30 4:00 Colon to Munich 830 6:30 5:30 3:35 Colon to Frankfurt M 220 2:18 2:18 1:00 Colon to Stultaart 400 3:48 3:10 2:10 HamburaMunich 820 7:03 5:30 4:45 Basel 875 7:34 6:QO a :oo HanoverMunich 640 5:44 4:15 3:30 Hanover-FrankfUrt M. 360 3:.12 2:15 2:05 HanoverBasel 700 6:16 4:45 4:20 Frankfurt M Munich 420 3:44 . 3:30 2:45 New and Upgraded ICE Service The primary additional high speed rai l projects under development in Gennany includes Aachen (Aix-la-Chapelle) to Cologne (Koln) traveling 220 km/hr (132 mph) for 215 km (129 miles) and between Dortmund to Kassel l inking Erfurt, Chemnitz and Dresden in the eastem part of the country. Segments to be upgraded include: Fudla to Frankf urt/Mannhe im; Hamburg to Munster and H amburg to Hanover; Neurembourg to Munich; Munich to Marktschwaven-Muhldorf-Freilassing; Wurzburg-Augsburg; a nd Stuttgurt-Munich49 48 ICE High Tech on Rails, HESTR:AVERl.A.G. o.mttadl, Oipl,-lng. Oi'*" Wlltteh.lng, Theo Rahn, President of the Bunde:Sbahn Zenll'11amt. Munich and Profeuor Or. -lng. Hutlert Hochbruck, Manager of the Forschun!JS9enleinsdlaft, Rad/ScMnen. 1992 49 Stemming trom SiroN, 1993 7 4

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A number of these alignments Include substantial upgrades of existing rail and construction of sections of new rail. Completion of new construction inc lude the Cologne-Rhine to Frankfurt!M scheduled for completion in 1998 including 4% grades with 300 kmlhr (180 mph) maximum speeds. New construction and Upgrades on Karlsruhe-Beset. The east boundary of the Rhine River is one of Europe's most densely saturated rail corridors with multiple link junctures end feeders at each end Substantial tunneling will be required for construction of this system including one 10 km (6.2 miles) long tunnel at Katzenberg with curvature reduced speeds below 70 kmlhr (42 miles per hour). Currently, over 300 trai ns travel in both directions along the banks of the Rhine This new high speed rail system will help the saturation in this corridor at a fo recast cost of OM 5.4 billion ($3.44 b illion US) of which OM 2.1 billion ($1.39 billion US) is attributed to environmental protection measures 50 New Construction on Hanover-Berlin: With the reunification of East and West Germany and movement of the capital of Germany from Bonn to Berlin, a n ew high speed east-west access line between Hanover and Berlin is under construction and will be completed by 1997. Some segments of the alignment between Hanover and Lehrt included on this alignment will be rebuilt. New Construction on Hanovor-Wurzburg: A newly constructed 327 km (196 miles) alignment for high speed operation between Hanover and Wurzburg will require 62 tunnels for a total of 118 km (71 miles), or 36% of the distance. Two of the tunnels, Landrucken and Dietershan, are 10,750 and 7,375 meters long, respectively.51 Construction costs for this alignme nt are high due the large number of tunnels and aqueducts and the extensive environmental protection measures taken. Costs f orthis new alignment is OM 37 million ($23.6 million US) per kilometer. New Consttuction on Mannheim-Stuttgart: New alignment between Mannheim and Stuttgart will include 97.5 km (58.5 miles) of construction, inc luding 28 tunnels covering a total of 27 km (16.2 miles) and 90 viaducts totaling 6 km (3.6 miles). 3. The Financing Of Maglev On The Berlin Hamburg Alignment In 1994, the German magnetic l evitation Transrapid system between Be rlin and Hamburg, known as the Magnetschnellbahn, received the green light, and a consortium of public and private interests collaborated to develop the financing of the construction and operation of this system. This plan is described in a variety of techni cal publications that are summarized in this section of the report. 52 The report dated January 1994, Munich Germany, was compiled by Thyssen Industries AG, Siemens AG, and Daimler Benz AG/AEG AG, the Magnetschnellbahn 50 Ibid. Strohl. 51 Ibid. 75

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Berlin-Hamburg GMBH, and the banks Deutsche Bank AG and Kred i tanstalt Furwiederaufbau (Institute for Credit for Reconstruction) The Gennan maglev system has been in lo ng tenn testing at the Transrap id test facili t ies in Emsland, Gennany since 1985 The system i s functional reliable, safe and ready for commercial deployment. In November 1991, after two years of eva l uation the Deutsche Bundesbahn in conjunction with seven Gennan universities confinned that the supersede maglev system was technically ready for application. The first proposed alignment for constructi o n was between Berlin and Hamburg. The alignment Is 284 km (170 miles) and trip time is expected to be l ess than 60 minutes with five stations potentially between Six trips per hour in either direction are proposed, with a fteet size of 16 trainsets plus three reserves, each with four vehicle sections. The initial cost estimates for this proposed alignment were comp l eted in March and the in itial investme nt costs are expected to be OM 8.91 billion. Forecasts suggest tha t 14.5 million passengers per year will travel on the Berlin-Hanover al ign ment with the persons per kilometer revenue falling between OM 0.23 and 0 .2 8 per person. S3 Risk Distribution Between Private an(! Public Sectors The private sector will be responsible for the financing of the Operations Corporation. The Operations Corporation will raise OM 1.5 billion in equity risk capital and will cany the entire entrepreneurial risk. The remaining financial resources, requiring OM 3 3 billion will be prov i ded by the banking and credit i nstitutions without any public collateral securities provided. The guideway will be provided by a general contractor under contract to the public sector Guideway Corporat i o n The contractor will be fully respons i ble for prov idi ng a full y functiona l guideway. The public sector will be additionally responsib le for the acqu is ition and procurement of the land and property for planning and approval processes, for legal and public processes, and all of the expenses related to these functions. Additional costs resulting from delays in the planning or approval process will be the responsibility of the public sector Financing the Guidewav A public-private joint venture will be responsible for co-financing the guideway. The guideway, however will belong to the Guideway Corporation which is directly and sol ely held by the government. The private sector will, however co-finance OM 2.4 b i llion ($1.53 Billion) of the total of OM 5.6 billion ($3.57 Billion) costs of guideway construction The p r ivate secto r in tum will receive a credit repayment for reimbursement of these capital expenditures, the first of which will be the write-off on the entire guideway which the Operations Corporation credits annually to the Guideway Corporation. This will total OM 138 milli o n per year. 52 COncept ror the fln1nclng 1nd pnvat NCtOI' of the superspeed maglev syst e m Berlin-Hamburg, Magnetschnellbahn. SertlnHamburg GMBH, 1994, 53 Fedelal Ml ..... ry ol Transport (BMV). November 1 992 76

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Secondly, a n additional payment of OM 173 million, which will increase by 3%, will !)ow f rom the Operations Corporation to the Guideway Corporation. Starting in the year 2004 that annual rate will be OM 310.9 million. Through th is method the Guideway Corporation will repay its credit of approximately OM 3 7 billion by the year 2025. The savings from the private sector financing of the guideway will save the public sector .over OM 3 7 billion over the life of the system to be returned through operation revenues described above. The capital contributing companies, banks and insurance companies will not receive any Interest on their investments until the year 2011. Financing through the public sector The other portion of the financed investment cost for the guideway will be approximately OM 3. 77 billion ($3.2 Billion) expended from the public sector budget. The Operations Corporation w i ll raise the following equity capital payments of OM 1.5 billion ($.96 Billion): OM 500 million ($319 million) -private and institu tional inv estors OM 300 million ($191 million) Deutschebahnen and Deutsche Lufthansa OM 700 million ($496 mill ion) holding corporations The capital in the holding corporations will be raised as follows: OM 500 million ($319 million) bank an d construction industry OM 200 million ($127 million) bank and insurance companies. The financing is in part predicated on the assumption that the government will allow substantial tax preferences for private investors for the infrastructure given that it will be mostly within the East German area and will therefore qualify for the Berlin reconstruction loan investment credit (Berlinerdartehen). This would allow 20% of the capital paid for construction to be deducted directly from the tax burden of the investor, itself a substantial incentive for additiona l invest ments This tax benefit used by all unlimited tax-paying purchasers of preferred stock would result in tax relief Irrespect ive of the ind ividual's tax bracket which would make the stock attractive to a wide range of the public. Profil!!bility of proposed Operations Corporation The project internal rate of return over the project life through the year 2043 is 16.93% before taxes and 12.41% after taxes. The equity interes t equal to 13.51%, is the sum of taxes over the life of the project. 77

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CHAPTERS FINANCING THE X-2000 HIGH SPEED RAIL IN SWEDEN WITH LINKS TO THE NORDIC NATIONS ANDING$ Sweden was the first nation to achieve a separation of Infrastructure from rolling stock as part of its explicit transit policy Sweden HSR plan's initial cost was set at SKR 32 bn (U.S. $4.5 billion). The first component of this proposal w as to increase maximum speeds on alignments between Sweden's main urban areas to accommodate the X2000 tilting train set and increase running speeds to the north. The second pert was to increase freight alignments running north and south to avoid the Stockholm region. Priority has been set to run between Stockholm to Goteborg at speeds ranging from 200 to 250 kmlh. Proposals for investment In high speed rail in Sweden are anticipated to exceed SKR 40 billion ($5.6 Billion) Ollllr the decade of 1994-2003. This represents a substantial increase over the expenditures inllllsted in conventional Swedish rail over the preceding decade. Denmark has a high speed railway master plan to ultimately construct over 200 km (120 miles) of high speed rail crossing their small, but dense nation. In 1987 the Danish government decided that it would construct a 19 km (11 mile) fixed link bridge and tunnel across the Great Belt which separates Denmark into three equivalent population geographic groups. Denmark has a high speed railway master plan to ultimately construct over 200 km (120 miles) of high speed rail crossing their small, but dense nation. In 1987 the Danish government decided that it would construct a 19 km (11 mile) fixed fin k bridge and tunnel across the Great Belt which separates Denmark into three equivalent population geographies. 79

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Germany and Denmark have agreed to the electrification of the line between Odense in Denmark and Hamburg in Germany to be comp l eted at the same time as the Great Belt link expected to open in 1996-9 7 Additionally, the Swedish and Danish governments have agreed to a l ink between Copenhagen and Malmo expected to be completed by the year 2000. This w ill mean an uninterrupted rail/ink between Scandinavia and the continent of Europe. 80

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1. Swedish Hjgh Speed and Conventional Rail Financing An Innovative Public-Private Partnership Insights int o one of Europe's most i n novative financing solutions of large sca l e public/private HSR systems ca n be gained from examining the Swedish HSR system approach. All of the western E uropean nations ( i ncluding Germany, Franca, Switzerland Spain, Italy and others) employ some form of economic separation of rolling stock and infrastructure and "externality valuation in making rail decis i ons. Others are in the process of developing and implementing a comparable "transportation pricing policy" tech n ique To date however the Swedish system has p i oneered in developing the first a n d most advanced system of its kind in Europe. SWec/i h Rail Financing The Swedish State Railways (SJ) was split up into two separate bodies : 1 ) SJ is sti ll owned by the State and 2) the National Rail Adm i nistration 54 SJ j ust owns a n d operates: Locomotives, wagons and coaches Terminal buildings and stations Maintena n ce ya r ds and industrial facilit i es. 55 SJ, while sti ll owned by the state must operate on strictly commercial transport criteria, i.e financial p r ofitability is required Railways are ope r ated as any other private company do i ng business only when passengers trade and i ndustry pay for them. 56 ANVERKET (BV) or the National Rail Adm i nistrat i on. The Swedish Railroad Financing Example This commercial evaluatio n mandates that financial pro!Hability be required If a particular route alignment does not have suffic i ent ridership to pay for operations of the SJ operating costs ( i nc l uding rolling stock capital costs) then service is discontinued. The second entity BANVERKET (BV) or the nationa l rail administration operates as a public utility where resources and objectives are similar to those for public libraries, museums, defense etc. These ope r ations are beneficial to the society without being profitable from a financial poi nt of view Railway companies are treated as any other private company doing business when passengers, trade industry and society pay for them. External costs wh i ch are important side 54 Tooseon Polley Strattgp ror the, Ral!wJyt. Lars Han$$on. 11th lnltrnational Sympo&ium on Theory and PraeWe in Tran:&p. Largo, FloMda, April 6-9 1990 81

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effects on the transport market are included in the charges for using The nat i onal rail administrat i on (BV) is responsible for: Railway lines : substn.Jctures, and track, signals and other safety electric traction Terminals: all th r ough tracks, certain storage tracks and sid i ng passenger platforms, lighting and some major marshaling yards. Fixed i nstallations for traffic supervision and safety. This treatment of the national rail administration as a public uti l ity wh i le treat i ng the SJ as an entrepreneurial private enterprise is very cons i stent with a number of other soc i a l arrangements that are common in all countries but not given full consideration in eva l uations of deployment of high speed rai l systems in many countries in the latter part of the 20th century. These are the very same conditions that have been practiced for bus and coach traffic as well as some taxi and commercial tn.Jck traffic for a number of years in the United States and elsewhere across the world. These "private" entrepreneurial transportation activit i es exist in l arge measure because of the public investment in major road i nfrastructure The predominant financial source of these revenues are the broader publ i c in general while private e n trepreneurial activ i ties are the recipients of the primary benefits of revenues derived from use of that i nfrastruc t ure. The public is the primary beneficiary of the public benefit of trave l benefits, time trave l and pollution savings and the other socia l benefits stemming from use of the HSR and conventional rail systems In Sweden very much l ike the United States local and reg i onal public transponation i s often undertaken by both public and private bus and coach companies Private companies act as entrepreneurs-that is, they pay for the i r rolling stock, taxes and fees and generate a profit to stay in business Pub lic authorities pay for those components of operat i ng costs not met by revenues from the fare box. Both systems are subsidized by the pub lic secto r where the provision of infrastn.Jcture, the roadway systems over which these n.Jbbertired vehicles operate, are provided by the broader public. While these buses, coaches and taxi companies are not regarded by either politicians or the public as being subsidized, In fact, the i r operations are subs i dized and the cost of that pub li c subsidy is not factored into the benefit cost of providing that serv i ce. In contrast, the Infrastructure on which the rail systems operate in the United States, and unt i l recenUy in other countries, is considered part of the i r "cost of doing business When public funds are expended in pursuit of Improving that infrastructure (rail rig h t of way signalization, maintenance and a variety of other fixed capital investments) those costs are considered by poli ticians and the general public in the United States as "costs of operation for the operator." This a fundamental error 82

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The Need to Include Environmental Eir,temalilies inJhe Development of Transporlation Svstems Of additional and perhaps even greater importance is the traditional benefit cost analysis to evaluate the merits of roadway, rail, port, and airp ort improvements. Principals of benefit/cost analysis have a long tradition in transportation planning and, as a regular part of t hat economic analysis financial costs and social (externa l ity) costs and benefits are and shou l d be included in the calculation of the merits oi aHernatlve trans portatio n deployments57. The Swedish National Road Administration has over the last 20 years been developing and refining a benefit cost based road planning model much like that in place in the United States. That model is adopted and i n use in Sweden for the National Rail Administration as well. The value of several "externality" affects are expressed in monetary terms. Frequent ly these external values are a reflection of individuals willingness to pay which Is the fundamental bas is for benefit cost analysis and explicit evaluations of "soft effects" derived from implicit evaluations and explicit empirical evaluations of social benefit and/or environmental benefit from the alternative modes :sa While there may be some legitimate debate on the monetary magnitudes of the evaluations, there is no debate on the pertinence of including externalities measured in terms of exp li cit monetary values that can be compared and weighed against each other along with and in a traditional financia l revenues and expenditures analysis (see the earlier TGV estimates of socioeconomic I RR estimates as an example of the importance of this form of evaluation). Truck and automobile have considerably higher environmental and social (traffic accidents etc.) costs than the rail option. Therefore the "infrastructure" charged for the motorized mode is considerably higher t han the rail mode, reflecting each modes rela t ive impact on the nations i nfrastructure. The environment itself is a finite resource and Is one of the most important parts of the worlds infrastructure. This provides decision makers with a far greater objective m easure ment of: 1. Greater consistency in the use of resources. 2. Far greater awareness of the significance of soft externality'' affects. 3. A far greater equity in use of res ources. 4. A far greater efficiency of use of finite economic resources 5 Reduced risk of capricious decisions. The demand for a formal calcul ation prepares the ground for pertinent facts. Tables 5-1 and 5-2 provide an overview of the critical externality components of p r oject analysis for road S7 Benefi/Cost and Cost Effectiveness Anatvsjs An ApoJiAd TraiQiQg Lynch, Thomas, A . Ph.D., Oir&Ctor, Cent&r For Economic Forecasting and Analysis, Florida State University, Tallahassee, Florida, 1 994 58 tOld. Hansson, 1990, p 9 83

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measurements in Sweden. Many of these categories are identical to those currently in use within the United States' social evaluation procedures. 59 As an example within the category of traffic safety are included the following social benefit measurements: Loss in production Medical treatment and hospital care Administrative costs Property damage Explicit evaluation of non-material effects or, human values include the following categories: The value of life expressed as the risk (or change in risk) of being involved in a traffic accident, not the eva luation of l ife itself. The final principal category of externalities exp l ici t ly factored into all trans porta tion decision making in Sweden are the externalities of environmental effects. Environmental effects have attracted increasi n g attention in transportation policy. As Hansson r eports60 th r ee different methods are used in eva lua tion of environmental external economic effects. 1. Calculation of financial costs, e.g., loss in productivity in forestry or costs for corrosion due to environmental impacts. 2. Costs for compensatory measures, e.g., noise barriers for mitigation of noise effects. 3. Quantifying environmental effect in monetary tenns. As an example the cost value or ris k of road accidents in 1994 equivalent dollars i s as follows: Total social costs for road accidents are now valued at $ 4.6 billion, where $2.45 billion are eval ua ted as external costs. lntemaliling Air Pollt.dion Damages in Transportation Policy Decisions In Octobe r 1989 the Commission on Economic Instruments and Environmental Policy concluded the following charges for emissions of sulfur, nitrogen oxides, and carbon d ioxid e (See Tables 5-1 and 5-2) The general charges are as follows: The base case cost of fuel is $0.86 per gallon. The additional costs associated with these pollution emission levels considerably raise the cost of a gallon of gasoline. 59 American Auociation of State Highway tnd Transportll:lon OfflciaJs (AASHTO) "'A Manual ol User Benefit Analysis of Highway and Bus Wtshlnj#on, DC. 19n and "Decision Tools for Transportation lnfrastl'uctwe user Guidelines for Mlcroeomput Oteltlon Suppott Syscems (OSS)", U.S. Dept. of July 1988, prepared by L Senoter Ttantf)QrtltiQn Center, Northwestern Evanston, IL, DOTT-89-16. 60 Hanuon, 1990, page 11. 84

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Additional reductions in these charges ,CI!n be achieved with installation of equipment that reduces the emission loading such as the introduction of catalytic converters. It must be emphasized that a charge for emissions and external costs are indeed not a general tax but a user charge. If new technology for petroleum or diesel engines are developed and emissions are reduced, the charges should accordingly be reduced Therefore, there Is an economic ince ntive to develop a cleaner technology which re duces externality damages. Without this i ncentive blatant waste of resources is encour aged. The Incentive Is that spending for developing this technology will be compensated by those reduced charges and perhaps higher p u r chase prices for the transportation equipment in question. Swedish (a nd American) studies show that road traffic more than meets society's financial costs for the road network construction and operation. Road traffic charges however, do not mee t its socioeconomic external costs in respect to traffic accidents and emissions. Finally, the relevant infrastructure costs for roads and rail are summarized i n this report They conclude61 that the infrastructure costs charged for rail traffic is only 25% o f the charge associated with road traffic. Even more discernible is the difference between rail traffic and road traffic on external costs where traffic accident costs are only 2% of the external costs assigned to automobile road traffic are l ess than 1/2 per cent of those costs incurred by rail traffic. Since the automobile mode is known to cos t considerably more than rail (because of the negative environ mental and social economic consequences) then in a true economic sense that cost should be reflected in use levels of each mode. This should result In lower costs and 61 fbjd, Hansson, Table 12, 22 titfed The Infrastructure Cost f Roads and Rail Traffic, 1989190 v.ith ValUations of 1 987 and 90." 85

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greater emphasis w i ll be given to the competitive rail mode with its considerably lower economic and environmental externality damages There is a very direct link between market share capture conditions (formed by transportation policy measures) and fares for the respective modes. When a mode's fare fully reflects their true economic cost (through internalizing these increasingly visible externalities} market share follows. In contemporary American transportation policy measures we simply do not consider market imperfections and the entrepreneurial role of railway companies in a proper prospective We w i ll simply never be able to resolve the "commercial profitability" of rail companies with these economic blinders on, or come to a reasonable balance between the use of scarce economic resources in an equitable and efficient manner without beginning to consider some of these externalities. Major industria lists in Europe are beginning to seriously support these new social transport policy evaluation procedures. In a recent speech62 Percy Barnevik Chairman and C.E .O. of Asea Brown Boveri (ABB) states, Governments, transportation companies and industry must gear up to new solutions for our congested and polluted big cities and for overloaded airports. Environmental concerns have exploded on us and the quality of life, in a broad sense has become a main issue in many countries, even beyond issues like unemployment, fear of war, etc. Scientists warn about the dangerous effects of acid rain and the warming of the atmosphere (Greenhouse effects). Today 200 years after the birth of r ailways and 100 years after the introduction of electrified urban railway transportation systems, we are seeing a renaissance in railway transportation and a rebirth of railways not only in Europe but throughout the wortd . .In the mid 60's I was amazed to see empty "cathedrals" in western Un ited States which used to be busy railway stations. They had become monuments from a past era The great old railway companies had either gone bankrupt or turned i nto real estate companies. In Europe high speed train systems, modernization and expansion of subways and suburban networks, increased restrictions on heavy truck hauling auto trave l and growth, and piggyback traffic is dramatically shifting the emphasis on transport In large measure these shifts are a function of recognized increased damage associated with environmental and social stagnation and damage. According to the Bouladon report the costs of bottlenecks on roads in the European community amount to 2.6 to 3.1 percent of the gross national product of the 12 62 Percy Barnevik, President & C .E.O. of AMI Brown Boveri, ltd. (ABB) and Bert-Ott Svanholm, Executive V;ce responsible foe the businesa segment transportation, ABB Group Management "The Cha11enges f Rail Transportaion In the 1990's. "lnl:ematlonal Preas Seminar on Transportation, London, OCtober 6 1989. 86

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countries That is an annual loss of. between $120 to $150 billion 1994 dollars .. This annual cost is of completing the European high speed railway networl< envisioned for the future. New financial and social economic ca lcul ation models are starting to be used. Not only "hard" costs but also "soft'' costs are considered. All cars and trucks In the European community (EC) emit 19 million tons of carbon monoxide and 4 million tons of nitrous oxides. In the Federal Republic of Germany, for example, these pollution costs may be as high as 1.5% of gross national product Studies In France, Luxembourg, Belgium and the Federal Republic of Germany reveal that the socioeconomic costs amount to 2.5% of the gross national product for road accidents. Incorporating these externalities into transp ortation calculations tend to re-emphasize the favorable transport energy economic and social efficiencies of the railway systems. In summary i mp lica tions for HSR f ina ncing in Sweden suggest that infrastructure should be separated from ra ilway operations. Truck o r bus compani es do not own the roads, shipping companies the harbors, or airlines the airports. There is no reason why ra ilway operators should own the tracks or railway stations. This just muddies the water and is normally to the disadvantage of the railway operators. Also, changes in evaluations of transportation policy (to in clud e th ese externalities explicitly in transport policy) are underway in Sweden and Switzerland and similar solutions are being implemented in Germany and elsewhere throughout Europe (see Chapters 2, 3, 4, 6 7 and 8). This then becomes the critical equalizing factor for evaluation of the deployment of rail systems across the world. This then also should become an issu e of centra l importance for evaluat ion of all future rail projects high speed and others in the United States where environmental sensitivity and potential damage is considerable. 2. Expansion of the Swedish X-2000 HSR Service Through 2000 and Beyond Sweden was th e first nation to achieve a separation of in frastructure from rolling stock as part of its explicit policy Objectives of the d iv ision of Swedish rail into rolling stock and infrastructure were the to: Restrict the environmental impact of transport; Reduce deaths and injuries in transport accidents; To develop infrastructure appropriate to the 21st century; To enhance efficiency of transport; To guarantee adequate capacity. 63 63 eanverket to ln\lest Skr40bn In Next 10 Years. Slcldr$, Karl-0, 1993. Oep.ly Oirector GeneraJ & Planning OVector. Banwrl
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This plan's initial cost was set at SKR 32 bn (U. S $4 5 billion) The first component of this proposal was to increase maximum spee
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Nordic Group of Nations to be Linked by Wav of the Gteal Belt ........ Denmark has a high speed railway master p lan to ultimately construct over 200 km (120 miles) of high speed rail crossing their small, but dense nation. In 1987 the Danish government decided that it would construct a 19 km (11 mile) fixed link bridge and tunnel across the Great Belt which separates Denmark into three equivalent population geographles.66 While considerable barge traffic has been opera ting for centuries, no fixed link currently exists. The construction began on the fixed link in 1988 under the direction of the state-owned l imited company NS Storebaeltsforbindelsen, financed by the federal government. Completion is expected in 1997 at a total cost of DKK 25 bn. Half of the cost is that of providing rail access while the other half is roadway. The project will be financed through toll charges on both systems.67 With the introduction of the IC 3 train in 1990 and prospects for increas ing maximum speed on the rail network, travel time between eastern and western Denmark is expected t o decline by 50% with ari associated doubling of passengers from 4.5 million to 9 million per year, largely diverted from air. Danish Rail (DSB) has purchased 85 IC 3 trains and 40 electric t rai nsets and 12 electric locomotives for the Great Belt traffic Gennany and Denmark have agreed to the electrification of the line between Odense in Denmark and Hamburg in Germany to be completed at the same time as the Great Belt link expected to open in 1996-97. Additionally, the Swedish and Danish governments have agreed to a link between Copenhagen and Malmo expected to ba comp leted by the year 2000. This will mean an uninterrupted rail link between Scandinavia and the continent of Europe. Danish and Swedish rail systems are each going to pay DKK 150 mn for the rail link ref erred to as the Oresund link. The third and final link across the .Fem er belt between Rodby and Puttgarten is the final of the three proposed for Denmark. With completion of this belt, the Danish, Swedes and Germans have the prospect of linking Scandinavia to the continent with high speed rail service early in the new century,68 66 S1rohl, Mitchell P., Europe's tHab Speed Tram;. A $tudy in Gao-Economics, Chapter 10, North and East and EIS\vhere, Pfaoe:t, 1900. 67european Rail Community of Ewopean RdHays Newsletter. No. 2 t-June 1994. 68eastian Zlbfandtsen OSS Planning Section. 89

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CHAPTER6 FINANCING HSR IN ITALY AND SPAIN FINDINGS This chapter summarizes the experiences of developing and financing HSR systems in I ta ly and Spain While each nations' circumstances were different, the overall characteristics of publicprivate financing h is torically are very similar to other nations of Europ e. Italy The I talian national HSR system i s referred to as the Systema Ad Alta Velocita (SA \1), founded i n tha 1960s and 1970s. There i s expectation of a final national commitment of over $7 billion for construction of the SA V The Treno Alta V elocfta (TA\1)Societa Per Azionl (S.P.A.) is a joint private-publ i c company created specifically to build and operate the TAV. Cu1T9ntly 60% of the Italian railways capita/Is held by private capital while the remaining 40% Is held by the public Italian railways The Direttisma line has been in operation be/ween Rome and Firenze Rovezzano south of Florence only recently The entire length 236 km (142 miles) operating attop speeds of 25C kmlhr (15C mph) was opened for service on May 31, 1992. Other HSR alignments radiate out from this system as it serves the backbone of the Italian peninsula It is anticipated that the Direttissima may ultimately handle between 351) to 400 ttalns in both directions. Spain The first Spanish HSR system operating betw een Seville (home town of Spain's Prime Minister Felipe Gonzalez Marquez) and M adrid, the nations Capital on a 471 km ( 283 mile) system on April 20, 1992 on the opening day of the Columbus Exposition Tha 1987 HSR Plan forecast a total outlay of 2 029 billion pesetas ($19 bill ion) for expansion and modernization of the Span ish ra ilway system incl uding modernization of the lines between Mad rid-Zaregoza-Ban;e/on a Madrid-Valenc ia Barcelona-Velencia and others. The Mini ster of Transport projects that the expansion of the HSR system outward from Madrid along the Zaragoz a Lerida alignment to Barcelona will cost 500 billion pesetas ($4. 7 billion). 91

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The Spanish expect to have completed the line between Madrid and Ban:elona and the French border by the year 200. The line will link up French connections to the Perpignan and Montpellier and an interconnection to be established with the South East TGV. This will fully integrate the Spanish HSR system to Europe. 92

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1. Fiinancii\g HSR In Italy Introduction The I talian Rail system, the Ente Ferrovie dello Stato or FS, shares a sorted financial and political past with the other major European national rail systems and is in a time of substantial transition. I n 1985 the Ferrovie della Stato (the public entity) was converted into the "Ente Ferroviario" a presumably Independent corporation with its own lega l status, assets property accounting and financing. Despite the apparent changes, government still retains control of internal passenger fares and influences freight rates, dealing with the powerful rail road unions on matters o f empl oyment leve ls, income and benefits.69 Employment levels are well above need and rail system productivity is below that of other European nations. Table 6-1 indicates that while FS i s making some improvements in productivity in freight (and passenger) movements it still trails most of the r est of deve l oped Europe. TABLE 6-1. Freight Traffic Productivity of Se l ect Rll I E 7o a way s n urope (1,000 Tons-Km %Change per employee 1991 to 1992 Sweden SJ & BV 985.7 7.5% France SNCF 573.1 2 1% SpainRENFE 556.9 5.8% ItalyFS 422 1 4.7% This lag in productivity and effic i ency Is attributable to the identica l problems facing many other developed nat i on's rail systems (espec i ally the U .S.) where over staffing cripp les pr o ductivity Desp ite gains and Improvements made in the FS, system costs are four times larger than FS system revenues I taly, much like France and other European rail systems enjoys an extensive and complex system of subvention (government grants) but FS annual debt still exceeds $200 million7' a year.72 Also, other rail financing priorities compete with HSR financing needs. For example, Italy is a pen i nsula and connected to Europe through the Alps T his passage to Europe handles 60% of all Italian FS freight movement. Considerable cost is a s sociated with double track ing, electrification and moderniz ing the A l pine crossing to facilitate increased freight movement. This and other projects draw f inancing from HSR deve l opment. 69 I taly Olrettis.sime, Si&tema MAlta Vtloclta' Ch1ptor 6 Ey ropt'$ Hig h Speed Tl"ajns .. A StudY In GeoEconomlcs S!rohl, Prager, westport Conn., 1993 ., P a ssenge r Trafftc Ho lds Up as Fntlght Co ll apMS, Gazet1o International, J uly, 1993 AI values aro exprts:$6d rn constant 1994 d01181'1. Ibid, Strclll, 1993. 93

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Systema Ad Alta Velocita Against this backdrop of fiscal strife the Italians have expa nded their ambitious goals toward creating a national HSR system. The national system is referred to as the Systema Ad Alta Velocita (SAV), founded in the 1960s and 1970s. There is hope of a final national comm i tment of over $7 billion for construction of the SAV during the next decade and a commitment from the federal government to reduce the systems operating deficits and i ncrease (public sector) compensat i o n for low fares. Public-Private Financing of the Italian HSR The financing, planning and execution of these HSR projects is provided by a unique public/private relationship in Italy The Treno Alta Velocita (TAV)Societa Per Azioni (S.P.A.) is a joint private-public company created specifically to build and operate the TAV. Currently 60% of the Italian railways capital is held by private capital while the remaining 40 % is held by the public Italian rai lways This lorrns the basis of a thriving public-p r ivate partne rship that is successfully imp lementing and operating the TAV across Italy The new Direttissima, now called the Line s Alta Velocita (AV) is a n increme ntal set of improvements and shortening of the distance between M ilan and Rome from 625 km {375 miles) to 544 km (327 miles) with special emphasis in the alignment between Florence and Rome. 73 Work on the 262 km RomeFlorence Direttlssima began on June 20, 1970 The fina l and most difficult section to construct, the 20 km (12.4 mile) section between Montevarchi and Figlione was completed over twenty-one years later. Thirty two percent of the Rome Florence al ignment is constructed in thirty tunnels (77 km or 46 miles) and fifteen percent i n forty-nine viaducts (32 km or 19.2 miles). The first part of the Direttissima was 150 km (90 miles) a n d completed in 1981 while the second segment of 74 km (44 miles) was completed in 1984.74 Operational service upgrades have been provided in i ncrements since that time. The Direttisma line has been in operation between Rome and Firenze-Rovezzano south of Florence only recently. The entire length, 236 km (142 miles), operating at top speeds of 250 km/hr (150 mph) was opened for service on May 31, 1992 Other HSR alignments radiate out from this system as serves the backbone of the Ita lian peninsula. 75 It Is anticipated that the Direttissima may ult i mately handle between 350 to 400 trains in both directions per day or about one train every 5 to 6 minutes in one direction. 76 Milao-Bo/ogna and Bologna-Fiomnce The completion of a third and fourth track along an existing alignment fro m M ilan -Rogoredo to Malegnano will cost about Lire 2,900 billion ($2.3 billion). The Bologna and Florence 90 km 73 Ibid, Strohl, 1900. 74 UIC Aetlviles Report 1992-1993", International Union ot Railways, Development of the European High Speed Network New ReY9rue Service at the End of 1993. High Speed Rail i n Europe Gains New Mome.wm, {HSR In Europe), Community or E uropan Railway$ and the Uni<>fl,f Railwoyo, 03.1994 Ibid, Strohl. 1993 94

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sector (54 miles) will cost an estimated l,ire . 11,2?0 billion ($9.18 billion). Finally, the Rome ' Naples line will cost Lire 3,900 billion ($3.18 billion). High Cost HSR /nfra$/tyctyre Considerations Substantial advances have been made in bridge design and technology to accommodate the new HSR configurations in ltalyn (and elsewhere). Viaducts and tunnels have become l onger and longer because: 1. higher speeds call for more severe track geometry and therefore it is more d iffi cult to follow the lay of the lan d; 2. passages through high, mountainous areas and needs for linear alignments f or greater speeds has resulted in increased tunneling in much of Alpine Europe; 3. given the greater power of conventional HSR trainsets and related higher speeds, there is a need to accommodate steeper grades; and 4. new lines cross densely populated urbanized areas minimizing land available f o r taking. Future HSR lines propose an even higher proportion of these structures for use in mountainous regions especially. These considerations raise the cost of HSR construction in and across Alpine areas. The Rome-Florence HSR 250 km-hr (150 mph) system is a prime example. With a total length ot 236 km, 19% is on a viaduct and 31% Is in tunneJ.78 Rolljnq Stock The ETR 450 (developed from the earlier ETR 40, Pendolino), includes a tilting-body trainset with two end power cars and 3 to 9 Intermediate trailers as needed. All cars, except the dining car, will have powered bodies. These tralnsets will offer a 20% increase in operating speeds over existing tra ln sets on existing lines and will be able to operate at 250 km/hr on new lines. The ETR 500 stock body does not have body-tl" faci lity and consists of two end power cars with 8 to 14 in termediate trailers without powered bodies It is capable of speeds up to 300 km/hr. In 1993, 94 trainsets were required for operations on the north -south route. The ETR 450 will be used on routes which invo lve operations over new and conventional tracks. The Oirettissima line operates passenger service with the ETR 450-type trainsets over the Rome-Milan alignment. Since 1988 these trainsets serve not only on the Direttissima line but also operate between Genoa, Milan, Venice, Turin, Bari and Naples. Within five years, by the year 2000, new alignments are planned to open service to the Turin-Milan-Bologna-Florence and Rome-Naples line corridors making the total length in service 898 km (539 miles). 77 High Speed lnfra&tructurt: Bridges, Marlo Paolo Petrangeli, Professor of Bridge Oe&ign, Univtl'$ity La S&.pllenza, Rome, ll:at;' "Rail tntemational Proceeding&, Eurallspeed 92". Schlenen der Wei. Brussels, 27 ,.28,29 -0+1992, Bureau d& Oepot, Sf'Ul
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U l timately, the Alta Velocita will consist of a nucleus o f 2 ,200 km (1320 miles) of lines forming a r shaped se t of comdors, 79 with the top northern p a rt of the T formed by the east-west alignment between TourinMIIan-Venice made up of both new and upgraded lines The north south route ( Mi lan-Rome Naples, Including Rome-Florence) was completed in 1993. Eve ntually this system will be extended to Bari to Reggio di Calabra and t o Sicily (via a bridge over the Strait of Mess ina) lntemational HSR Unkaqes Unkage of the French and Italian HSR lines will be accomplished through a trans-A l pine link between Lyons and Turin An agreement signed between the French and I talian governments is the basis for completion of thi s project Completion of this project will provide an important International l ink between the major cities of Rome Venice Milan and Turin to Lyons. Marseilles Barcelona Valencia, Madrid and Paris itself. 80 Additional trans-Alpine li nks will be established to provide suffici ent HSR capacity to carry both passeng ers and freight over the next decade. These Include the Basle-Milan via the Gottha rd pass Mun ich-Verona via the Brenner p ass and Vienna-Ben l ce via Tarv isio Each will play a critical role in expand ing and integrating the Italian HSR system into the European i nternat i onal HSR system and breaking the A lpine bamer that the current Ita lian rail system finds itself beh ind.s1 2. High Speed Rail Service In Spain Spain is a high p lateau country sepa rated from the rest of Europe by the wall of the Pyrenees that contains four different mountain ranges. Spain, like e very other Europe an nation, has developed a rail system increm entally s ince the mld-1850s. Spain has to service ils widely dispersed populat ion of 40 million over very large peninsula Madrid the center of polit i cal power was also the site of several of the first main rail lines constructed In 1851 a rail system was constructed between Madrid to Aranjuez and then from Mad rid to Barcelona in 1860 These e811y efforts were dependent upon British expertise and financial assistance .82 These i nitial efforts led to designation of the original gauge across Spain of 1 .668 meters (5 ft 6 i nches) This gauge became the Spanish standard, and was different from most other European nations, prohibiting i nterconnecting ro lling stock along its borders. This standard has persisted unti l recent times and has proved a hindrance to goods and freight movements in and out o l Spain. Spain's rail system was privately owned until it was seized by General Franco's Nat i onal Socialist Government on February 27, 1943 Over the period 1963-73 a process of modernization involving $1.04 b ill ion was undertaken fin anced in part from Federal 79-proposats for a Europeen Januwy, 198i. community o r European Railways. UtC, (European HSR. fbkl, HSR in Europe, 1 61Jtd, HSR in Europe, 1994 82/b/d, Stroh l 96

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government budgets and i n part from loans After the 1973 oil crisis a push for greater modernization resuHed in electrification of 6,258 km (3,755 miles) of the 12,721 km (7,633 m i les ) rail network This 49% of Spain's rail system carries over 80% of Red Nacional de los Ferrocarriles Espanoles' (RENFE's) traftic flowing over these electrified lines. Also 80% or 10,158 km (6,095 miles) of Spains rail network is single track railway. The Spwfsh HSR System Numerous factors contributed to Spain's decisions regarding HSR. First, Spain is a member of the EEC and increasingly is drawn into the political and economic sphere of full E u ropean Community membership This membership has helped fuel Spain's substantial economic growth and income ga ins of the past severa l decades. Second In mid-1992 the Summer Olympic Games took place in Barcelona. Also, on April 20, 1992 the international exposit ion commemorating the SOOth anniversary of the first voyage of Columbus began in Seville. [The Span i sh Prime Minister Felipe Gonzalez Marquez is from the Seville area but leads the Spanish government in Madrid the capita l .] Third, one of the critical ties to continued prosperity and growth is compatible transportation and communication networks across the EEC. The Spanish peninsu l a is connected to the rest of Europe over the Pyrenees through France Therefore any ground access by rai l to and from Spain must be transported through France. Finally, the state of art of development of HSR systems In Europe and Japan are the most advanced in the world and the French TGV HSR system has the reputation of being on the leading edge of techno logical deve l opme nt and performance These realities led Spain to choose to build, i n cooperation with the French, the first HSR system in Spain in 1992. These factors all conspired to help convince Spanish decision makers that their HSR system should most cost effectively and efficiently be constructed with an adapted vers io n of the French TGV HSR system This decision also d i ctated development (and redevelopment) of the Spanish HSR infrastructure from the Spanish 1 ;668 meters to the common European gauge of 1.435 meters. Elsewhere in Europe HSR systems can operate at lower speeds along conventional tracks. This option is n ot available in Spain because of the wider gauge. This decision to adopt the European gauge furthe r i ntegrates Spain into the fabric of the European Union and ensures continued increases In trade and economic growth in Spain. These decisions concluded with the first Spanish HSR system operating between Seville (home town of Spain's Prime Minister Felipe Gonzalez Marquez) and Madrid the nations Capital on a 471 km (283 mile) system on April 20, 1992 on the opening day of the Columbus Exposition Financjna SAAin's ttSR System This Pts 350 billion ($3.3 billion83) HSR system was financed between the RENFE and the Ministry of Public Works and Transport. The Railway c ontri buted Pts 188 7 billion ($1.8 83 1994 exehange rato of 1 06.8 P't$ pet dollar are used i n thi& report. All oonvet&ions are 1994 dolara. 97

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billion) or 54% while the Ministry contributed the remaining 46% or PIS 161.1 billion ($1.55 billion).84 Additionally, the EEC has allocated a lmost $1 billion in international assistance to construct the Spanish HSR system The EEC Fund for Regiona l Development prov i ded 41,870 Million Pesatas a nd the EEC has provided a grant of 64,000 million Pesatas for construction of the Madrid and Seville HSR system. 85 Mrs. Merce Sala, President of the publicly-owned Spanish Rail system, indicates that the system first year results were "exce llenr. The system experienced average load factors of 85% which were "better than any h igh speed train in the wortd." She also noted that the train's on time perfonnance was 99.74% and that the system is providing a positive cash flow of over Pts 1.3 Billion ($ 012 billion) This Spanish HSR system is the only rail system currently operating with a profit. As elsewhere in Europe the Spanish central government publicly finances development of this HSR system and in part recovers its initial investment through socio-economic benefits the system provides throughout its service areas. The new line has generated considerable economic development and growth in Ciudad Real and Puerto llano. Additionally, the AVE is stimulating the economies of Castilla-La Mancha and Andalucia.86 Local government also plays an influential role in Spain just as it does elsewhere in Europe where if a service is detennined to be uneconomic, the regional governments may decide to financially assist in providing resources to cover the short fall to make the alignment profitable (See Chapters 3, 4, 5, and 7 for an expansion of thi s discussion elsewhere In Europe). Much as in the other European nations examined in this study however, the final decision on investment and route alignment rests finally with the central government. As the President of the Spanish rail system RENF E states: ... (those decisions) ... are not within my control. The decision goes beyond RENFE "self. RENFE is a transport company and "s only duty is to offer quality service to the passengers . It will always be the government who hav ing carefully stud i ed the transport needs and the range of transport ava ilab le in an area decides to ... (offer service or) ... close a l ine. The Ministry of Public Works and Transport published a financial evaluation of the costs and benefits of developing the HSR Madrid to Savill system. It reported the PIS. 350 Billion ($3.28 Billion) i nc luded all costs for construction of the l ine, electrification, signalizing, three stations and trainsets and locomotives. The Future of HSR Expansion in Spain Unkinq to France The 1987 HSR Plan forecast a total outlay of 2,029 b ill ion pesetas ($19 billion) for expansion and modernization of the Spanish railway system including modernization of the lines between Madrid-Zaragoza-Barcelona, Madrid-Valencia, Barcelona-Velencia and others The Minister of 84 avE Underpins Rente's Commetdal Ortw". ftaitway International, Jlfy, 1993 85 Ibid Strohl, 1993. 86tbid, Raim:y Gazett e International, Juty, 1993. 98

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Transport projects that the expansion of the HSR system outward from Madrid along th e Zaragoza.Lerida alignment to Barcelona will cost 5 00 billion pesetas ($4. 7 billion). The Spanish expect to have completed the line between Madrid and Barcelona and the French border by the year 2007. This Is part of their Infras tr ucture Advisory Plan for 1994-2007 made operational by th e Ministry of Public Worl
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CHAPTER 7 IMPLEMENTING HIGH SPEED RAIL IN EUROPE WITH LOCAL GOVERNMENT AND THE PRIVATE SECTOR COOPERATION A Case Study-Lessons from Ul/e FINDINGS Important Attributes of European public-private HSR ventures: a Broad based Federal state and local government financing is essential to implement HSR infrastructure systems in Europe and elsewhere. a Biparlisan (or mufti-party) political supporl across a wide spectrum of municipal governments affected by HSR is central to successful implementation of HSR systems. a Robust and mutually beneficial public-private parlnerships are essential tor successful deployment of HSR systems a Private sector Involvement is increasingly essential in financing and planning the integration of the HSR system into the commercial fabric of the urban areas. a Each of the puplic-private parlners performs the functions most appropriate to their unique strength to accomplish final HSR implementation success a Success of the HSR system ridership is increasingly tied to the system's multimodal linkages for efficient passenger transfers and mode share transfers. National Regional and Local Government Partnership Responsibilities Include: a Overall planning and systems design and integration with national mull/modal transporlation network. a Lead responsibility tor environmental planning design and mitigation strategies. a Primary responsibility for financing, planning and implementing and maintaining rail lnfrestructure. Including corridor alignment purchase, design and construction. 101

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a Facilitate aaministrative processes that authorize and encourage successful public/private partnerships essential to implement HSR systems within and across the nation This may include: authorization for unique and favorable trading and service provision status including ownership of a sola HSR franc/sa award; favorable government contracting authority (e.g special indemnity, protection, transport of public catpo, ate.); access to preferred lower cost public sector financing; provision of credit for environmental offsets resulting from HSR deployment over the alternative modes; and Facilitate research ana design projects that are most appropriate to accomplish the needed tasks. Private and Quasi Privata Sector Partnership Rasponslbflltfes Include: a Estabishment and methods to operate within well developed business like" prac/ices such as establishment of minimum investimant criteria (like the SNCF 8% investment threshold) before a HSR investment is committed a Assisting "traditionally government" institutions to function in much more efficient quasi private marl
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. . . The public sector has the primary responsibility of funding owning and operat ing the Infrastructure and providing the means to complete needed system design and midigation planning and development. These tasks are distributed among federal, state and loca l governments with increasing funding responsibilities at the federal level and land use planning and controls and environmental permlt ing and mitigation at the regional and loca l leve ls. The private sector or quasi-public-private sector can be class ified as the entity that owns and operates the HSR system in a "business like" maner with investment critera such as a threshold lnvestiment criteria (like the SNCF 8% criteria) before a HSR investment is connitted. This public-private entity begins to make "traditionally government" instit ut ions into much more efficient "market responsive" institu tions and reduces the traditional governmental excess and waste that has traditionally accompanied public rail development. The fully commercial private sector (in cooperation with the public and quasi-private sector) has a growing res ponsib i lity to efficienUy secure and integrate the terms and conditions of financing (as a facilitator but not a fully respons ible debtor for repayment of debtr), provide for initial land use planning and des ign and in a number of cases, become the operator of the rail system in a profrt driven framework. This model assumes development of sufficient public subsidies (such as In France, Sweden and elsewhere) to ensure financia l stability of viable routes over the initia l period of greatest need A unifying and integrating sense of cooperation pervades the public/private ventures across Europe in developing HSR projects compared with th ose e quiv ilant feeble atttempts to date within the U.S. In the U.S., the members of the private and pub lic te a ms ask, "Who is going to do something for me? Who will pay my (and their own) financial transportat ion bills? Who will provide me with revenues, regionally and locally demanded person and goods transportation services? Who will provide me with technological advances, environmental benefits environmental damage mitigation financial risk mitigation and a number of additional locally based needs?" In Europe, the combined public/private HSR development teams comprehensively see what needs do ing They efficiently sit at the table as full partners divide up res ponsibi lities on the basis of need and specialization brought to the partnership and get the job done. Differing levels of government do not pose purposeful restraints but render meaningful solutions to pending constraints There is a general recognition of the significant regiona l and national values in providing the leve ls of public transportation services economic growth, reductions in pollution generation and energy consumption There Is also an agreed upon acceptance and high value placed on the considerable private sector profitable gains from final deployment of a successful HSR services to a region This becomes the general unifying single purpose for the integrat ed HSR public-private partnership. There is a recognition that there are sufficient (and significant) gains to all members of the this public-private alliance to warrant completion of the HSR system. T he 103

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implicit recognition is to complement and not drain the system s energ ies and resources for parochial or individual team member needs In the U S. these have come to include extracting system resources to resolve local transportation service demands, so lv e local environmental conflict problems, satisfy local tax revenue shortfalls or serve as the primary economic recovery and job creation engine for a city or region While a number of these potential benefits may evolve in part or in whole from deployment of these systems, burdening the system with resource draining expectations or extractions to achieve such ends as a cond i tion precedent for permission for support for deployment o f such a system sounds the death knell to prospects of the system's ultimate success 1. The Evolution of Loca l AuthoritY and Responsibility in Fraoce-Bckground to Lilla HSR ProJect Development Through out the 1960s, 70s and 80s, France and most of the rest of Europe proceeded with strong central planning and centralized dedsion-making Some scholars suggest that !he decad e of the 80s and earty 90s experienced a substantial shift towards decentralization across Europe with the focus of urban pol i cy dedsi on making and planning forming at the local l evel. 10 Increasingly, intertocal and global economic competition have wor1
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development in ltle 1980s and Into ltle 90s and has resulted in a shift in public policy and shifts of power from federal to A similar phenomena evolved simultaniously in the United States under the Reagan-Bush administration with ltle "new federalism" of ltle 1980s and earty 1990s. While these shifts were similar In some ways, French decentralization came wiltl associated increases in federal funding while ltle shift of increased responsibilities to loc!il governments in the U.S. typically concluded with fewer resources."' These were times of i deological tempering of political extremes across Europe as Communism crumbled in ltle East and the Soviet empire was in disarray. For example, in 1991, the Socialist Party under Francois Mitterrand came to power as a party of government in France and not the party of opposition During that period Socialists who had historically ranked with their Communist allies in attempting t o i nsist on government-dominated means of production across France and much of Europe began to mod erate these ideologies. The Soviets were pursu ing a course of economic modernization and embraced new means of cooperation and partnership between government and the bus iness community. So also, many local European Socialists began enthusiastically embracing the right-wing free marketeers a nd sought to secure joint grant assistance to finns to assure creation and preservation of local jobs.92 While French municipalities are far les s subject than their U S. counterparts to fiscal cutback pressures, they are still l ess reliant on their own sources of revenue ltlan are U .S. cities. French urban areas do not benefit as clearly as American urban areas from commercial economic development. For example French cities do not collect new loca l property based tax rev e nue from increases in building values. They do, however, capture increases in economic expansion through job and income expansion and sti ll are significantly benefited by economic growth. They are therefore increasingly aggressive in pursuing economic expansion and development of future growth This momentum combined wiltl a renewed emphasis of capturing federal funds motivated the local public sector in Lille. This combined wiltl the movement of Internationa l private sector interests that recognized the benefit of joint venture activities of this scale resulted in development of a Ulle pub l ic-private joint ventures where both parties recognize mutua l benefit and gain from t he association. Public assistance for traditional service programs, such as extensive social welfare and related services, are borne by the federal government in France and are not the burden of local government. As a result, the French system of decentralization of the early 80s did not adversely effect local governments nearly as significantly as th ose simultaneously transpiring in the States and England. Under decentralization during this period, central ., "Fif'lanC:ing H.igh Speed Rail and Maglev Systems in Europe, Japan and the United StalK: lmpcatlons for systems nnanelng in Florida: Or. Thomas A.. Lynch, Oirectot for Center for Eoonomlo Forecasting and Analyses, Florida State University in cooperation with th& Center for Urban Transportation Research (Cuttor, Unlllersity of South Florida), January 12, 1992. Keating, M. 1991. "Local Economic Development Politie& in France, Joumal of Utban Affltir$ 1 3(4}, 143-159. 105

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government tran sfers to local governments in France actually increased compared with the marked reduction in revenue in the United States and Britain during their decentralization initiat i ves over the same period.93 During this period, local governments in France and across much of Europe gained increasing sources of autonomy and additional sources of revenue For example decentralization loosened restrictions on local taxation and result ed in transfers of tax levies s uc h as property sales and automobile registration from the state to local governments ... TABLE 7-1. Sources of Local Revenue in France Year Local Tax Revenue Federal and State Transfers Loans 1980 35% 43 % 11% 1988 45% 34% 11% Another researcher suggests that local government sources of revenue shifted significantly during the period of 1980s with renewed emphasis on loca l sources of revenue. This was true even though substantial sources of revenue continue to come fro m transfers from the federal and state levels The preceding table indicates that local sources of tax revenue including those that were transferred from the federal level grew by 10% over the period 1980 to 1988 while federal and states sources of revenue declined by an almost equivalent amount95 These increased sources of revenue also resulted in transfers of powe r and local decision making. These shifts of revenues and authority from the federal government also re su lted in shifts to local government of new responsibilities for creation of economic growth and job opportunities. A perfect example of this shift is in the securing of financing and loca l administrative involvement for deployment of high speed rail in Lille (the Europeanization of Lille) ... 2. Case S1udy ot Lllle France-Blueprint for Local Government in Securing HSR Services "Eura Lilla today represents 5 3 billion francs invested. 3. 7 billion francs are in the form of private investments originating from outside the region for the most part and which wou ld neither have been brought into the Nord-Pas de Calais region without a project on the scale of Eura Lille. Public and parapublic commitments alongside Eura-Lille account (amount 1.6 billion francs) are mainly devoted to transport infrastruc tures 111 Ibid., LeW., 1994 .. Bernier, L .L,, 1990, "Polic.y lmplleatlons of the Ot<:tnt:raiZation Rtfonns in France," paper presented at\he annual meeting o f the Urban Affairs Assoelatlon, Chartotte, NC, April. 1992, .s reported in Levint. 1994. "Ibid, Semler (1992) lbid.,l.eWne, 1994. 106

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... . Well thought out task sharing between the public and private sectors is the strength behind the operation which is a shining example of urban projects. When the channel tunnel represents one of the biggest development sites in the region undergoing extensive transformation The Ulle metropolis stands out as one of the cities which wi ll have a key role in the Europe of to morrow."97 The city of Ulle represents a key component of the new wave of realities facing high speed rail financing and development across Europe. Traditionally the financing of HSR alignments across Europe came from either the Federal government or from the nationalized federally subsidized rail system. I n the future financing a HSR system In western or eastern Europe or the United States will warrant significant involvement from local municipal governments and increasing partnership and financial risk sharing with the private sector. Lille, once the stronghold of communist reactionaries, has become the mode l of the growing emphasis towards two 1990s phenomena that Will prove instrumenta l in the success of financing high speed rail across Europe and into Eastern Europe and beyond: 1. Dominant roles of political and financ i a l leadership by urban municipal governments in defining and f inancing high speed rail systems in urban areas ; and 2. Closer relationships between public and private sector investment interests in bringing these massive infrastructure high speed rail projects to fruition Development of Private(Public Joint Ventum Lilla is the fourth largest metropolitsn area in France, with a population of 200,000 with a metropolitan area exceeding 1 million persons. Lilla is located on the northeast border of France close to the border with Belgium and closely linked to Britain historically Litle is also proximate to the port of Calais seventy miles away and located directly across the English Channe l from Folkstone, England Ull e is what we in the United States would call a rust belt"city, traditionally dominated by te xtiles, steel wor1
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wage competition from factones in liberated eastern Europe posed yet another threat to th is industry98 Unemployment has averaged considerably more than France as a whole and the rest of the northeast region of Europe, standing at well over 13% in the early 1990s. As Id entified above, the key transformations of in tegration of Europe, increas i ng globalization of mar1c:ets and the dropping of trade barriers were the central premises of the evolution of a new order across Europe and specifically within the urban sector of Lille. The detenoration of the economy led the municipal government and pMvate sector to realize that new direction and new partnerships would have to be forged to move the urban area into economic rec overy Local Urban Leadership Forges Public/Private and High Speed Rail Financing Relationships The dominance of a few key individuals including lille's long -ti me Socialist mayor Pierre Mauroy, was pivotal in forging private/public partnerships fro m formerly hostile Socialist, communist and pnvate sector interests in the city of lille. The municipal government brought together regional and national and private sector funding that became the basis of fi nancing high speed rail capital investments in the lille region and moved the metropolitan economy forward Mauroy was instrumental in convincing the French rail system to locate the new TGV station in downtown lille i nstead of in the neighbonng countryside. His leadersh i p also proved i nstrumen tal in securing cooperation of bankers and officials of small communities in the region. The influence Mauroy enjoyed was helped considerably by the fact that under French political rules he served in a number of joint capacities during th i s period including that of Mayor and simulataneously for a time, Prime Minister of the French government. Additionally, despite criticisms from neo-Sta l in ists in Lille opposed to deve l opment plans the local left-wing of political arm of the Socialists and communists parties abandoned old sty l e socialism for a new socialism that accepted the need for pub lic/priv ate partnerships and embraced the bank sponsored tunnel projects (to England ) and additional new investments by big business... This transformation of Lille's socio-political left-wing neo-Stal i nists to a cooperative venture with the Mght-wing private sector entrepreneurial interests led to a reawa keni n g of the need for cooperation In the urban areas Recognition of this need also leads the way towards future economic expansion for deployment of high speed ra il infrastructure investments as well as cooperation for the betterment of the municipal and urban areas collectively. This same reawakening in the United States has yet to come to frui t ion. Integrat ion of public and private sector needs have not yet converged to dominate the political horizon to congeal financing high speed rail development anywhere In the U .S. The re is a grow i ng need for both the pnvate and public sectors to recognize their respective strengths and operate "lbict Levine, 1994 .. Ardagh, J .. 1989 "Lille Gets R"d)' for 1992," Yorlr r.mts Mzin. Dec:embef 3, 58FF. A$ rtp0f1ed in Levine, 1 994 108

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, : > ... : . cooperatively with a division of labor that builds on those strengths and complement respective weaknesses For example the public sector must provide the institutiona l support of land use and e nvironmental assessment and mitigation and financing of infrastructure. The private and quasi-private sector meanwhile must focus on financing efficient operation and management of support facilities and adjoining commercial investments. These kinds of joint ventures are essential for successful deployment of high speed rail anywhere in the Uni ted States Three simultaneous events conspired to also bring the city of Lilla into new focus f or this new urban growth. First, the European community suppressed customs and duties and created a genuine economic common market Since Lille had historic economic ties of trade and commerce with both Belgium a nd northern Europe and England, lfs proximity to these national frontiers and the opening of t rade enhanced Lil la's naturallocational advantage Second, and further accelerating this advantage was the construction of th e "Chunnel" or Eurotunnel which linked England to Nord-Pas de Calais at the port of Calais, 70 miles from the center of Lille. This locational advantage placed Lilla as the larg est urban area closest to the point where the European continent would be joined with the British Is les Third, Lille served as the centerpiece and intersection of two northern European TGV lines the TGV lin e from Paris to London and from Paris to Amsterdam, Brussels and Cologne. This resulted in Lille being only one hour from Paris with TGV connections, two hours o r less from London by way of the Chunnel, a half-hour from Brussels and two and a half hours from Amsterdam1 00 Combined factors of central location and intersection between urban areas, TGV locat i on the shift ing of political power to the local level and the dominant urban leadership provided by it's Mayor poised Lilla to become a boom town of Europe fostering the recovery of the Lilla's postindustr ia l economy The new TGV rail station and the area just adjacent to that station (which is dose to Lilla's central business and historic centers) became the focalpoint of this economic expansion. The station's center project is commonly referred to as Euralille. It e ncompasses 120 hectares (300 acres) including 250,000 square me ters (2.3 million sq ft) or more for office space, commercial service and communications center. The municipality of Lille and the region of Nord-Pas de Cala is initiated a number of large scale projects to capitalize on the city's fortuitous locat ion and timing. Lille i nit ia ted multiple public/private j oint ventures that ensured not only the success of financing the high sp eed rail t rain station but also facilitated the success of the adjoining privately funded l oca l commercial areas While the i nvestments were to bring the station to the downtown l ocation, French TGV planners had originally indicated a desire for locating the station in the suburban areas. The loca l private/public partnerships viewed the station i n the downtown area as '011 Ibid., Levine, 1994 109

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central to the "economic reconvers i on of the metropolis. This private/public Lille partnership were ultimately able to provide the TGV builders with sufficient financial and other concessions to successfully convince them to relocate the station to the central Lille area."101 Development Of A Metro Infrastructure To Assist TGV Multi-Modal Capabilities In Lille public-private I nterests combined efforts to create a high tech "technopole" to attract and Implement new economic growth. In 1986, in an attempt to diversify the economic service base of Lilla s high tech capabilities, three universit i es with combined student population of 43 000 were created in the town of Villeneuve d'Ascq. T h is became a prominent technology oriented center to combine education, research and industry to promote technology oriented innovation. As many as 1,800 firms including Matra, Digital Olivette, and Hewlett Packard, with 2,300 researchers were linked to Lille s downtown urban area by a fully automated subway system developed in cooperation with the of Science and Technology of Lllle and the firm Matta. Lille's metropolitan area now crosses the border Into Belgium and to further facil i tate th is in tegration of international linkages, the Lille Metro plans to extend their rail linkage into Belgium proper. This linkage, given its International character, will be co-built with joint EC financing initiatives. This area has been designated as part of the three country Euroregion of 15 million people and it is deemed to be a significant point of future economic development Table 7-2 provides a profile of the nature of the projected buildout in square meters of the Lille development surrounding the transportation station. TABLE 7-2 Lille Station Center Project: Planned Space Allocation Offices and Business Services Hotel and Lodging Housing Other Facili ties (Convention Center, etc.) 0 Ville de Lile 1 989, p. 9. 55, 000 20,000 25 000 0 110 185,000 60 000 15, 000 60,000 240,000 60,000 30,000 80, 000 295,000 80,000 40,000 60,000 425,000 80,000 55,000 80,000

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E(J(!l Wle Public/Private Joint Venture financing Ananqements The opening of the channel tunnel in mid-1994 opened the TGV rail network through Lille to serve over 70 million inhab itants In the London, Amsterdam Cologne, Paris quadrang l e as the gateway to the entire northern European market. Lllle serves as a northern European TGV juncture and will serve 30 mill ion passengers through its two r a ilway stations each year. The city of Ulle developed a 288 acre military site in the center of Lilla and expended over 5.3 bi ll ion francs, 32% (1.6 billion francs) of which are public funds and 68% (3.7 billion francs) are private funds. to acres Offices 45,000 square meters 31,000 square Open square meters space, meeting rooms plus 3 fl exible conference amphitheaters able to of rem oved nearly 2,000 people Eura Lille's team e.g. Eura LJI/e the Company In 1988, the public-private French joint venture Eura Ulle Metropole was established as a private company to conduct surveys into the feasibility of the expansive deve l opment of a high speed rail TGV station. Their p rimary focus was on d eve lop in g the TGV HSR station and thereafter capturing the increased value from the commercia l development in the area 111

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surrounding the station. In conformance with French law the Societe de Economie Eixte requires the ma jo rity of capital to be owned by a public sector body. The publ i c partners own 53 9% of the company The owners include the cities of Lille La Madeline, Roubaix, Tourcoing, and Ville Newvu de Ascq, L a Communaute, Urban de Lilla (Administrative body for the Metropole area) Department de Nord (Department of the North) and Region Nord Pas-de-Calais regional council. The pnvate sector shareholders i ncluding leading French banks, several i nternat i o nal banks from Belgium, Japan and Italy, own 46.05% of the capital. Other private sector owners include regional banks and SCTEA a subs i diary of French railway company SNCF: Ulle Roubaix-Tourcoing Chamber of Commerce as well as regional insurance compan ies. See T able 7-4 for a complete profile of public and private sector ownership and initial investments in francs and dollars.102 While some public and pnvate sector initial investments were sma ll their involvement itself and not its magnitude was the important issue The TGV Rail Netwo(k And Ul/e Europe Station The services and linkages offered by the TGV Ulle station incl u de Lille to Brussels 30 minutes, Lo ndon 2 hours, Amsterdam 2 hours, Cologne in 2 hours and Leon in less than 3 hours. High speed trains will leave Lille Europe to bypass Pans towards the southeast the south of France and southern Europe. There will also be direct connections to Roissy Charles de Gaulle Airport. Service i nit iate d in 1994 include eight TGV trains bound for London eight b o und for Brussels, 15 bound for Pans and up to 20 direct trains bound for southern Europe each day. From 1996 nearly 100 TGVs will stop at Lille each day with as many as 30 million passengers per year passing through Ulle The Ulle TGV station is expected to handle an estimated 1 5 000 passengers per day Lille is a mult-ilevel transportation station while the Lille Flanders station will continue to serve the internal French railway nelwortk and i s expected to handle 70,000 passengers a day and is located next to the Eura Lille development Lille Europe will also include direct connection to the loca l underground VAL driverless metro system and tram nelwortk. The VAL (light automated vehic l e system) is a computer contro ll ed driverless metro designed and built entirely in Lille Launched in 1983, VAL was the first system of its kind to be fully automated in the world. Additionally, trains tram and bus nelwortks intersect th i s multimodai transportation HSR hub. The tram has been rerouted to include Lille Europe and the Port de Romarin area. Lille i s also connected by direct route to A 1-A25 motorway links from Dunkirk to Paris and A22 to Brussels. By air Lilla i s also well served by Lesqu i n Airport less than six miles from the city s center. 102 Source: Eura Ulle and its Transportation Network, Eura Lif,e 1 994 112

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Franc Investment 6 Dollar Invest ment 113

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Summary and Conclusions The conclusions to be drawn from this jo i nt public/private Lille/Eura Lille association are that there is an essential need for local municipal public and private leadership in shaping the fin anci ng planning and development of any HSR system within and across urban areas. The federal, regional and local public sector must be the predominant source of funding for the rail infrastructure. The second conclusion is that a quasi public-private entity (like the SNCF in the case of Lille) must exist to establish and operate within "business like" efficient decision mak i ng critera for deployment and ope r at ion of the HSR system. In this case if the internal rate of return must exceed the minimum SNCF HSR investment threshold of 8% to warrant provision of serv ice. Knowing these conditions, the city of Li lle (and other r egional or loca l governments) make concessions or provide other financial awards to the HSR operator to bring the pro ject up to the minimum acceptable rate. The third conclusion is the need for a primary leadership role f or the private sector as a primary source of planning, financing and coordination for HSR deployment within the municipality. The private sector is a critical team member within a joint venture of this sort to develop funding and plan for commercial, retail, residential, hotel and open space accommodations, exhibition and conference areas, entertainment and a variety of other commercial properties. Together these i nterests form a public-jlrivate corporation that (wit h support from the state and federal levels of government) leveraged substantial leadership for successful planning and imp lementat ion of TGV HSR across the Lille urban area. Joi ntl y these partners planned and developed the TGV station to serve as the foca l point for development of a highly integ rated multi-modal transportation system and prized private sector commercial deve lop ment The solid cooperation of all levels of gov ernment with this private-public partnership was essential to finance and deploy high speed rail in the City of Lille and will increasingly be critical to future HSR deployment everywhere else in Europe as it will in the U.S. 103 ICO Ulle Metropolitan Area klvHtment in Lille Metropolitan Area., Europe' $ N
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CHAPTERS COMPARI SON OF EUROPEA N AND AMER I CAN PUBUC TRANSPORTATION FINANCING POUCIES FINDINGS Public sector explicit and implicit policies decisively dominate the decisions about which modes will dominate that nations transportation infrastructure. Public sector policies will dominate the decisions of the amount of subsidies each transportation mode will receive Every transportation mode, including high speed rail systems, In each country examined are publicly subsidized. The size and persistence of these subsidies vary widely across modes and nations and is dominated by internal and external cultural and environmental factors Public subsidies for support of the automobile exist in each country examined (except historically across former Eastern Europe) but highest in the U S .. In virtually all of Europe all income levels use public transportation services Public subsidies In Europe are considered good investments tor provision of an important public services high quali/y person and goods movements and are broadly supported by all Income groups With the exception of several major cities public transportation use in the U S is dominated by low to moderate income travelers. Subsidies for public transportation in the U S are often considered welfare support for public dependent "lower incoma segments of urban s o ciety. Public transportation and high speed rail subsidies are most favored across former Eastern and Western Europe. Public subsidies for mass transjt in the U .S. are considerable but public subsidies for rail are vary modest compared to European standards The United States subsidizes the automobile well beyond any other nation in the developed world. 115

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Over the past five decades the United States powerful private sector industrial interests have reinforced cultural bias to influence public p o licies and subsidies to advance the automobile mode and to de-emphasize support for public transit and (conventional and high speed) rail modes. These dominant interests have combined to under value public transportation and under price automobile ownership and operation costs For example the real price of gasoline in the U.S. is less expensive in 1995 than any time since the end of World War II. Decades of under investment in public transit and rail in the U.S. and massive subsidies for the automobile which has result e d in the dominance of pre-committed land use decisions have developed into an almost intractable situation and in many cases undermines the viability of deploying high volume public transportation fixed rail systems. 116

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Introduction Historically, the financing of public transportation in Europe and the United States have varied dramatically. One author1 04 states, When visiting cities In other countries (Europe) one is often struck by differences in their transportation systems. These differences are among the most visible indicators of variation in underlying socia l political and economic systems ... There is an unmistakable increase in the relative importance of the automobile and corresponding decreases in importance of public transport modes such as bus, streetcar, subway and commuter rail (and high speed rail between Europe and the United States) Whatever their limitations, the availability of data strongly suggests that public policies significantly effect travel behavior and explain more of the variation among countries in urban transportation than can be explained by differences In income levels." Table 8-1 provides a profile of differences in automobiles per thousand population Note that while westem Europe has gained considerably on the U.S. in the past 15 years, the United States started well ahead of Europe after World War II and continues to dominate vehicle ownership per thousand population at 555 in 1987. West Germany is next with 470 per thousand population and only slightly trails the U.S. in 1994 estimates Estimates for 1994 see th i s gap declining for most of the nations of westem Europe. Net ownership increases demonstrate that eastern Europe and the former Soviet Un i on have accelerated ownership since deregulation of automobile constraints and increases in production in those countries along with substantial import of foreign autos that had previously been unachievable Tables 8-1 and Table 8-2 also demonstrates a leveling off in the growth in auto ownership everywhere except th&former Sov i et bloc countries. Even though auto ownership has grown appreciably in Europe over the past two decades, the level of dependence on the automobile Is typically slightly under ha l f that of the U S. while public transport ridership levels a r e three to nine times higher in Europe. Comparatively pedestrian and bicycle modes are also three to four times higher in Europe than in the United States or Canada. To what do we attribute these trends? Largely the conscious publ i c policies formulated by each nation. 104 John Pueher, capitall$m, Socialism and Urban Transportation, Policies and Travel Behavior in the East and APA Joums{. Summer 1990. 117

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TABLE 8 1. Comparison Of Auto Ownersh i p Levels In Eastern And Western Europe And North America Source : M ot o r Veh i cl e Manufacturers Anoc::iation 19521962, 1i72, 1982 and 1 989, 1994 v al ues are extrapolation of 80-8 7 tre-nds. TABLE 8-2. Percentage Change in Automobile Ownership In Europe and North America 118

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Explanations Foe Qi(fweacys In Modal Share Distribution Perhaps the most visible explanation of the relative size and dominance of the public/private sector influence on public policy on fuel costs and subsidies across these nations. The public sector as a percentage of gross domestic product In the United States is only 37% while the rest of western Europe with the exception of Switzerland have much larger public sectors constituting between 46% to 63% of gross domestic product expenditures. These difference in relative size influen ce public transportation policy debates. 105 For example the respective cost of fuel for most of the developed nations of the world vary by only 25%. Meanwhile the respect ive cost of taxes for these nations varies by 800% or more. The various prices of do not vary substantially in the cost for fuel but the final price i s largely influenced by the addition of taxes which are a direct reflection of public policy among nations. Per capita gasoline consumption in a sample of U S., Canadian and European cities provides comparison regarding the excess consumption predicated on the lower cost of fossil fuels In the U.S. The U.S. consumption is 200% to 250% in excess of its major European and Asian competitors. Much of this excess consumption is a function of Inexpensive fuel but as one author demonstrates106 automobile based transportation systems require high leve ls of private ownership while public transport systems in both socialist and capitalist countries are almost always publicly owned. Public transportation policy therefore has evolved within the foundation of the social and economic fabric of culture within each of these nations, and urban travel and behavior mirror many aspects of the society as a whole. Regarding the relationships between culture public policy and transportation, John Pucher writes: "These differences in urban transportation ... to a significant extent result from decades of deliberate public policy ... Policies i n the United States have strongly encouraged auto ownership and use. For many decades large subsidies to highway constr uction, automobile use and low density suburban housing have made the automobile very appealing if not Irresistibl e while ... a decline of public transport ... was eliminated for most Americans anyway. In western Europe ... public taxation policies make it much more expensive to own and operate automobiles ... Moreover large subsid ies to public transport in western Europe have helped finance mucl1 more extensive and much higher quality public transport services than in the United States "The automobile, enabling almost unlimited freedom of movement and location embodies the principals of individ ualism privatism consumerism and high mobility. By contrast, public transport depends upon, fosters communalism planned transport ation and land use systems, restricted mobility and less individual freedom of choice both In 105/0id. Pueh.er, 1990 1061bid. Pueher, t990. 119

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travel and in locat ion. In the United States the automobile has become a virtual necessity of life 'Those without automobiles in the United States are forced to suffer a substandard level of accessibility and some Americans view people without automobiles as outright deviants ... In contrast to the United States, people without automobiles do not suffer from immobility (in Europe) to nearly the same degree as do Americans without automobiles thanks to generally excellent public transportation systems. "107 Pucher goes on to say that in most western European countries public transport is viewed as an e5sentia l public service not out of ideology but out of practical considerations such as congestion reduction, pollution abatement, compact urban development, traffic safety, energy conservation and, probably most important, the enhancement of mobility and travel options for all segments of the population. 108 In the United States the vast majority of the population view public transport as totally irrelevant. At its worst it is nonexistent. At best it is the mode of last resort used predominantly by those so poor that they cannot afford to use an automobile.109 In the United States an in d iv idual is able to take three to four trips by automobile for the cost of one trip by public transit. That is to say public transit is three to four times more expensive in the U.S. than using an automobile. By sharp comparison the cost of using an automobile is half the price equal to or greatly exceeds the cost of using an automobile depending upon the nation selected across Europe. In Ita ly, for example, the average cost of using an automobile Is 6.5 times higher than that of public transportation while in Austria the average price is 3.17 times higher, falling to a low of 0.8 of the cost of an automobile in Sweden. By comparison, the much lower typical f are is half to slightly in excess of the cost of an automobile in Europe while it is 2 .28 times higher in Ita ly whi le by comparison the gasoline cost for an automobile liter of gasoline is only 26% of that of a transit fare in the United States. In star!< contrast in eastem Europe the much higher publiCly subsidized trans i t systems of eastem Europe exceed fuel costs by factors of 8.2 to 11.7 respectively in Poland and Hungary. This reflects the much higher public directed public subsidy to public transit at the cost of again publiCly dictated constraints on much higher fuel costs. Table 8-3 shows that auto use in the U.S has historically exceeded that of westem Europe by a factor of two or a lmost three. U.S. use of public transport in the late 1970s and early 1980s constituted only 3.4% compared to 11% to 26% across Europe and Canada during ( and since) that period. t07 Ibid. Pucher 1990. 108 European Council, Minl$1:rie$ of Tf'Jnsport, 1984, 1966. t09 Bruce Bnggs, 1975. Mass Tr6Mp0ft.Mjon and Minority Transportation the Pubic /ntetest Summer 42-74. 120

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" : TABLE 8-3. Modal Split In Urban Passenger Transport (As Percent of Tote/ Trips) Source&: J Poeher et al., "S<>cloeconoml.c-Characteristics of Transit Riders," Trafftc Quarterly 35, no. 3., pp. 461-483 : German Minis.try of Transport, '"Modai-Spflt,'" FotSCbJrtg Sta<:ft\'tf1(ehr, Heft A, Bonn, West Germany, 1984, p. 44; F .V. Wobttet 01: al., "Changing Patterns of Urban Travtl,"' Tnlnsport R....;ews 6, no. 1 January-March 1986 pp. 49-86; HUkonlng KonlnJ dljk lngenleurs en Architectenbureau, Changes in Trlffio and Tran$potta.l:ion P8ttems in Denmark, Netheftands Mini&tty of Transport, The Hague, Netherlands, 1964, p. 60: Austrian Ministry of Transport, "Verkehrðebung-BetKAZung von Vert
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Figure 8-1 Real 1995 and Nominal Cost of a Gallon of Gasoline in the U.S, (1970-1995) $2.50 $2.00 $1 60 I. '<'
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per gallon on average. In the early 1970's almost 33% of the price of gasoline was federal, state or local taxes. Unlike Europe and developed nations in Asia Inflation has eroded away the value of those tax revenues. In the United States the real value of f ederal, state and loca l taxes has fallen dramatically by over 50% of it's 1970 level over the past two plus decades. Trenq$ jn PyPlic Transport Service and Ridership While the data in Tabl e 8-3 are somewhat dated, they provide an i ns ight into historic 1960 to mid 1980s (and beyond) trends in urban public transport use in the U.S. compared to Europe. Public transportation modal share use by urban passengers as a percent of total trips shows the U.S. per capita kilometer and trip use between 17% to 50% of European and Canadian levels Average annual change in transport use is also declining in the U.S. while generally increasing in the major European nat i ons. TABLE 8-3. Trends In Urban Public Transport Service And Ridership Country Total (million) 1982 a. Vehlele-km data for 1984 b Vehicle-km 1983. c. Vehlchrkm data for 1961. d. Vehiclem dala for 1980. Per Capita 1982 e. Passenger Trip data forl he period 1973 to 1 981. Annual Change (%) 1965-Total (million) 1982 Per Capita 1982 Average A.nnual Change (%) 1965Note: In general, data exclude commuter rail. Figures f Sweden and Denmark Include some short-dlst1nce publi c uansport in rural areas. Source: Based on data collected by the author directly from mlnlsiM$ each country and on unpublished data provided by the Transport and Road Research labora1ory. 123

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Public Subsidies bv Transport!!tioa Mode in the United States Of the funds that remain most of the emphasis has been on the automobile Furthermore this erosion in fuel tax value has resuHed in developing alternative subsidy funding sources for several transportation modes. Massive public subsidies to the automobile and highway construction mode have visib l y slanted public transportation policy in the United States away from large scale public encouragement. One author suggests111 over the a ten year time period federal state and local governments subsidized highway construction and operation between $3. 6 to $18 billion annually in 1995 dollars On average, annual federal state and local highway subsidies exceeded $14.2 billion with decade total subsid i es in excess of $142 billion. By comparison, the air mode received an annual subsidy ranging from$ 1.9 to $4.1 billion annually with an average of S2.9 and a total of $29 billion over that decade wh il e the rail modes, both freight and passenger received annual total subsidies ranging from a high of $1.4 to a low of $8.8 billion with an average of $4.6 and a total of $46 bill i on over the decade These and other mass i ve subsidies to highway construction, automobile use and low dens i ty suburban development have dictated universal automobile ownership to be the norm rather than the exception in the United States. Subsidies to auto use take many forms some of which are so i ndirect that they are not even perceived as subsidies.112 For example, the provision of employee parking as a tax free fringe benefit represents a subsidy to auto commuting estimated to range from $12 billion to over $50 billion per year .113 Again, these very conscious public policies fostering development of one mode and deferring development of other modes is an expl i cit part of conscious public po l icy in one nation or the other These respective mode use rates then are not a reflection of exogenous factors such as l evels of income or other socio-demographic characteristics as much as conscious public policy. The conclusions as pointed out by one author are that: These conscious public polic i es make automobile use in eastern Europe and Russ i a almost impossib l e as transit use for most Americans for a ll practical purposes Modal choice in the United States is extremely limited and massive subs i dies to suburbanization and auto use over many decades in the United States have encouraged Americans to live at low densities and to rely almost exdusively on the automobile for their travel needs 11 t Lynch, T A "Public TraMpOftation Financing and SUbSid'tH tty in tht Unit.c:l Statts: prepared for High Speed Rail Anaheim. CA. May 7 1991 Florida High Speed Rai Transportation Commission. Ibid Pud>ef. 1968. 113 J. and Gomez Ibanez. 1981 '"Autos Trans. ana Cities," Cambridge, MA Harvard UntYel'$lty Press. M .. 0 Shoup and M. Wachs. 1984 '"Affects of ending driver pai d perking for sore drtvers. Transportatfon '""'eh rooord 957 : 46-54 u referenced in Pucher, 1990. 124

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Public transport services by contrast are so limited in most areas they do not offer a feasible transport option. ehosen the automobile over public transport, but only under extreme public policies that have strongly favored auto use while neglecting public transport Summgrv In summary, while eastern Europe and western Europe are generally tilting their transportation modes increasingly towards the automobile It is highly unlikely that they will ever reach the level of automobile dependence that the U.S. has acquired. Their emphasis on high quality public transportation will keep these modes competitive and viable even as Europeans increasingl y approach the leve ls of automobile mobility enjoyed by the United States. These shifts in mobility in Europe will also generate, as they have in the Uni ted States, increasi ng demands for automobile related consumer goods that will further stimulate the consumer oriented economies of western Europe. A second and related perhaps increas ing ly important question for the United States is will a reciprocal balance and shift of modal share toward s public transportation evolve as automobile and air travel saturation set in? Will higher levels of qua lity service for public transit become a public policy priority across federal, state and l ocal levels of government as saturation point in automobile ownership, congestion, energy consumption and pollution become a marked threat to the quality of life enjoyed by American urban citizens? This can only evolve when conscious public policy explicitly direct the incentives toward public transportati o n and away from the h igh automobile subsidies enjoyed by the automobile mode In the U.S. over the past five decades. 114/b/d. Pueher 1988. 125

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BIBLIOGRAPHY Akaha, Tsuneo. International Handbook of Transportation Policies. Ed. Tsuneo AkahaAmerican Association of State Highway and Transportation Officials (AASHTO). "A Manual of User Benefit Analysis of Highway and Bus Transit Improvements," Washington, D.C.: 1977 Amtrak Source Book, 1989. Ardagh, J. "Lille Gets Ready for 1992: New York Tim es Magazjne. December 3, 58FF. Aschauer, David Alan. "Transportation Spending and Economic Growth the Effects of Transit and Highway Expenditures." September 1991. Ayer, Lucllla L. and Richard J Hocking. "Land Development Impacts of Tran sit Construction." Joumal of Transportation Engineering. Vol. 12, No. 1, January, 1986, p. 77. Bachman, John A. "HSR Vehicle Performance Characteristics." Journal of Transportatjon Engineering. Vol. 115, No. 1, January 1989, p. 48. Bamevik. Percy. ''The Challenges for Rail Transportatio n in the 1990's." International P res s Seminar on Transportation, L ondon October 6, 1989. Bennett, John and Patterson, Vincent. "Northeast Corridor Travel Demand Mode l." Transportation Research Board Conference, January 8, 1990. Berliosz, Claud and Leboeuf, M. "Performance of the Paris-Southeast TGV--An Assessment of the Paris-Southeast TGV The AVantlc TGV, Revue Generale Des Chemins De Fer, SNCF-CAV Bruno Vigna!, December 1986. Bernier, L.L. "Policy Implications of the Decentralization Reforms in France," paper presented at the annual meeting of the Urban Affairs Association, April, 1992, as reported in Levine 1994. Brand, Nicholas M. and Marc M. Lucas. "Operating and Maintenance Costs of the TGV High Speed Rail System." Journal of Transporta tjon Engineering. Vol. 115, No. 1 January 1989, 37. Briggs, Bruce. Mass Transportation and Minority Transportation the Public Interest Summer, 1975. 127

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Cervero, Robert. "A Tale of Two Cities: Light Rail Transit in Canada." Joumal of Transoortation Engineering. Vol. 111, No.6, November, 1985, p. 633. Claytor, W Grahm, Jr. Amtrak's Railroader of the Year Modem Railroads. Amtrak's Performance, January 1989. "Community of European Railways, The." Traffic and Profitability of the High Speed Tra i n WeS!em Europe Networ!s, April 29 1993. Daly, Melanie Baker. "America--On the Road to Mass Transit.", 357. Diamond, John. "Amtrak Tiling to Sweden for High-Speed Technology." Boston Globe Associated Press, Business Section, November 25, 1991. Eura Lilla. The 21st Century in !he Makiog. Pavillion Souham 44 Rue de Vuex-Faubourg, Lille Cedex France Spring, 1994. "Europe Starts Building H igh-S peed Train Tracks to Link Major Cities." JiliB April 15, 1991, 22. Evers, Gerard H. M and Jan Oosterhaven "Transportation, Frontier Effects and Regiona l Development in the Common Market. F edera l Highway Administration, 1977, Nationwide Personal Transportation Study Report #9 and Federal Highway Administration, 1983-1984 Nationwide Personal T ransportation Study Survey Tabulations (Washington D.C.: U.S. Department of Transportation) 1985, p 37-44. "Financing and Developing the European Network-Different Philosophies in the Different Countries COER, 1989. "Fin ancing Europe's Railways." A Supplement to Euromoney and Corporate Finance. March 1990. "Financing Future Inte rc ity Passenger T ransportat ion Systems: Perspectives of Regional Developers, the Technology Community, and the Financial Community." Summary of a Working-Level Seminar Held at the USDOT /RSPA Transportation Systems Center, Cambridge, MA, February 9 1990 Gardner Timothy P. "Amtrak Rolls up Records in Riders and is Expanding." The New York T imes Monday March 13, 1989 Gerardin B., the European High Speed Train Network." Planning and Transport Researc;h and Computation, Vol. P320, 1989, pp. 1, Se minar E PTRC, Summer Annual Meeting. 128

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"Germany Is Kicking Up Dust." Business Week, McGraw Hill, December 26, 1994-January 2, 1995. K M. & Prideauz, J.D.C.A., et al. A Comparative Study of European Rail Performance University of Leeds and British Rail Board, 1979. Hansson, Lars. "The Swedish Approach to Multi-Modal Transportation Planning," AAR 1990 lntermodal Policy Conference, April6-9, 1990. ----=,...Transport Polis;y Stl'l!!IM!ies for the Railways. 11th International Symposium on Theory and Practice In Transport Economics, Brussels, September 12-14, 1988. Harrison,John, Address to the TRB Executive C om mittee January 91, 1990. Transportation Research Board Executive Comm ittee Meeting, Washington, D C., np. "High Speed Rail in Europe Gains New Momentum," (HSR in Europe), Community of European Railways and the International Union of Railways, 03 1994. "High-Speed Rail Systems in the United States Prepared by the Subcommittee on High Speed Rail Systems of the Committee on Public Transport of the Urba n Transportation Division. Journal of Transportation Engineering. Vol. 111 No. 2, March, 1985 p 79. Hilton George. Amtrak. (Washington D.C.: American Enterprise Institute, 1980), p. 2-5. Institute for International Research, "Financing of Transportation Infrastructures." (Seminar) July 11-12 1990 "Investing in the Future", ZIA ALLAWAY Spring, 1993. Jarzab, James T. "Economic Impacts and Transportation Projects." Journal of Transporta t i o n Engineer ing Vol. 112, No.3, May, 1986, p. 276. Keating, M. "Local Economic Development Politics in France," Journal of Urban Affairs 13(4). Levine, Myron A. Albion College. "The transformation of urban polit i cs in France : the root of growth politics and urban regimes," Urban Affairs Quarterly. Vol. 29, No. 3 Sage Publications, March 19 94 Ludw ig Dr. Frank Mathis "Restructuring Germany's Railways Facing a Decade of Reform. Railway Gazette International. July 1994. Lynch, Tim. "Flnancing High Speed Raid and Maglev Syste ms in Europe Japan and the United States: Imp li cations for Systems Financing In F lo rida." 1992. ----"Overview of the Financial Proposals for the Florida High Speed Rai l and Mag lev Transportation Systems." January 31, 1991, np. 129

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---.,.---.., "Public Transportation Financing and Subsidies by Mode in the United States May 7, 1991, np. McKenna, Frank and Anderson, David. lntemational Handboo k of Transportation Policy. "Chapter 10, The United States," Tsueno Akaha, Ed., New York, Westport CN and London: Greenwood Press, 1990. Mongini, Arrigo. "Prospects and Issues Affecting Amtrak Self-Sufficiency." Federal Railroad Administration, Session 167, Planning for High-Speed Rail Passenger and Freight Operations on Common Trackage, Transportation Research Board Program, 70th Annual Meeting, January 13-17, 1991. N ice, David C. "Consideration of High-Speed Rail Service in the United States. Transportation Quarterly. 359. ----.,..,....,....,-,. "P assenger Train Ridership in the Amtrak System." Transportation Quarterly. Vol. 45, No. 1 January 1991, 121-132. ----=--:-"Stability of the Amtrak System Transportation Quarterly Vol. 43, No. 4, October 1989 557-570. Ohta, Katsutoshi. "The Developmen t of the Japanese Transportation Policies in the Context of Regional Development." Transportation Research Vol. 23A, No.1, 1989,91-101 Olson P .E BANVERKET-An Issu e Paper." Swederail Consult i ngAB, September 9 1988 np. O'Sullivan, Patrick. T ransport Poljcy Geographic and Planning Aspects Sames & Nobles B ooks: Towa, NJ, 1980 Page, John H. and Michael J. Demetsky. "Planning Development with Transit Projects." Joumal of Transportation Engineering. Vol. 111, No.6, November, 1985 "Paris-Southeast TGV System-Project Implementation and In itial Results After the First Year of Full Operation, The." SNCF September, 1985 "Passenger Traffic Holds Up as Freight Collapses." Railway Gazette lntemati onal, July, 1993. Petrangeli, Mario Paolo. Professor of Bridge Design, University La Sapilenza, Rome Italy H igh Speed Infrastructure: Bridges." Ra il ln temational P r oceedings Eura ilspeed 92. Bureau de Depot Bruxelles April 27-29 1992. Pintag, Gerhard "Capital Cost and Operations of High-Speed Rai l Systems in West Germany." Journal of Transportation Engineering Vol. 115, No. 1, January 1989 p 57-60 130

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Proposals for a European High-Speed Network. Community of European Railways, British Railways Board (BR), Chemins de Fer Federaux Suisses (CFFS), Societe National des Chemins de fer Luxembourgeois (CFL), Organisme des Chemins de fer Helleniques (CH), Coras lompair Eireann (CIE), Campinhos de Ferro Portugueses (CP), Deutsche B und esbahn (DB), Red Nacional e los Ferrocarriles Espanoles (RENFE) Societe Nationale de Chemins de Fer Belges (SNCB), Societe Nationale des Chemins de Fer Francais (SNCF), 1989 Pucher John. capitalism Socialism and Urban Tran sportation Policies and Travel Behavior in the E ast and West," APA Joumal, Summer 1990 ----Financing Trends in Larg e U.S. Metropolitan areas." Transportation Research Record #759, 1980 p. 6-12. ----"Urban Public Transport Subsidies in Westem Europe and North America." Transportation guarteriv. Vol. 42, No. 3, July 1988 p 377-402. Masami. "Restructuring of the Japanese National Railways: Review and Analysis Trans p ortation Quarterfv. Vol. 43, No. 1, January 1989, 29-45. Scholer, Joseph L. "Decision Tools for Transportation Infrastructure Reinvestment-User Guidelines for Microcomputer Decision Support Systems (DSS) ," U.S. Department of Transportation, Northwestem University, Transportation Center Evanston, IL, July 1988. Shaw, Shlh-Lung and Jack F. Williams "Role of T ransportation in Taiwan's Regional Development." T ransportation Quarterly. Vol. 45, No.2, Aprll1991, 271-296. Sicking, Carl 0., Deputy Director General and P lanning Director Banverket lntemational Railway Gazette, 1993. Simpson, Barry J. Planning and Pyblic Transport in Great Britain, France and West Germany. Colin Bassett, ed. (Longman Scientific & Technical) Speedlines High Speed Rail Maglev Association, Vol. 2, No.5, September 1 994. Strohl, Michelle. Inte rnationa l Handbook of Transportation Policy. "Chapter 4 Germany" Tsueno Akaha, ed., New York Westport, CN and London: Greenwood Press, 1990. Sychrava, J. "Funding Europe's Fast Tracks," Euromoney, a Supplement to Euromoney and Corporate Finance March 1990. Transport Policy Strategies for the Railways. TRRL: The Demand for Public Transport, 1980 131

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Treumann, Pitt. Financing Transport I nfrastructure," Tomsport in Europe-Creating the I nfrastructure for the F uture. Financial Ti mes Converences, Mar 2-3, 1993. U .S. Code, Section 541. Wayson R.L. and W. Bowlby. Noise and Air Pollution of High-speed Rail Systems," Journa l of Transportation Engineering Vol. 115, No.1, January 1989 p. 20. Webster, F.W. "Urban Passenger Transport : Some Trends and Prospects." TRR L LR 771, 1977. Weller, John L. "A Perspect i ve of Transport Finance in the United States. Transportation Quarterly Vol. 42, J uly 8, 1988, p 481. Wolfe, K. Eric. "Financial and Demographic Conditions Associated with Local and Regional Railroad Service Failures." T ransportation Quarterly. Vo l. 43, No. 1 January 1989, 328. World Projects Cover Story, ENR/Ap r il15, 1991. "Eu r ope Starts Bu il ding High Speed T r a i n Tracks to Link Major Cit i es." p. 22. 132

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APPENDIX 1 THE EUROPEAN HIGH SPEED RAIL FINANCIAL AND ECONOMIC ANALYSIS MODELS1 RNDINGS The use of well defined, consistent mathematical ridership models predicated on reasonable and reliable assumptions is the foundation of evaluating HSR financial feasibility. High levels of HSR ridership are in part predicated on the number and efficiency of multimodal linkages to a/female complimentary transportation modes. These linkage,s Include connections to airports, mass transit and light rail systems, ports and major auto routes. HSR operations are being reevaluated to determine which segments are fully paying for their operation costs and yielding an operating profit. Decisions to discontinue setV/ce to areas that do not cover the rail systems operating costs and yield an acceptable rata of return (typically 8%) are increasingly being made based on benefit/cost principals. If an urban area's forecast ridership revenues are under the m inimum required financial threshold but the area sli/1 seeks to have HSR setV/ce provided the local governments can further subsidize the services or reimburse the operational managers to the extent necessary and the service will be provided. Additionally, if an urban area's forecast ridership revenues are under the minimum required financial threshold the Federal govemmant can (and often does) make a determination that it is in the public interest to provide services to this region and it will be responsible to provide the necessary financial resources to defray financial operational losses if: the social rate of return considerably raises the projects overall (financial and sociaf) internal rate of return o r; the environmental benefits of completing the project considerably raises the projects overall viability. 1 The author v.ishea to thank Mr. Gerard Mathieu for his cooperation on materials and offom: contributed to this report Much of thiS seotion I s abstracted t1 from "Frenoh TGV Sy$tem and It's Economic A&sessmenr, Presentation by Mr. Gerard Mathieu, Director ot the High Speecf and new lnfras:tJuetrures Deptrtment, Soo16tit NatiOnale de Chemins de Ftane3i$ (French National Raitways}, PARIS-FRANCE, for the International Sympo$1Um on High Speed communfcattons, China, November 3.S, 1993. 133

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Introduction The scale of investment in large, HSR projects and the i r substantial multinational financial and technical importance requires in-depth analysis. This need has r esulled in d evelopmen t of a series of sophisticated HSR ridership and financial models that are applied extensively anywhere in the world that HSR systems are under evaluation. The advanced state of development of these models in Europe has led to wide use i n the United States, Asia and elsewhere. A profile of US applications are summarized in a number of published wor1glon, D.C., 1991. Hit,_.,. VMit t:lenelts costs Not PI Nlt VM1t The PAisent Value (PV) (or Net Pre&ert \faloeo NP'V) is uses disc::ountln9 the spot d a "An"'lle. H .. lhl 1\Aft va.tiS kncPM'I Wid the pt'OMI't value is not ... ..... )--y.>-lodayckcounlodat6%. 134

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The intemal rate of retum depends on the discounted differenceS between revenue from traffic with or without the project and variable costs (such as infrastructure and operating costs) with and without the project in relatio n to initial inves t ment. Any analysis of the economics of major railway projects must, of necessity, include, at a m inimum the following three majo r facets: traffic forecast models incl uding passenger and freight revenues; project Infrastructure and operationa l costs; and secondary economics and socio-economic assessments of benefits and costs. This Chapter will focus on the f irst of these three factors, traffic forecast models. 1 Traffic Forecasting Methods6 To calculate potential future revenue, it is necessary to forecast the volume of traffic likely to use the planned new HSR infrastructure. This is done by means of econometric mode l s that estimate the attractiveness of the proposed new HSR system attributes (such as speed, and comfort} to prospective customers compared to altemative transport modes (including auto, air, and conventional rail). The Attamatlves The analysis compares three altematlve transportation scenar ios or cases: 1) the base case which corTesponds to travel pattems o n existing modes of transportation in the last year for which statistics are available (base year) 2) the reference case which would emerge if the project did not go ahead with existing and proposed alternative transportation investments in other transportation modes. For the socio-economic variables. th is situation is ide ntified through trend models superimposed on the base case. Variables rela ted to competition are obtained either by means of models or from experience. 3) the case following completion of the proposed HSR project In which the reference case is replaced as soon as project implementation begins. This scenario also is established on the basis of econometric trend models when the variables studied are not significantly affected by the project. For competit ion -related variables, forecasts are based on a direct analytical approach. 4 tntemal Rat8 of Retum (IRR) -The if'Hmal rata of nwm is the discount neat vA'Ii:h the net presert valse of a pojec:t is zero. It may be lAewed as approldrnating the periodic {anrval for e>afT1lle) rate of return ol project or lrwestment benefls Ollef project CW.s. For a project resul!ir'G n $ 1 08 000 benelit$ a year from today with todays prciec;t ir'lvestmtnt costs of$100,000\VOIId re&Utinan IRR of8%. Generally the IRR,Ihemore -lhe pojedor I,...._. Di#OtHtCing. The simple revno of oompounc&'lg. SUppose that someone v.11 be paid a given sum ot money at some Mure ti'no. TM prcxer. of discounting eslimateslhe realwh or that fut1.n (noi'Tihii) amolri of money n todays eqUMJient worth. Extractad directly from Malhieu, 1993. 135

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Each scenario consisted of the following stages, Stage 1 relates to the base year, the year for which the most recent statistics are available or in which more recent surveys were conducted Stage 2 is the transfer from the base year to the reference year in which the project i s expected to become operational. Stage 3 consists of forecasting extra traffic and changes wrought by the project. During this stage, the situation assuming the implementation of the project replaces the reference situation Stage 4 is the stage when traffic for any year after project commissioning may be predicted. Economic and Competition Factors Any corporate investment project has to be studied in a clearly defined socio-economic and competitive context. Inv estigations of passenger traffic patterns and trends are in larg e measure based on data concerning the transport sector and the general conditions expected in economy itself. The economic and competitive environment is a factor in each of the different stages in the study The main factors to be taken into account are the socio-economic indicators and the range of services offered by competing modes of transport. Among the main socio-economic factors considered are the following: population growth and other demographic patterns; growth in the volume of household consumption; d istri b ution of revenue among the population; growth In the volume of gross domestic production; price escalation in general; and developments in the price of household consumer goods. Knowledge about the following quantitative factors of the competing modes ( i e .. auto and air) is essential: fares; frequency of service ; fastest and mean joumey times; connections between services; comfort standards; 136

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weekly frequency patterns; and station and airport access times. For air transport specifically, account must be taken of developments in the aircraft fleet load factor standards, on-boa rd services, unit fuel consumption, etc. It is also necessary to collate airport data such as position, hours of operation, landing fees and so forth. Any new development in the transport will have repercussions on th e transport market in general and for individual carriers, regarding both volumes (with transfer of passengers from one mode to another or newly-created travel) and passenger structures and characteristics Major changes in the Image of the mode promoting the project may also to be expected. 3. Traffic Forecasting Models The following methods are applied to Stages 2, 3 and 4 described above : 1) Calculation of the reference situation: For each of the modes of transport involved in th e study (air train, private cars, coach), a general model may be suitably adapted to link the traffic of each particular mode to a series of parameters For each mode the model introduces socio-economic variables relating to the range of transport services. The mod el, which is multiplicative may be expressed as follows: where: I M K c PM p c(M) pm(M) p(M) = = = = = = = = = Traffic(M)f= KC I c(M) PM I pm(M) p f p(M) Indication of t ime In years transport mode: plane, train constant household end consumption mean product population elasticity of traffic of mode M in relation to consumption elasticity of iraffi c of mode Min relation to fares elasticity of traffic of mode Min relation to the population To calibrate the mode l, It Is necessary to identify the most pertinent of these variables for each mode of transport on an iterative basis and to estimate the corresponding elast icity. 2) CalciJ/ati,On of t!Je situation with the eroieft When a new line is placed in service, it causes the following to occur: A transfer of air traffic to the project that can be estimated using a price-time model. For example, passengers may opt for air travel in the reference s i tuation but prefer the HSR line if the project goes through. A transfer of traffic from the roads. Passengers decide against using their cars and select the HSR line Ins tead because of the shorter journey times 137

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Increased mobility (newly-created traffic) either through more frequent travel on the part of existing customers or with the emergence of new types of travel which may be predicted using a gravity model. The next stage is that of estimating the proportions of these different types of extra traffic. This is done by means of two specific models namely the price-time model and the gravity-type generalized cost model. A) THE PRICETIME MODEL. The price-time model, in which traffic is won over from other modes, provides a means of working out the share of the different modes as a part of total traffic. Because travel time is inversely proportional to speed, travel time is halved whenever speed is doubled. For example, if average speed is increased from 120 to 240 mph, the t i me required to travel 200 miles decreases from 100 to 50 minutes. This relationsh i p and travel cost are the two most important factors in attracting new passengers to the HSR mode.7 The model is based on the assumption that passengers choose between two different modes in relation to the value they attach to time and the cost and journey time features of each of the modes concerned Thus user k selects the mode with the lowest generalized cost in relation to his value for time hk. If, for example, the case is taken of competition between two modes (train and plane) and if PF and P A are the respective prices of the journey by train and the journey by plane and if T F et T A are journey times (including travel to and from station/airport), the generalized costs of each mode for user k may be defined as : CgAk=PA+hkTA If on a given route the value of time is h 0 1 the result is that CgA = CgF which is the value at which the time factor favors neither mode on route i. If hk is l ess than h0 1 passenger k will choose to travel by train otherwise he will opt to go by plane It is assumed that on a given route there is a distribution among the traveling populat i on where the value they attach to time f(h) Is described by the distribution function : F(h) = h0 t(x)dx which gives the proportion of journeys where the value of time is less than h. In the light of knowledge acquired on income distribution across the population of a large number of countries it is possible to take a log-normal time-value F(h) density function. The model may then be adjusted by calibrating the log-normal parameters i.e., the standard deviation of the time-value and the mean value of time. These parameters shou l d be calibrated for the largest possible number of routes where there are two or more competing 7 Ibid, TRB, NRC, 1991. 138

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modes (in this case, train and plane) Th'l . obtained suggests the stability of the selected parameters and, In the countfy. Consideration, that there is a correlation between the mean value given to time, expressed in constant currency and th e volume of household consumption. B) THE GRAVITY MODEL. The gravity model is designed to forecast the total amount of extra traffic for each of the different modes. The creation of new traffic is a fundamental phenomenon that arises when new railway infrastructure is placed in service. For e xample, in France's South-East TGV newly-created rail traffic represen ts some 25% of the Initial traffic and 50% of all new traffic. Greater mobility is the result of either more frequent travel on the part of existing railway customers or new types of travel. Newly-created traffic may be quantified by means of a gravity model. These expansions in flows of goods and services can be thought of as net increases in the nation's Gross Domestic Product attributable to creation of the new HSR system construction. 8 These expansions may ref lect net new economic activit i es (increases i n industria l activity and job expansion) that would not have existed without creati on of this new mode of travel. Gravity models are single-mode In the sense that they only apply to the mode. of transport whose traffic growth is to be calculated. The link between growth in traffic and changes in the services offered by the particular mode may be established by application of a generalized cost models. Traffic between two geographical zones i and j can therefore be exp ressed i n the following form: and}, where: Pi and Pj = Respective populations of th e two geographical zones i and j, {PiPj} Cg ij = Generalized transport cost taken in to consideration in zones i Elasticity of traffic in relation to this generalized cost, K = Adjustment parameter. In this equation, the numerator includes attraction factors and the denominator the repulsion or resistance impedance factors. Following a change in the services o ffe red, the variation i n traffic Tij is linked to the variation i n the general i zed cost Cgij by means of the formula: 8 Energy Emlrtonmtnta! and EeononJ!c Qtntljts of F!otida's Hjgh Speed Rail aod Magley svstems Prooosals.; A Comparative AnamJs, lynch., Tm. Assl&tant Director, Aoricla High Speed Rail Transportation commission, September 12, 199t of lht Tht Eurodft;Jn Tmn&port & Planning 181b SumtJIU Amual Meetlogs, PTR:C EdUcation and Resesreh ServiCes Limited, U ni'WSity of Sussox, England. 139

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dTij dCg i j = Y--Tij Cg i j The genera l ized cost of the mode studied may then be expressed in the general f orm: Where p Tg h = = = Cg=p+h Tg Mean price of the journey between i and j General time factor between i and j Mone t ary parameter represent i ng the mean value of time as per c e ived b y the passengers Depending on the mode s tud i ed, the parameter Cg may be broken down into detail in order to reflect the journey t ime as well as the access time either end i f applicab l e and the intrinsic performance and quality of the mode under c o nsideration: Mean price for the journey between i and j Mean va l ue of time for passengers. Journey time i n the form of the time taken by trains to cover the d i slance between the origin and dest i nation points i n zones i and j. Indicator of the mean interva l between two trains depending on the length o f a normal service day. Number of changes of t rain or plane forced on passengers (breaks in load). Frequency of trains or p l anes on the route. Constant rep resenting the duration of the terminal sections of the j ourney The law of gravi t y is verified When the equation: {PiPj} Tij-= K -CYij is confirmed with Y valued around 2.0. 140

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Economic consistencY between supply and qernand After calculating traffic using the models described earlier, checks are carried out on the basi s of various criteria to establish consistency between estimated supply and calculated demand including: suitability of the stopping poin ts selected for each Individual train in relation to the flow of passengers; calculation of the load factor for the different trains in order to remain within a commercially and economically acceptable range; calculation of the fleet of tralnsets required and the Corresponding productivity ratios; and calculation of operating costs. Often it Is necessary to adjust the services initially planned in the light of this exercise. By repeating the process a few times on an interactive basis it is possible to achieve consistency in the supply and demand built into the project. This methodology i s repeated in every corridor under examination for high speed rail development anywhere in Europe. The resulting ridership levels and associated passenger fares serve as the foundation of the systems revenue cash flows. The discounted value of these cash revenues matched with system's stream of capital and operation costs yield the NPV and IRR financial statistics described above and underpin th e decisions of build o r no build for each corridor under review. While the major decision makin g rule to build HSR system between two points typically is the I RR exceeds 8%, European government employ other factors to influence the final decision For example the estimated economic value of environmental and/or social externalities9 often play a dominant role in final determination of a system being built. For example, if an urban area 's forecast ridership revenues are under the minimum r equire d financial threshold the Federal government can (and does) make a determination that i n th e public inte rest to provide services to this region and it will be responsible to provide the necessary financial resources to de fray financial operational losses if: the social rate of return considerably raises the projects overall (financial and social) Internal rate of return or; 9 Ibid, Lynch, 1991,1992. Eoonomlc ExtemaNtles Those &eCOOCiary or untttended economk: lfl1led$ that result from a pro;ect that affect hc!Mduals cr entties olher than the primary effects on the prodUcer or consumer irtended lo resu1 diecfty from the project. Whf e the market rf1a11 pace no Yaloe on these effects, they frequiE!fOt result i n measurable societal costs Ef'ld benefts. Externalities can be either negaUw or posili\oe and consumer or producer 141

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the environmenta l benefits of comp l eting the project considerab l y raises the projects overall viability Ano ther mitigat i ng factor can be when an urban area s forecast ridership revenues fall under the minimum r equired financia l threshold but the area still seeks to have HSR service provided In this case the local governments can further subs i d i ze the serv i ces or reimburse the operational managers to the extent necessary to bring the IRR up to the m i nim required threshold and the service will be prov i ded (again See Chapter 7 The Critical Role of Local Government-Private Sector Cooperat i on i n Financing ... High Speed Ra i l A Case Study Lessons from Ulle). Finally, each major European travel corridor has used a variant of this financia l model and associated socio-economic externa l i ty evaluation methodo l ogy to assess the viab il ity of developing HSR service. The technical precision of use of this type of model in application final ridership and financial revenue results of these assessments for all of Europe a r e prov i ded i n Chapter 2 and France i s e xam i ned in Chapt e r 3 142

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Glossary of Financial Definitions Benefit-Benefrts are the or value of the gain or (public and private) "proflr resulting from the goals of the proposal Wider review. Some benefits are the flip side of costs and can sometimes be viewed as negative costs (cost savings). Benefit measures must include direct and indirect, tangible on not, monetized and and lon g and short run gains. Benefit to Cost Analysis -A tool for measuring the relative efficiency of a range of alternatives where the discounted benefits of a project are divided by the discounted costs resulting in a benefit to cost ratio (B/C). Benefit to Cost Ratio-The ratio of discounted benefits to discounted costs. Compounding The process of the increasing value of a deposit or deposits growing over time based on interest being earned at a predetermined Qnterest) rate over a specified time. The growth of value of the deposit or deposits Is not only due to the increasing size of the interest accumulating on the principal but also the increase of the growth in valu of the i nterest compounding upon itself. Costs Generally costs are defined as the value or level of the resources employed Cost measures must include direct and indirect, tangible on not, monetized and and long and short run resource commitments. Cost EffectivenessA tool for finding the alternative which accomplishes a specified task at a minimum project cost Where it may not be easy or possible to measure the benefits of a project, cost-effectiveness analysis seeks to identify the aHemative which achieves the ob je ctive but minimizes cost I n this analysis only costs need to be monetized. Differs from cost-benefit analysis, which may be used to compare alternatives which have very different goals. Cost Revenue Analysis Cost revenue analysis is sometimes called a fisca l impact analysis. A tool for evaluating the profitability of a proposed action. Only monetized revenues and costs to the entity undertaking the action are considered. 143

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Discounting-The simple reverse of compounding. Suppose that someone will be paid a given sum of money at some future time. The process of discounting estimates the real value of that future (nominal) amount of money in todays equivalent worth. FV $1.00 $1.00 PV = = --= = $.665 (1+int)'n (1.06)"7 1.50 Where FV = Future Value PV = Present Value int = periodic interes t n = number of periods Direct ImpactAn intended effect of a policy or program which addresses a stated objective of that policy or program. Economic ExternalitiesThose secondary or unintended economic impacts that result from a project lhat affect individuals or entities other than the primary effects on the producer or consumer intended to result directly from the project. While the market may place no value on these effects, they frequently in measurable societal costs and benefots. Externalities can be either negative or positive and are termed consumer or producer externalities Future Value The value of a principal or series of payments at a precise future point i n time compounding at a specific interest rate. The principal, or payment is known but the Future value is not. Example of the future va lue of a single $1.00 payment compounding over seven years at an interest rate of 6%: FV = Pmt x (1+int)"n FV = $1.00 x (1.06)'7 FV = 1 5 Where FV = Future Value int = periodic interest n = number of periods 144

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Indirect Costs The cosiS associated with impacts or consequences of a poficy or program (loss of tax revenue, for example, when a commercial building is bought by the city for public puJpOses). Indirect Impact An unintended effect of a policy or program which is not associated with one of its stated objectives. Intangible Costs or Benefits Costs or benefits which cannot be measured i n recognized units (pain and suffering, inconvenience, loss of confidence, etc). lntwnal Rate of Return (JRR) .The internal rate of return is the discount rate at which the net present value of a project is zero. H may be viewed as approximating the periodic (annual for example) rate of retum of project or inves1ment benefits over project costs. For example a project resulting il1 $108,000 benefits a year from today with todays project Investment costs of $100 000 would result in an IRR of 8%. Generally the greater th e IRR, the more attractive th e project or investment. Marginal Analysis A comparison of the cost lnoorred by the production of one additiona l unit of output at different levels of production (1001 units instead of 1000 or 5001 instead of 5000) with the benefits derived from producing one additional unit at each different level of production. The resuH is a best scale Qevel of production) for the policy or program, defined as that level at which marginal costs equal marginal benefrts. Monetizable Costs or Benefits Costs or benefits which can be !lxPressed in dollars. Net Present Value Discounted benefits minus discounted costs. Direct Costs: Resources which must be committed to implement the policy or program. This Includes borrowing costs, one-time fixed costs, and operation and maintenance costs. Opportunity Costs The Resources diverted from other uses to make a given po licy or program possible. These include those resources which can be exPressed in dollars (monetizable costs), non-monetizable but tangible costs (such as increased numbers of accidents), and intang ible costs (such as delays in delivering regular seiVices due to staff having additional responsibilities under the new program) Nat Present Value The Present Value (PV) (or Net Present Value-NPV) Is uses discounting to determine the spot cash equivalent of a future value. Here the future value is known and the present value is not. Example is to calculate the present value of a single $1.00 (Future Value) received seven years from today discounted at 6%. 145

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PrincipalThe amount of money invested at a specific point in time Sunk Com -Resources which have already been commltted before the decision on the new policy or program is made. These can be ignored in computing the cost of the policy, as they have already been spend and there is no way to take them back. However if these sunk costs will resuH in additional costs (or benefits) in the future as a resuH of the proposed "new" program actions, these additional consequences must be factored Into the analysis. Tangible Costs or Benefits Costs or benefits which can be measured in some type of recognized units. These are contrasted with intang i ble costs. Time Value of Money-Money, If property invested, will eam interest and thus grow in magnitude over time. Also there is a cost associated with the use of borrowed money. Both the interest earned and the interest paid are a reflection of the value money has over time, or the time value of money. POUCY ANALYSIS DEFINmONS Administrative Operability Administrative operability criteria measure how possible it is to actually implement the proposed policy or program within the political, social and administrative context proposed. Distributional or Equity Issues Distributional evaluations relate to an equity analysis or an evaluation of the distribution of goods and services (emanating from projecls) among individual members or subgroups (e.g. the eldef1y, Hispanic, female heads of households, etc.) of society. Equity Issues are important to examine for the consumption side of public policy ( Who benefits? ) and also on the production side (Who Pays?). Horizontal Equity Does a proposed project provide for the "equal treatment of equals"? This analysis evaluates the provision of public goods and services and examines how closely a proposed program provide uniform costs and benefits to similar classes of people? Vertical Equity Analysis of vertical equity concerns the questions of the distribution of goods and services to those of unequal circumstances. Economic and Financial Feasibility. Economic feasibility examines the program costs and benefits and the projects magnitudes including revenues and expenditures and determine if the proposal outcomes (benefits or revenues) are sufficient (exceed costs or expenditures) to warrant i mplementation.

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Economic EfficiencyEconomic efficiency Is the concept that the benefits to be gained i n the use of resources (costs) be ma>
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Inelastic -If the percentage change in price is greater than the percentage ehange in quantity sold, then the commodity is price inelas!iy If the price of insulin rises by 100% but demand dedlnes only by (-30%) then the elasticity is only .3 re lative ly price inelastic or not very responsive to price changes. Elastic If the percentage chang!l in guantity sold Is greater than the percentage change in price than the commodity is said to be price elastic. If the price of portable computers drops by 50% and demand for the product thereafter rises by 150% then the elasticity demand response for the product is 3.0 which indi cates very elastic demand. Shadow Prices Shadow prices are a method of establishing the economic value of a benefit or a cost when ma11

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