Time to pull the plug on Eurostar?

February 23, 2013

The dismal economic returns on the Channel Tunnel Rail Link are a stark warning to supporters of a high-speed line to Scotland and the North of England.

The total cost of the link, now renamed “High Speed One” (HS1), is close to £10 billion in today’s money, when all the hidden subsidies and extras are included. And this figure does not include the substantial “deadweight” losses from the additional taxation required to fund the line. A commercial business would expect to make an annual return well above £500 million on such an investment, particularly since railways typically need to be substantially rebuilt after 30 or 40 years.

In this context, the return on HS1 is pitiful. Last year, the “investment recovery charge” levied on Eurostar was reduced by more than half to about £2,200 for each train service using the route. By my calculation, this adds up at most to about £40 million a year – a return of less than half of one per cent on the government’s original investment.

But even this return is questionable. Eurostar has made large losses during its sixteen year history and it remains to be seen whether the hidden subsidy of cut-price access charges will enable it to make sustained profits in the medium term. In other words, not just the infrastructure but the service itself has been heavily subsidised by taxpayers, meaning the overall economic return on HS1 has almost certainly been negative – even before inflation is taken into account. The local “Javelin” services to North Kent now using the line are also subsidised.

Of course, advocates of high speed lines may point to “wider benefits” such as regeneration. Indeed, the expensive re-routing of the Channel Tunnel link through East London was supposed to boost the area’s economy (as well as to facilitate currently non-existent through trains to the North of England). However, state-funded regeneration tends to be a negative sum game. Resources are inefficiently transferred from some areas to others, while social problems are displaced rather than reduced. Moreover, if nebulous “wider benefits” arguments were used consistently as a rationale for taxpayer support, just about every business activity would be entitled to subsidies and almost the entire economy would become socialised.

After sixteen years of support, the government should stop subsidising train services to the continent. Taxpayers could receive at least some compensation if the high-speed line were sold off to the highest bidder with the proceeds used for tax cuts and (unlike in current proposals for its “privatisation”) no restrictions imposed on how the route is used. Perhaps an unsubsidised international service could just about cover maintenance costs, with the sunk capital effectively written off. But far better returns could almost certainly be achieved by shutting down the line and disposing of the assets – which include substantial plots of land, tunnels under London and the Thames, and large amounts of scrap metal.

22 July 2010, IEA Blog

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Obama’s folly: high-speed rail in America

February 17, 2013

From China to California, the current slump has been marked by enthusiasm for high-speed rail. Projects typically form part of some kind of “Keynesian” stimulus package.

Here in Britain, there is strong support for a £34 billion route from London to Scotland. Even the Conservative Party supports high-speed rail as an alternative to airport expansion.

This is economic madness when the UK faces its worst-ever peacetime fiscal crisis. Given the history of big government projects, the final cost could end up being closer to £40 billion or perhaps even more. One should also factor in the “deadweight” losses produced by the higher taxation needed to fund such a scheme, as well as the cost of the operating subsidies once the line opens. And all this expenditure would be focused on about one per cent of the UK’s passenger traffic, making the proposed scheme extremely poor value for money.

If high-speed rail makes no sense in Britain, then the economic case is even weaker in the United States. American cities tend to have low population densities and in most cases there are very long distances between them, making rail a highly unsuitable mode of passenger transport. Accordingly, Amtrak, which operates inter-city services, has required substantial ongoing government aid since its formation in 1971.

The fact that high-speed rail in America is not economically viable is implicitly recognised by its inclusion in President Obama’s mammoth Recovery and Reinvestment Act. The costs of construction and operation clearly cannot be covered by passenger fares. Instead, general taxpayers must bear the burden, starting with an $8 billion government down payment.

Accordingly, it seems highly likely that Obama’s support for high-speed rail is based on “pork-barrel” politics and rent-seeking behaviour rather than any genuine economic rationale. Concentrated interests such as local politicians and transport bureaucrats may gain a great deal from high-status grand-projets – at the very least they visibly demonstrate to voters success at obtaining resources from the Federal Government. The victims of government largesse, taxpayers, as a dispersed and fragmented interest group, find it almost impossible to organise in opposition.

10 September 2009, IEA Blog

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Heathrow expansion vs. high-speed rail

February 17, 2013

The Conservative Party has proposed an alternative to the £9 billion expansion of Heathrow. A high-speed rail line would be constructed along the route London-Birmingham-Manchester-Leeds to reduce pressure on the airport by lowering demand for domestic flights.

Yet there is a fundamental economic difference between the two options. Whereas Heathrow’s third runway will be privately funded by the airport’s owners, the high-speed line will be funded by taxpayers.

Its estimated cost is £20 billion. But given the history of big government projects and the fact that extensive tunnelling will be required – probably in the cities and certainly under the Pennines – £30 billion plus seems like a more realistic estimate.

It will be impossible for fares to cover the capital costs. On current figures, this would require the allocation of more or less all the passenger revenue from the UK’s entire inter-city rail network. In reality, of course, most railways struggle to cover even their running costs with ticket sales and require additional operating subsidies.

High-speed rail also offers poor value compared with roads. £30 billion would perhaps buy 1,000 miles of motorway, which, if sensibly located, could be expected to carry more passengers and freight than the entire rail network. And the funding could be entirely private, paid for by tolls, particularly if competing routes were also priced.

Finally, the environmental case for high-speed rail is greatly exaggerated. Running at 180 mph uses far more energy than at conventional speeds and the saving compared with air travel is likely to be small. While electric trains can be powered using renewable energy or nuclear power (hence the claims of low carbon emissions), given the limited capacity of such generation the additional demand created will almost certainly require extra fossil-fuel consumption to supply existing customers.

23 January 2009, IEA Blog

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