Public Sector Economics
Mills College Spring, 2012
High-seed rail studies assess business, employment, tourism and residential patterns along the route and compared hubs with peripheral stations. These economic calculations of intersecting variables complicate the analysis and could reach inaccurate conclusions. The California HSR project is a monumental undertaking; by current estimates the project’s first phase will cost $68 billion. This size project could not be launched by private enterprise due to the risks for profitability and the required large investment costs. When ridership predictions do not materialize HSR could become an expensive luxury. Therefore HSR falls into the category of natural monopoly. The state has economic interests in developing this massive project for a competitive advantage over other economic centers and the benefits for its growing population. California’s population growth is projected to more than double its current size; HSR will provide a structure of smart growth with long-term benefits.
The decision to build a High Speed Rail (HSR) system has financial, economic, environmental and social components. These aspects of the project affect all of California’s residents, through financial burdens or shifting economic priorities, benefiting one region or another. The state has the obligation and incentives to provide a viable economic future to its citizens. This future growth expands the tax revenue and provides a competitive market base for global interactions. However due to the scale of this project, the original investment must be provided by the state. At a later stage of the process private investors can take on operation of the project or create investment opportunities. Since the HSR is on a scale of a natural monopoly in order to capture the economic benefits from this process the state has to provide the initial costs.
An accurate cost benefits assessment would include projection of population growth, social economic benefits at the HSR hubs and businesses, as well as residential configuration related to travel opportunities. HSR can bring business opportunities, employment mobility, residential growth and tourism to the Central Valley.
Vast expanses of the California highway network connect the far reaches of the state, making car travel long, costly and polluting. The car culture cultivated by the automobile industry destroyed the social relevancy of rail transportation in the interest of highway expansion. Environmental benefits of HSR through emission reductions incorporate economic benefits to Central Valley communities’ health and agriculture interests.
Calculating these trends in terms of economic value is a complex process since these aspects intertwine and influence each other. The California HSR project is a costly undertaking. If ridership predictions do not materialize, the HSR could become an expensive luxury. However, with projected population growth in California at 60-70% of its current size, the foresight of directed growth will provide long-term benefits. By increasing connectivity, the HSR opens up employment opportunities and services to a wider population. California HSR will connect the San Francisco and Los Angeles’ tourists with access to the Central Valley, which opens up related business opportunities.
In this report, I will compare California’s unique characteristics with HSR studies of other countries. The comparison will include population growth, spatial plan of HSR and integration of periphery locations within the network. This analysis will provide an understanding of the economic growth anticipated from this project and its prospects.
[“Definition of 'Natural Monopoly'
A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. Because it is economically sensible to have certain natural monopolies, governments often regulate those in operation, ensuring that consumers get a fair deal.” (Investopedia, 2012)]
HSR as a mode of public transportation directs economic growth to station locations. HSR will increase economic activity along its route in the Central Valley, since every station becomes a desirable hub. In the California scenario, the Central Valley could see economic growth in several respects. Real-estate prices could rise due to easier access to economic centers’ jobs such as in San Francisco, Silicon Valley and Los Angeles. Property prices around transportation stations tend to rise due to increase walk-ability options. Economic activity geared towards tourists will get a boost from the increased access that connects the coast with the Central Valley. The valley residents will benefit from greater access to numerous education and health centers, and services availability. The mode-shift benefits and market’s accessibility redirects population’s movement and land availability.
Today’s dense population centers such as the Los Angeles area would benefit from flexibility and population mobility through commuting opportunities. In addition to other social benefits of reducing congestion and pollution, economic growth and diversification of markets increases regional economic stability and improves local services (CHSEA, RES, 2008). Elements of social benefits inherently derived from public transportation are education, health and housing access, with retail services associated with all three.
[“Social benefits - The total benefits of an economic activity to both the individual and the spillover effects to third parties. Social benefits are the total of private benefits and any external benefits.”] (Biz/ed)
Most studies of HSR (Albalate, 2010; Ahlfeldt, 2010) note the economic growth associated with this transportation mode in the hub centers and only a slight increased economic growth in periphery locations. In the California plan, there is no hub-spoke structure but a north-south system connecting two main economic centers of Los Angeles and San Francisco, with shorter connections to the further urban centers of Sacramento in the north and San Diego in the south. In this configuration, the Central Valley stations act as periphery and Los Angeles and San Francisco as hub locations. The periphery communities support the employment needs of the economic hubs, and the hubs in turn provide higher paying jobs to the periphery locations.
Business trips are the main consumers of HSR systems (Martin, 1996). Business travel benefits by easy access to city centers, comfort and efficiency that surpass air travel and vehicles.
The California HSR is looking at the Spanish system since the geographic and population conditions are similar. In Spain “a young woman from Madrid taps away at her laptop keyboard, occasionally pausing to answer her cellphone…” For business travelers the HSR system is a convenient way to travel due to the time benefits on board and easy access to town centers (Sheehan, 2012).
Surface area (sq. km)
Density (people per sq. Km)
GDP per capita ($)
Railway network (Km)
HSR network (Km)
Data from CA HSR Blog
Spain spent approximately $60 billion on its HSR system in construction and expansion costs. By comparison, CHSRA’s latest estimates stand at $68billion. A year after Spain built the first line between Seville and Madrid; The HSR had more than half of all passenger travel on this route and car travel fell from 60% to 34% (Graph and numbers, Sheehan, 2012).
High-speed rail ridership peaked in Spain at approximately 17 million in 2009 and the government is planning to expand the system to the tune of $77 billion over the next decade (Sheehan, 2012). With the economic downturn ridership declines and the financial crisis in Europe makes that sizable expense less palatable.
Higher connectivity between economic centers leads to growth regardless of an existing travel bottleneck (Martin, 1996). This means that even though the travel options in California are not beyond capacity the lack of connectivity between the economic centers of northern and southern California limit economic activity in both. Although the airports in California are not yet beyond capacity they do “face long-term capacity restraints.” (CHSRA, Econ Impact Bay Area) Therefore, HSR travel is set to reduce this long-term strain and open up opportunities for cross-country and international flight that are more profitable.
Improved transportation infrastructure and connectivity increase economic regional accessibility (Ahlfeldt, 2010). Current conditions limit travel due to inefficiencies and costs, whether in time or money. These are lost opportunities for Los Angeles and San Francisco. The business community in both coastal centers are directly involved in the negotiations with the HSR authority (CHSRA) to assure the system provides their needs. The success of the HSR is dependent on these negotiations. At the last revision of the system’s business plan the issue of a cost-effective one-seat ride from San Francisco to Los Angeles was raised, and the CHSRA asserted that they intend to provide such service (CHSRA, 2012).
The business destinations determine the efficiency and accessibility of the system, while leisure travel raises profitability by adding seasonal travel patterns. The HSR route is set up to support the business community and connect economic centers. These economic centers already developed their infrastructure to provide connectivity within them. The periphery on the other hand does not have the infrastructure to provide this access. For the California HSR to be successful in the periphery destinations of the Central Valley state and local governments are obligated to provide adequate bus services and infrastructure to incentivize the HSR travel (Murakani & Cervaro, 2010). The periphery locations support and promote the economic activity of the hubs. All referenced studies confirm that HSR raises economic viability and global competitiveness of the current economic centers. Community investment in the Central Valley takes proactive measures to support such a process.
HSR is an investment in a transportation mode that reduces pollution, saves traveling time and increases accessibility to services as well as elevates the standard of living in California. The relatively high standards of living that we have come to expect entice quality professional jobs and skilled employees to the state. Higher wages increase aggregate social benefits and demand for services.
The social benefits of HSR reach many other facets of our lives. The health benefits due to reduced pollution and reduced accident are difficult to assess however, the reduction in these negative externalities are a definite benefit of HSR.
HSR will help California meet its CO2 emission target to correspond with AB32 the state’s commitment to global warming solutions. This report states that “a HSR trip from San Francisco to Los Angeles will save 324 pounds of CO2 over the same trip by car.” (CHSRA, Econ Impact Bay Area)
HSR reduces pollution by diverting travel from more polluting modes. Although HSR has high contraction emissions, the ongoing operation of HSR is low in emissions, making this mode preferable to vehicle and air travel. Some studies of HSR do not take into account the construction pollution from other modes of transportation such as highway and airport expansion. Instead, they compare the HSR project to existing infrastructure of other modes. This is appropriate when examining Japan’s HSR since the Japanese population increased by only 2%. California’s population is forecasted to increase dramatically, especially in the Central Valley where population growth is expected to reach 48.5% (Author’s calculation from Counties data; see table 1). Road and airport construction in California would require expansion; otherwise, they would reach over capacity. The predicted diverted in-state trips from San Jose Airport to southern California, for example would alleviate the need for runway expansion (Bay Area Council Economic Institute).
Efficient use of energy is a long run investment in pollution reduction associated with health and agricultural benefits. HSR energy demands tap into the state’s commitment for cleaner electricity sources. Another overestimation in several studies (Chester, 2009 and Chang, 2011) calculating California’s electric production pollution, as it currently stands, however with the state’s commitment to reducing GHG emissions, these pollution levels are expected to decrease significantly. Current CO2 emissions per kWh are at 0.681 lbs in the San Francisco Bay Area (EPA estimation tool) while state average is 0.9 lbs per kWh (Fowlie, 2010). Under AB32 standards, these emissions would be reduced by approximately 35% (Fowlie, 2010).
Sweden’s CO2 emissions per kWh in 2009 were 28 gram (0.062 lbs), with target of “41 TWh of end-use energy savings by 2016.” A conservative study of mode transfer in Sweden indicates “an annual emission reduction of 17,500 ton CO2 – (per million passenger/ km) by a new high-speed rail,” (Akerman, 2011). This illustrate the importance of HSR in CO2 emissions reduction in California, overall the United States emission standards lag European standards considerably. The intra-air travel in Sweden is not as close to capacity (Akerman, 2011) as it is in California. All studies in listed references agree that HSR operates with lower emissions to both vehicles and air traffic. The comparisons of current infrastructure for car and air travel to high-speed rail construction (Akerman, 2011; Chang, 2011; Westin, 2012) do not include the California population growth and overused highway infrastructure.
While limiting pollution is one health benefit, access to medical centers is another. HSR will provide access to populations with limited access to services by connecting to coastal economic centers, where the options for non-emergency medical procedures and specialist visits are readily available. HSR will increase access within the Central Valley as well. This greater accessibility improves services whether medical of educational in nature. The Central Valley institutions will be available for coastal populations and vise versa. This process of easier access promotes diversification and specialization that benefits the state as a whole.
Saving traveling time is a social benefit as well. Although, as reported (Martin, 1996), most HSR trips are for business purposes, saving travel time is a social benefit whether for business or leisure. Time saved improves productivity. This timesaving could translate into an easy commute mode of transportation. Bedroom communities already provide the labor force for the coastal economic centers of San Francisco and Los Angeles. The HSR could become a commute mode of choice and ease the housing demand in the high cost centers.
Sustainable and smart growth is an aggregate economic benefit. Population growth can become an economic weight when planning does not address a community’s needs. Connectivity to employment and services increase aggregate income and therefore tax revenues. Higher salaried positions depend on inter county access. Transportation is a vital part of smart growth plans. This structured concentrated growth around service and retail hubs helps absorb population growth in an integral way to current population centers and jobs availability. Smart growth limits sprawl by creating denser population centers around jobs and transportation. Uncontrolled sprawl increases externalities from CO2 emissions and extensive paving that restricts vegetation, which is a carbon sink. Smart growth via large-scale public transit projects creates concentrations of housing and services that support the communities around them. With the expected rise in the Central Valley population, using smart growth models through HSR stations as community hubs will ease environmental stress from sprawl. Future population growth in California spreads to the relatively less populated region of the Central Valley counties, following accessible lower property prices. The coastal economic centers do not show population growth percentages as high as the Central Valley. California is actively reducing sprawl through the implementation of SB 375, California’s Sustainable Communities and Climate Protection Act. This legislation connects global warming to the impact of urban sprawl. HSR stations can be used to concentrate economic activity and housing near transportation connection to employment.
Population growth in the Central Valley could become an economic gain or a strain on California’s economy. If this population growth depends on low-level industrial or large-scale agriculture jobs alone, the over-all social benefit will be minimal. HSR would provide skilled maintenance positions as well as office and retail opportunities. These jobs provide a higher pay scale, which increases the multiplier effect on the aggregate economy. It is in the interest of the state to support viable business and community services for the growing population in the Central Valley raising the social benefits to the state as a whole.
HSR helps redirect employment opportunities housing construction and services without expending the current footprint of Central Valley cities. At the height of the real-estate boom, San Francisco employees extended their commuting neighborhoods to include Pleasanton and Livermore, and as far away as Tracy, up to 50 miles commute. HSR with BART connection will provide a commute corridor for San Francisco Bay Area jobs. This access will support the high-tech and financial sectors. HSR in California is a powerful tool for economic diversification. Albalate shows that industrial zones move away from HSR hubs due to higher real-estate costs (2010). Services and retail surround hubs as well as financial and other professional businesses. In order to capitalize on the hub’s growth opportunities local and state governments providing financing and support will extend the benefit through a local transit system that feeds the HSR travel options.
HSR benefits flow to the Central Valley with real estate and tourism activity. HSR could expand tourism in the Central Valley. Besides direct travel, the Central Valley is a gateway to the Sierra Nevada. The Modesto station could provide easier access to Yosemite Park, which will decrease the car trips into the park meantime increasing visitors. The Fresno station will provide easier access to Kings Canyon and Sequoia National Parks. The Sacramento station will provide easier access to Lake Tahoe area. The HSR could invigorate the tourist industry to include more organized tours and bus services along the HSR line.
The CHSRA revised the original business plan to create a more financially viable option. This Revised 2012 Business Plan begins with three powerful words; Better, Faster, Cheaper, which sum up the evolution of the process and resulting plan. Three funding streams back the HSR, proposition 1A, Federal financing and private investment. Prior to this revised plan the HSR project’s budget was off track and did not reflect funding sources.
This revised plan has an initial operating section between the Central Valley and Los Angeles, projected to be finished in 10 years. Another element of the plan is blending HSR with existing services. This option will cut costs and increase efficiency. This early investment in bookends sections of the route, will electrify Cal-train by 2020 and another will update existing service in the Los Angeles basin. Prop. 1A money will finance some of the smaller projects. The first phase of HSR plan includes these projects and is projected to cost $68 billion and completed by 2028. The improvements will build up ridership and supply extra financing through ticket sales. By 2025 ridership will provide the system with operating funds since ticket sales exceed projected maintenance costs at all levels of ridership.
The CHSRA is collaborating with private investors on funding sources for the project. They estimates that once the first segment is operational and the financial risk decreases, the private sector will provide adequate funding.
California Alliance for Jobs reported that UC Merced students chanted “If you build it, we will ride it!” and carried a cardboard train at a rally on February 2, 2012 at Sacramento’s City Hall (2012).
The HSR represents California’s economic future, with direct benefits to the business community. The current business plan is a profitable option and private investment will gain directly and indirectly from utilizing the system.
The United States auto industry curtailed the rail systems in countless cities. While Europe and Japan heavily invested in comprehensive rail systems, the United States expanded its highways. There are many reasons for the lack of rail lines in the United States, the country’s size, the car culture and the fragmentation of the states’ budgets and regional political influence. The American car companies deliberately cultivated the car culture to undermine the acceptance of public transportation.
One of the ugliest chapters that promoted the car culture at the expense of light rail is narrated by the documentary “Taken for a Ride” by Jim Klein and Martha Olson. According to the documentary, General Motors viewed the light rail systems as direct completion to car sales. They set out to destroy the municipal light rail across the country. In the 1920’s all major American towns had light rail with dedicated lanes, which was efficient clean and comfortable transportation. By the 1940’s most rail systems were gone and the tracks removed, replaced by noisy dirty and bumpy diesel buses. The documentary reveals how General Motors through its subsidiaries took over and promptly demolished the light rail in cities across the United States. The monopoly involved General Motors, its subsidiaries Yellow Coach and Greyhound as well as Standard Oil, Mack Truck, Phillips Petroleum and Firestone Tire. They were found guilty, but since there were no anti-trust laws at the time (1936) each company was fined only $5000.00 for conspiracy charges.
By the late 1940’s the damage had already been done and very few rail systems survived, the ones that still operated were struggling. Locally, Oakland had the light rail Key line prior to the establishment of AC transit busses that serviced Alameda County. The Bay Bridge light rail lines including the Key Lines, were dismantled in the 60’s for car travel (Swenerton, 2008).
The California HSR will provide a framework of a smart growth development model for the state’s growing population. By most conservative estimates, as long as costs are kept low, this project will bring prosperity to the entire state through connecting dispersed urban centers. The Central valley would greatly benefit from improved connectivity to the coastal regions and economic hubs. In many studies of HSR the interlocking aspects of economic criteria complicate simple analysis. Fluctuation in economic conditions and influences of travel habits whether for business or leisure confound straight forward analysis. Conditions in California are different from other HSR locations and comparison models do not include all variables such as population increase, infrastructure limits or energy production and pollution levels. These limitations in comparison analysis undermine accurate assessments. Including highway expansion and air traffic is crucial in evaluating the efficiency and benefits of High-Speed Rail.
HSR will provide the skeletal structure that can support wide range of public transportation offshoots. This north-south connection creates numerous options of economic growth along its route and has the potential of advancing California’s prosperity by leaps and bounds.
Madera 150,000 413,500
Mariposa 18,000 28,000
Fresno 940,000 1,900,000
Orange 3,000,000 4,000,000
Kerns 850,000 2,100,000
Los Angeles 10,000,000 13,000,000
San Joaquin 691,000 1,800,000
Totals 15,649,000 23,241,500
Selected counties along the HSR route show 48.5% growth in total populations in these counties.
(Calculated by Tami Etziony for this report)
Table - 2
Carbon Footprint Calculator Assumptions
- Electricity Usage: 540 kilowatt-hours (kWh)
- Natural Gas Usage: 45 therms (winter 60 / summer 24)
- Electricity: $0.00254 per kWh
- Natural Gas: $0.06528 per therm
- Electric: 0.524 lbs CO2 per kWh
- Natural Gas: 13.446 lbs CO2 per therm
Average Per Capita CO2 Emissions (Energy and Vehicle Use)
22,941 lbs CO2 per person
22,941 lbs CO2 per person
- 2005 California Per Capita Electricity Usage: 7,032 kWh7
- 2005 California Per Capita Natural Gas Usage: 422 therms7
- California Emissions Rate for Delivered Electricity: 0.879 lbs CO2 per kWh8
- Emissions Rate for Natural Gas: 13.446 lbs CO2 per therm9
- 12,000 miles per year and 21 miles per gallon for average passenger vehicle10
- Burning 1 gallon of gasoline produces 19.4 lbs CO26
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