Week 9: Texas HSR Economic Model

Hello everyone and welcome back! Here’s a quick recap of what I worked on last week:

Last week, I developed the finalized plan for the layout of the Texas High Speed rail utilizing Spanish high speed rail design principles. This included station location, urban high rail routing, and potential station connectivity. The finalized network provides high speed rail access to over 21 million Texans, connecting 68% of the Texas population with just 885 kilometers (or 550 miles) of track. 

Week 9 Progress:

This week, I developed the economic model to make Texas HSR financially sustainable while limiting government subsidies. After analyzing the Spanish post HSR market liberalisation in accordance with EU standards, the economic model proposed for the HSR system is a two-tier public-private partnership, which splits the HSR network into the high speed rail developer and the operators. I call this model the airport model, as like how airports are separate from airlines, this model separates the infrastructure operators/managers from the actual train operators. This model has several pros, namely:

1. Monopoly prevention. Since the developer does not operate trains, multiple HSR operators can enter the market. This newfound competition results in a higher quantity of seats on the route supplied, resulting in cheaper fares and higher market share capture vs road and air as seen in ALG’s analysis on the impacts of Spanish HSR liberalization.
2. Specialization: By separating the infrastructure developers from the HSR operators, it allows both tiers to focus more narrowly on generating profit through real estate development or HSR train operation . Additionally, the barrier to entry for HSR operators is lowered significantly, as new players only need to raise money for HSR stock/labor and not carry the burden of paying back the high fixed cost of the infrastructure.

While the system has worked well in Europe and Spain, one of the biggest drawbacks to this system is that the infrastructure development requires significant government funding to bridge its budget deficit. This makes the original model not entirely applicable to the U.S. ever since U.S. Transportation Secretary Sean P. Duffy’s announcement of the termination of Amtrak’s $60 million grant to plan the Texas high speed rail route.The announcement signified that the private sector will be the main driver in the construction of this infrastructure, making long-term profit generation a vital factor for the viability of this project. As a result, it is crucial for the infrastructure developer, who is limited in the amount they can charge operators to use the HSR infrastructure due to the Public-Private-Partnership deal with the government, to find alternative and lucrative means of turning a profit.

Inspired by the case studies of JR Railways in Japan and the Hong Kong MTR, my model allows the high speed rail developers to make money through real estate surrounding the train stations. Since land values jump with the construction of public transportation, the infrastructure developer can make money by owning and profiting off the jump of the land values next to the high speed rail station. This model has allowed JR Central and MTR to be some of the only public transportation systems to be profitable, with 40% of MTR’s total revenue in 2016 stemming from real estate investments. By collaborating with the government to obtain land surrounding the station through eminent domain, the mutualistic relationship between the infrastructure developer and government leads to the creation of more well developed cities that preserve the social benefits and the equitability of the HSR project. Additionally, the infrastructure developer can create partnerships with local real estate developers that allow the company to recoup their losses without risking significant additional funding to generate returns. To see a diagram of how all the stakeholders in the economic model come together and interact, please click here.

Next Week:

For next week, I plan to discuss the track width, suggested train stock, potential market players, and potential depot locations. Thank you for reading and see you next time!