After the Grand Canal, China’s high speed rail is the most politically popular, financially profitable infrastructure project on earth, and thereby hangs a lesson..
Dreadful warning
In 1986, TML corporation, financed by shareholders and £8 bn. debt, spent £10 bn to building Eurotunnel double the estimated £4.7bn. The 400 km London-Paris Eurostar high speed line opened on 6 May 1994. After TML lost £925 million in its first year, it struggled on until it was declared bankrupt in 2006.
Naturally, when Beijing launched its first Shanghai high speed line in 2007 skeptics predicted either bankruptcy or white-elephantcy. Certainly not profitability.
Making Money on HSR
Traffic has grown 30% annually since then, to 600 billion passenger miles this year and, though fares are unchanged, the HSR system averages 8% annual profits. The profits come from almost everywhere:
Increased forecasting accuracy. Every mile of rail they laid improved the ability to predict costs and, therefore, accurately price HSR construction bonds.
Falling incremental construction cost. The more rail they laid, the less each extra mile cost. From mass-produced, unballasted rail sections to bridges (ordered by the meter) to engines and carriages (ordered in hundreds).
Tight integration of production and demand eliminated stop-and-go and costly downtime, keeping construction and manufacturing costs 40% below Europe’s. The SLJ900/32 Bridge Girder Erector, below, lays tranches of prefabbed track in 50 minutes, a daylong job for 30 manual workers.
Income and sales taxes come back within twelve months of the original investment from factories and construction sites and steel and cement industries.
Employment. The first Beijing–Shanghai HSR mobilized 110,000 workers. The second line, just opened, was privately financed.
Land development. The video, above, of Nanjing South HSR station at night, shows the apartments, offices, hotels and shopping complexes above the station. Their massive rents pay off the bonds. The appreciated land values around all HSR stations pay off the bonds, and the increased commercial activity around stations generates taxes that pay off the bonds. Those ‘stations in the middle of nowhere’? When new towns are built around them, land sales, development, and an increased tax base will pay off the bonds.
Increased national productivity. If HSR saves its two billion riders four hours this year compared to other transportation modes, then it will give each rider $32 of productive time, for a total national saving of $64 billion, boosting economic activity and, of course, tax revenues.
Ticket sales. Since the first line opened, ticket prices stayed flat ($80 Beijing-Shanghai) while wages doubled, affording twice as many people access to HSR.
Freight sales. Same-day and overnight intercity high speed package delivery is a huge revenue source – e-commerce is flourishing. Moving passengers onto high-speed lines frees older lines to carry more profitable freight.
Advertising revenues. Billions of ‘impressions’ on middle-class passengers.
Concession revenues. Those snack carts, station concessions, drink dispensers? They’re paying off the bonds, too.
Environmental benefits. HSR reduces noise, high-atmosphere pollution and CO2 dramatically. These direct contributions to quality of life and reduced atmospheric pollution raise the value of surrounding land.
Tourism revenues. HSR lifts market potential of the secondary cities it connects by 59%, promotes second-tier cities’ growth by making them more livable/desirable/accessible.
National cohesion + national market. HSR helps rural areas profit from their natural resources by bringing business opportunities and tourists while reducing rural people’s isolation. More profitable lines subsidize less profitable ones serving thinly populated areas.
Intellectual property revenues. Chinese train-makers are the leading source of high-speed rail technology. All new HSR trains are built with 100% indigenous IP.
Defense. HSR don’t use imported oil, uses less energy to move people and goods, and draws power from renewables, cutting billions from energy imports and reducing national vulnerability.
Profitable infrastructure
Profitable, public infrastructure has been a Chinese obsession since at least 256 BC when, after eight years of patient rock-cracking, the Dujiangyan Irrigation System began irrigating 668,700 hectares of what are today the world’s most productive farmlands, while ending annual floods. Like the thousand mile Grand Canal, which paid for itself with tolls and lowered delivery costs, Dujiangyan’s ROI is almost incalculable. But modern China’s infrastructure returns are not too shabby, either.
The Three Gorges Dam returns 100% of its construction cost every 47 months – before counting its navigation, irrigation and flood control benefits.
The high speed rail system will take longer to retire its debt, but for a project that has improved the lives of almost every citizen, it’s doing fine.
Making Money on Infrastructure