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05 february

Vladimir Kosoy, Vice President of the Center for Strategic Research Foundation: «The Moscow-Kazan High-Speed Rail Line Project will pay for itself multiple times over»

The future of the Moscow-Kazan High-Speed Rail Line, which is to cross seven Russian regions, will be determined during Q1 2014. It was originally proposed that it would be commissioned in 2018. However, the Russian government still has not decided whether to allocate funds from the National Wealth Fund for its construction or to spend them on other, more important goals. Just one of the benefits of the line would be that it could cut up to 3.5 hours off the travel time between Moscow and Kazan. Vladimir Kosoy, Vice President of the Center for Strategic Research Foundation, told Interfax that the high-speed line would influence the economic development of the Russian regions it passes.

Vladimir Vulfovich, what techniques form the basis of calculations of the economic effect of the project to build the Moscow-Kazan High-Speed Rail Line?

Our work is divided into two parts. On the one hand, we assess the socially anticipated passenger volume. On the other hand, we assess the effects on the government budget, cumulative effects, effects on GDP growth, gross regional product, and industry multipliers.

What was your starting point for calculating the economic effect of implementing the project?

If we are going to talk about the methodology used for predicting passenger volume, then we should say that we assessed several parameters. The first area is the general statistical series of passenger volume in selected areas. The correspondence of the Moscow-Nizhny Novgorod and Moscow-Kazan lines is what we first have in mind. Secondly, we assessed changes to the region's demographic situation. Thirdly, we evaluated changes in the population's mobility.

So you made a long-term assessment?

Yes. We evaluated existing passenger traffic volume for all modes of transport. We have these statistics. The only thing is that we were able to conduct quite serious work related to the reevaluation of vehicle passenger volume, including both private vehicles and public transport.

No one else carried out this work before you did?

That is right, practically no one. More precisely, no one else undertook anything on this scale before. I would be lying if I said that we did something revolutionary, but by taking such a cross-section and using a large number of measurements obtained from counters, direct observations, as well as other data from various sources, we were able to calibrate data sufficiently. Yes, apparently no one did this before.

The second point that we were able to evaluate was the flexibility by which people switch from using different modes of transport. In other words, we assessed the likelihood that passengers would choose to switch from second-class passenger and coach compartments, air travel, private vehicle and bus travel.

What can make passengers switch from riding in ordinary coach compartment trains to using high-speed rail? Ticket cost?

No, we assumed a discrete-choice model for how passengers choose a mode of transport, which assesses the cumulative effect of several factors: this includes both travel and time cost, so the analysis was conducted across a few parameters.

You drew a conclusion about the economic viability of the project based on these parameters?

No, we are only talking about calculating the volume of passenger traffic. The third component that we were not able to calculate accurately was the presence of induced demand. In other words, we evaluated what would happen to passenger volume after the new services appear. This is the first point. Secondly, we evaluated how the elimination of infrastructure gaps would affect passenger volume.

You might ask what we were trying to get at. For example, between Nizhny Novgorod and Kazan there is no direct rail link. You must take a very large detour, which means that there is no direct correspondence with short travel time despite the geographical proximity between the two cities. This point factored into our calculation of passenger volume.

According to your forecasts, how do you expect this to affect the high-speed rail project?

We had a very difficult job with the project's economic parameters, and it was preceded by two years of work with OAO Russian Railways and the Ministry of Transport relating to the development and improvement of methodologies for assessing transport infrastructure projects. The complex model that we now have developed is suitable not only for assessing high-speed rail projects. In fact, it represents a set of models that can be used to predict to a significant degree complex multiplier effects on any infrastructure project, whether it affects blue-water, river, rail or air transport.

An interindustry balance model lies at the basis of the methodology that we are using together with the curators of the model, the Institute of Economic Forecasting of the Russian Presidential Academy of National Economy and Public Administration. The second basic model is a general equilibrium model.

In addition, we use a number of other models since we are dealing with a complex set of problems. We use a number of econometric models to estimate cumulative effects.

What are the cumulative effects of constructing the rail line?

If we are going to discuss how high-speed rail lines will affect the lives of Russians and the Russian economy, then one of the major drivers of change are exactly these cumulative effects. An evaluation of how much time is saved by passengers to a significant degree forms the basis of European methods of calculating the economic viability of high-speed rail lines.

This methodology is not very applicable to Russia. This is due to such subjective factors as the lower value that passengers place on their time, which is an objective and subjective observation. I can provide two examples: if in Spain it was assumed that the cost of a passenger's time was estimated to be EUR 22 or 26 per hour when calculating the economic parameters of the Madrid-Seville line, then according to our estimates, the cost of a passenger's time is less than RUB 150 (approximately EUR 3-4) per hour. That is, we believe that we are taking a much more conservative approach to our calculations, and, in fact, we are much closer to the truth than our European analysts are.

As far as cumulative effects are concerned, there are many factors to consider here. If we are to talk about the Moscow-Kazan line, then the main thing that is happening is the creation of a single metropolitan area in the European Part of Russia.

That is, we can speak about the creation of a kind of conurbation effect with a particular degree of certainty. That is what is going to happen here: Vladimir and, accordingly, Vladimir Region will generally become a part of the Moscow metropolitan area, since the estimated time of travel between Vladimir and Moscow will be shortened to 57 minutes. This should radically change the level of communications between Moscow and Vladimir Region. The high-speed rail line should affect commuting as well as the use of Vladimir Region as a vacation area for the Moscow metropolitan area and the seriousness of the tourism partnership of the two cities. This is true, especially because Vladimir Region has one of the most developed tourism industries in Russia.

Thus, if we talk about the impact on the gross regional product of the Vladimir Region, then we can say that it will be simply colossal. For the first 10-15 years that the high-speed rail line is operated, we predict that the GDP growth rate for the Vladimir Region will be 1.5 times higher than in the baseline scenario where such link is not built.

Could the operator of the high-speed rail line decide to run only express trains along the line that do not stop at intermediate stations despite your calculations for Vladimir Region?

This is an improbable scenario, because none of the strategies provides an option where nonstop trains would run between the terminal points on the route. It is proposed that two types of trains would be used along the high-speed rail line at speeds of 350-400 km per hour that should provide the main link between Moscow and Nizhny Novgorod and Moscow and Kazan.

In addition, we expect to introduce a new type of rolling stock, i.e., accelerated regional trains. These are trains (we still do not know their technical specifications) that are intended to transport passengers across distances reachable within an hour. In other words, these are trains that do not provide the highest level of comfort, for which, thus, fairly cheap tickets can be purchased, given the high density of passengers. These trains will allow us to serve commuters, and in particular, Vladimir will fall within this zone. In addition, we will have two service intermediate stations along the Moscow-Vladimir stretch, namely in Noginsk and Orekhovo-Zuevo. Correspondingly, this is where it is proposed that these accelerated regional trains will make stops.

These routes will be no longer than an hour?

Yes. We are benefiting from the huge effect of Moscow becoming completely accessible, meaning that Noginsk will be within a 15-minute journey from the center of Moscow, and Orekhovo-Zuevo will be 30-40 minutes away. Thus, Vladimir will be approximately within an hour's distance.

How will real estate values change in these cities after this project is implemented?

They will certainly change. Moreover, the value of land will also change, since recreation in these regions will become very attractive.

In addition, we have calculated the prospects of passengers switching from using personal cars to using the high-speed rail line. The figures that we have obtained show that, along the Noginsk-Moscow and Noginsk-Orekhovo-Zuevo sections, we will reduce the amount of car traffic along the Moscow-Nizhny Novgorod highway by 15%. This is a huge impact on the amount of car traffic headed into and out of Moscow.

How effective is this project for the state? After all, it requires colossal investments in order to be implemented.

If we are talking about impact on the public budget, then several factors will affect the amount of budget revenues. On average, the level of labor productivity in urban areas is significantly higher (by 3.4%) than outside such urban areas. Correspondingly, with such indicators as the growth of labor productivity and industry multipliers, budget revenue will grow. These multipliers show the influence of the construction of high-speed rail and the implementation of the high-speed rail project on other industries. In addition, this applies to the financial sector, since we have new financial instruments. And it also concerns industries: engineering, construction materials manufacturing, etc. In fact, it applies to all industries, including even agriculture.

And these multipliers show that budget revenues will be generated indirectly through taxes?

At the national level, we have evaluated the demand for investment goods and services and demand for intermediate goods as part of the assessment of the investment project. We have also evaluated the demand for investment goods and services as well as for intermediate goods at the regional level. We have assessed what affects income generation. Therefore, through income, taxes and payroll, we estimate the impact on the gross regional product in both regions where the line will run as well as in other regions.

What are we prepared to announce now? During the construction of the high-speed rail line, because of the generation of multiplier effects on the manufacturing of goods and services, that is, from 2014 to 2019, we obtain an impact of RUB 1.2 trillion. Note that the project cost is now estimated at about RUB 1 trillion 50 billion. The size of the impact on the state budget during the period of operation lasting until 2030 is assessed at more than RUB 6 trillion. In fact, from the government's point of view, this project pays for itself many times over. It will pay back its costs not over the life cycle of 40 years (which is a typical consideration), but in the first decade of operation.

It is another issue that the impact that the state receives and the effects of commercial use of the line should not be confused. We often notice that others freely substitute these concepts for each other. If we are going to talk about the commercial effects for the operator of the line, then they, of course, will be much lower. And nowhere in the world, the level of direct commercial return on such projects is high.

That is why the rail line operator is not a single investor, but rather the investor is also the state?

Unfortunately, for a long time, the commercial viability of a project in terms of government revenue and as a multiplier effect have been confused in Russia. Any attempt to assess the commercial viability of the project show very low results, while no one in the world, in any country, ever evaluates the construction of transport infrastructure (whether high-speed rail lines or highways or river ports) in terms of direct commercial effects. It is simply methodologically incorrect.

How much time does it take a high-speed rail line to operate with a full load?

I would say that not much time is required, because it is not a new mode of transport. We already have a rapid rail line (it does not reach very high speeds, but it is still a high-speed line). People are used to them, and this line is in high demand. As you know, it is hard to buy tickets on Sapsan trains. There is a shortage of supply for this type of transport. Therefore, we do not need a period of psychological adjustment for people to get used to something completely new. Another issue is that, of course, the growth rate of passenger traffic depends on several factors. This depends on how quickly we will be able to commission new rolling stock and meet demand. On the other hand, these are marketing policy and market penetration strategy issues in particular. Most common questions: what will the prices be, how effective is the proposed fare model… These are purely commercial issues.

What could create obstacles for the construction of the high-speed rail line?

Concerning issues related to difficulties experienced when building the engineering infrastructure of the project… Given the present level of development of construction technologies, I would not consider them risk factors.

Of course, there are always risks associated with the geological underlay, but in any case, the issues can be solved. It is a matter of some additional costs, no more.

The lack of public funding can certainly act as a real obstacle to the implementation of the project.

Firstly, this project will be significantly financed using public funds regardless of the selected financial model, so a lack of funds allocated to the state budget would present obstacle number one.

The second risk factor is environmental. However, I do not see any particular problems getting around the major national parks. All of this was worked out during the feasibility study stage, which was carried out by OAO Lengiprotrans. There are risks, but they have been thoroughly worked out.

In addition, there are factors related to land acquisition, which is currently a serious risk factor. We should remember that a high-speed rail line is not a highway: given the radius of curves that must be complied with at such speeds, the tracks cannot wind avoiding certain areas. Yes, the final layout may somewhat differ from what was worked out at the feasibility study stage, but it is a sufficiently straight layout with a small number of turns.

Could reducing the speed due to improperly constructed turns lead to financial losses?

There are turning radius requirements that must be maintained. In some places, such as along the approaches into megacities (in Moscow, for example), no one is going to demolish blocks of multifamily residential buildings in order to provide straight access to Kursky Railway Station. Of course, we are using the railway's current right-of-way, but (and this is important for the public to understand) it will be not the same as the existing rail line. We are talking about the right-of-way of the railway, and not about existing lines.

At hearings in the Civic Chamber, we encountered something quite amazing. One of the directors that I respect, and who well understands rail transport, suddenly said: “See that you don't ruin the suburbs.” If people involved in rail transport do not always understand that the high-speed rail line has its own dedicated infrastructure, then what can we say about the general public? I admit that there is one factor: after they started running the Sapsan trains, there were problems with suburban commuter rail traffic. However, the high-speed rail lines provide a solution for commuter rail traffic. That is why we are creating dedicated infrastructure, including in the area of the Moscow transport hub.

Source: http://www.interfax-russia.ru/exclusives.asp?id=461438

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