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mai 2015

High Speed Rail Business & Financial Model


Before joining Transport Research Institute, Alain MICAS acquired a through theoretical and practical grounding in all fields of transport economics through his experiences in the SNCF (French Railroad), RATP (Parisian public transport operator), for SYSTRA, international consulting engineers for rail and urban transport, and ISTED (Institute of Sciences and Techniques of Infrastructure and Environment for the Development).

He gained in depth in the evaluation of major railway projects in particular: train traffic surveys and multimodal model calibration, prepared hypotheses and scenarios, drew up train traffic forecasts, operations simulation, capital investment estimates, economic profitability and socio-economic profitability evaluation, and simulation of project financing.

He is also skilled in the field of strategic planning, tariff policy, marketing and competition evaluation, marketing strategies and finance.

He has participated in high speed rail connection studies in France, Europe and worldwide.

High Speed Rail, a success story all over the world

The French TGV system will undoubtedly go down as a landmark in European and worldwide transport, railway and High Speed Rail history.

In France, as a combination of superb rail infra­structure and extremely sophisticated rolling stock, the TGV system is a fast, safe, frequent, comfortable and efficient mode of transport accessible to all. Ever since the South-East TGV was first placed in service in 1981, it has been a technical, commercial, economic and financial success. Its technical performances are well known: the world rail speed record was set at 575 km/h. TGV train-sets are lightweight push-pull train-sets with a high power to weight ratio that can be coupled together in pairs.

This HSR system in operation has spread over all Europe: France, Germany, UK, Spain, Italy, Netherlands, Belgium and Switzerland. The future Trans-European interoperable high-speed rail network will be a major infrastructure of the European continent.

Basic principles of high-speed rail

Whilst the Japanese Railways had implemented high-speed rail services at 200 km/h in 1964, it was in 1967 that French Railways began studies into the concept of very high-speed rail at 300 km/h and more. First results emerged in 1970 with the proposal to build a new line between Paris and Lyon on the basis of the following three basic principles: new line dedicated exclusively to passenger traffic, compatibility with the existing network and operations based on greater frequency and much shorter travel times.

New line dedicated exclusively to passenger traffic

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The following advantages are associated with this option:

  • Substantial reductions in the cost of infrastructure by virtue of steeper gradients, cutting the number and size of the infrastructures especially tunnels and viaducts and ensuring the straightest possible alignment, thus shortening the length of new line and reducing the corresponding journey times.
  • Increasing the capacity of the new line through uniformity in the speed of the trains.
  • Releasing substantial capacity on existing conventional lines to the benefit of freight traffic.

Compatibility with the existing network

By ensuring compatibility with the existing network, HS trains may continue their journey over classic lines and serve city centres thus offering full territorial access to the new network.


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Operations based on high frequency and short journey times

A high-speed system based on the principle of significantly more frequent services and reductions in journey times constitutes a totally new departure for the travelling public. The sudden upsurge in traffic recorded may be ascribed to this phenomenon.

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Economic Modeling: Demand forecast, Rail simula­tion & Internal Rate of Return

In view of their economic, social, financial and technical importance, major high-speed railway projects require extensive studies taking their specific natures into account. Evaluation of a large railway project is divided into four major sections:

  • ENGINEERING. Estimation of investments costs based on experience and market knowledge,
  • DEMAND. Estimation of future traffic and revenues based on traffic forecast models,
  • OFFER. Simulation of railway operation costs based on simulation models,
  • ECONOMY. Estimation of economic profitability, socioeconomic and environmental balance.

Knowledge of revenues, operating expenditure, investments and scheduling, makes it possible to calculate the internal rate of return. The internal rate of return shows the total economical impact of the project. It depends on the updated difference between the earnings from the traffic and the operating costs related to the initial investment. IRR is calculated using the discounting principle.


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The socioeconomic rate of return takes into account the advantages of the project for the entire national community, such as advantages to railways companies, time savings for passengers, net losses of other transportation operators, net benefit to the State, reduction of road congestion, and impact on economic activity in regions related to the project. Environmental impacts are estimated through studies. Impacts on the environment are very detailed, balancing for instance the energy required to build the infrastructure with the energy saved by the passengers shifting from air to rail.

Discounting principle

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To take account of the fact that monetary flows in year j will not have the same value at the time they occur as they have today, it is necessary to project forward into the future and for this the discounting method is applied. This consists of transforming all the flows staggered from year 0 to year n into equivalent flows for a given year.

The equivalent for a given year (year 0 for example) of sum Sj appearing in year j is shown as:

where a is the discount rate.

The two main economic indicators used are Net Present Value (discounted profits) calculated at a specified rate and on the date when the project is implemented and internal rate of return IRR attached to the project, i.e. the rate that cancels the net discounted profit. IRR is dependent on the date on which the investment is placed in service but it is independent of the discount year. IRR does not take account of inflation and thus measures the intrinsic value of the project. Compared to the real rate of interest on the market excluding inflation, it shows the margin that should be released for the promoter of the project as against the risks he incurs in its implementation.

Finally, as shown in the diagram, for the first HSR line build and operated in France, South-East TGV, IRR has been 15% when Social rate of return reached nearly 30%. These results are very close to what was expected in the first studies at the end of the sixties. Others TGV projects in France have been less economically profitable but socially still very attractive.

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New Financial Business Model: Public Private Partnership

In order to promote the development of High Speed Rail, European Law requires that Rail Infrastructures and Operation must be split as shown in the following diagram. Infrastructure construction maintenance and management could be done by a private company. Fees must be paid by the Operator to the Owner of the Infrastructure. Estimation of future traffic indicates future earnings, making it possible to calculate the economic advantages of the new line. Future traffic is estimated by econometric models explaining the passengers’ choice of transport mode.

Railway operation is estimated by models coherent with the future traffic projections. Simulation of operation provides operating costs, calculates rolling stock, and proposes timetables.


Private Partnerships PPP: Two Main Types of Contracts

Management contract

  • Government pays a private operator to manage the facility.
  • The operational risk remains with the public authorities.

Lease contract

  • The public sector leases the assets to a private operator for a fee.
  • The private operator takes on the operational risk.

In the frame of a concession, a private entity takes over the management of a state-owned enterprise for a given period during which it also assumes significant investment risk.

Various types of concessions are foreseeable for rail projects as described in the above diagram.

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PPP are presently under development in many projects around the World, especially in the Rail industry. The next figure presents the Net Present Value of a Railway Project in Asia under different assumptions of the level of Private money invested in the Project. The equilibrium between Private and Public money is reached when the Private money is at 30% of the total investment. More Private money leads to a situation where the Project is not privately profitable even if still publicly profitable.


To conclude, High Speed Rail is a success when projects are carefully studied, designed, build and operated. Engineering is still at the root of all major transportation projects, but marketing must not be neglected and Finance Engineering is the tool to select the best projects. ■




















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