Are high speed rail projects a good or bad deal? // Or mainly poorly researched investments?

Here is a short excerpt about rail project due diligence from the files of The Economist. They published this investor alert back in 2012. I am recirculating it in case you missed it.

The theory is that …”new-build rail projects are horribly likely to come in way over budget and to be used much less than expected.”

Their researchers discovered a 2009 paper by Bent Flyvbjerg of Oxford’s Saïd Business School entitled “Survival of the Unfittest: Why the worst infrastructure gets built—and what we can do about it”. That paper presents data on predicted and actual costs and ridership for 58 rail projects around the world.

On average, these rail project costs ended up 50% above predictions, and the ridership usage was 50% under.

Due diligence!

What due diligence?

For many of these complex rail projects—for example the much delayed Brazil bullet train — require precision engineering. The Channel Tunnel linking Britain and the European mainland, and the Great Belt Rail Tunnel linking two Danish islands were this type of complex project. Both of these ended up costing around double the initial budget.

AND… initial revenues did not hit the promised targets suggests the research.

In the case of the Channel Tunnel, the due diligence overlooked the competitive response. The English Channel ferry operators reduced their unit costs by modernizing their boat fleets and won the initial price wars.

The poor revenue oversight might reflect the use of too many engineers for the initial competition due diligence and too few economists.

http://www.economist.com/blogs/americasview/2012/08/high-speed-rail-brazil

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