Ohio 3C Quick Start
Passenger Rail Service
Mario Halasa Sam Hinkle
Mike Shields Alex Asser
Economics of the Public Sector, December 10, 2012
Background
On January 28, 2010, the Federal Railroad Administration (FRA) announced
that it had selected Ohio’s Cleveland-Columbus-Dayton-Cincinnati corridor, the 3C
Quick Start Service, to receive $400 million in American Recovery and Reinvestment
Act (ARRA) funds. This Federal funding would cover 100% of capital investments
needed to implement the new service. Because the Kasich administration attempted
to receive these earmarked funds and reallocate them to other spending, Ohio has
lost the grant, and it remains unclear how a future rail project would be funded.
However, because attempts to implement the project have been ongoing since the
1970’s, this paper will take the view that a 3C Corridor start-up would be publicly
funded and would cost approximately $400 million in its current inception. Thus,
our analysis will focus on the social benefit of the project, to determine first whether
the service would create significant external benefits for parties not using the train,
and if so, whether these benefits justify its cost to taxpayers. The analysis will
consider both equity and efficiency, with efficiency considerations including
reduced auto commute times, emissions and pollution reduction, and the
agglomeration affect on jobs within the region. (ORDC 2010 p.7)
The Proposal
Plans for dedicated passenger rail service in Ohio date to 1975, when the Ohio
General Assembly established the Ohio Rail Transportation Authority, charged with
the creation of a statewide passenger rail service plan (ORDC 2010 p. 3). Since then,
proposals have been made for various corridors, and discussion regarding whether
the service would utilize conventional or high speed trains remains unsettled. The
latest proposal, the 3-C Quick Start Plan, would link Cleveland, Columbus, and
Cincinnati, via Dayton, using conventional rail service in order to reduce start-up
capital costs by sharing existing rail with freight trains. This network would form
the main artery of the Ohio Hub, later expanding to comprise subsequent links to
other Ohio cities (including Akron) and connections to a larger Midwest network, as
well as to the East coast via existing Amtrak line. Not on the table at this time, due
to lack of interest by current Ohio Governor John Kasich, this project is nearly four
decades in the making, and is likely to see a resurgence in the future. This analysis
will focus on the most recent 3C proposal, and figures associated with it, in the
context of the Ohio Hub network.
Whereas estimates have indicated that the $400 million federal grant
previously earmarked for the project would cover start-up for the 3-C line, costs for
the Ohio Hub network as a whole range from about $4 billion for conventional
service, to $4.9 billion for high-speed service, exceeding ninety miles per hour.
While this paper will consider the cost/benefit analysis of the 3-C line, it is
important to note that the benefits accruing from the line are contingent on the
future development of the broader Ohio Hub network, so the larger costs associated
with that project cannot be ignored.
Because market decisions are made at the margin, it is necessary to define a
“unit” of passenger rail line and assess, based on its msc/msb ratio, how many units
constitute an efficient level for this market. Rail service is a market in which
network externalities play a major role in determining value. Adding an additional
mile of track for instance on a line connecting Cleveland adds little value if the line
falls short of Columbus but leaves us a mile further south into a cornfield in Holmes
County. Due to this specific nature of rail service, it makes sense to regard the 3-C as
a single unit within the context of the larger network of existing and proposed rail
projects. Marginal social benefit will thus be assessed on this basis. The
determination of whether the 3-C line meets efficiency criteria will hinge on
whether it produces at least $400 million in marginal social benefit.
Economic Impact Claims
The Ohio Hub Economic Impact Study, completed by ORDC in June 2007,
makes significant but likely inflated claims regarding the projected impact of the
project. According to ORDC, The Ohio Hub would create 16,700 permanent jobs,
generate 320,000 overnight trips to Ohio each year, creating an $80 million impact
on state tourism, and raise the region’s income by over $1 billion over the life of the
project (ORDC 2010 p. 7).
While it is safe to say that these figures place an upper bound on the potential
impact of the project, unfortunately they appear highly exaggerated. A
Massachusetts study found that the economic impact of a $1 billion expenditure on
mass transit created some 19,800 jobs, in addition to induced spending multiplier
effects. The Ohio Hub Study itself cites projected operating expenses including train
crews, train and track maintenance, insurance, sales and marketing, station costs,
administrative costs, on-board services, and the operation of a feeder bus service.
We can begin with these to deconstruct the claims. Train crews are a given, and we
may assume that, until a rail network becomes fast enough and covers sufficient
distances to substitute for air travel, those persons using the train will primarily be
substituting away from automobile travel. Thus, most crew positions will in fact be
new jobs, not ones redistributed from elsewhere. As far as other categories, it is
likely that these jobs will be significantly redistributive in nature, not new. Taking
maintenance jobs for example, as riders substitute away from auto travel, train
maintenance crews will replace auto mechanics, and rail crews will replace road
construction workers. On down the line, on-board service workers will replace
restaurant workers along the I-71 highway that currently links these cities. While
some new job creation is likely to occur, and in fact new regional income of at least
$400 million must occur in the context of the federal grant, to balance the new
spending in the region, the fact remains that most jobs associated with the project
would not be new, but redistributed from other sectors. Thus the 16,700 jobs figure
grossly overstates what is likely a net positive impact, but of a much smaller
magnitude.
Increased tourism claims are an important aspect of the economic impact
assessment, because tourism functions in the same way as exports, bringing in
outside dollars to increase income within the regional economy. The Ohio Hub
Study projects that passenger rail service would generate 320,000 overnight trips to
Ohio and $80 million annually (ORDC, 2007). There are some important
contingencies to this figure. First, like the employment impact, some tourism may
be redistributive, not new, as tourists who would travel to Ohio regardless opt for
rail transportation in lieu of driving or taking the bus. Also, just as a person could
get on a train to travel to Ohio, Ohioans could use the train to visit other regions,
thus diminishing net regional exports as they spent their dollars elsewhere. This
latter effect is likely to be minimal for the Ohio Hub itself, since Ohio has relatively
more tourist destinations than have bordering regions (consider Cleveland’s world
renowned art museum and symphony orchestra, the Rock and Roll Hall of Fame,
and moving outside the 3C network as the Ohio Hub expands, Cedar Point). Yet, as
the network links to the Midwest Hub and Amtrak destinations eastbound, the
likelihood of Ohioans travelling to Chicago or New York seems greater than the
reverse.
Because so many mitigating factors could significantly reduce the projected
operating impact of the passenger line, it is useful to consider income added to the
region in terms of the initial infusion of 400 million federal dollars, which is off the
table now, but remains a possibility going forward, and the likely multiplier effect
accruing from this. Given the $400 million initial infusion, in order to achieve the $1
billion in added regional income as claimed, passenger rail service would need to
have a multiplier of 2.5. While this figure is within the range of plausibility, its
magnitude arouses skepticism, as it would mark rail service in Ohio as a major
regional export industry, having a significantly higher multiplier than 1, which
would indicate regional sustainability without import or export dollars. Finally,
even if the figures were true, the Ohio Rail Development Commission which
published them points out that this alone would not suffice to justify its cost. To do
so, not only would the project need to generate substantial new income for the
region, but this income would need to exceed the income generation of alternative
uses to which the funds might be spent (ORDC, 2007).
Finally, to justify the project as a public, rather than private initiative, we
would have to show a marginal social benefit accruing as a positive externality to
taxpayers not directly involved in a transaction to purchase or sell passenger rail
service. Direct earnings effects do not satisfy this requirement, since individuals
earning a salary as railroad workers are involved in a transaction to sell their
services to the railroad, but multipliers do. They constitute one of the various social
benefits considered here.
Efficiency: Congestion and Environmental Impact
Taking the $400 million figure which represents the most recent federal
funding strategy, in order to justify the project as a public initiative, it is necessary
to show at least $400 million in public benefits, accruing as positive externalities to
persons not involved in transactions to buy or sell rail service. Public benefits fall
under a number of categories, including emissions reductions, reduced traffic
congestion on roadways, and the conservation of fossil fuels.
The construction and development of the 3C rail could have a number of
efficiency impacts associated with it. The first, and maybe the most obvious impact
of rail service as an alternative to roadway travel is reduced traffic congestion.
According to the Ohio Rail Developmental Commission (ORDC) traffic congestion
costs Americans 4.5 billion hours in delays, resulting in $78 billion in lost monetary
value every year (ODOT 2005). The construction of the 3C line could serve about 6.7
million people in Ohio, who live in close proximity to its projected corridor,
accounting for roughly 58% of the total population (TEMS 2007)). Those individuals
who would in fact use the train are not the ones considered here. The fact that a
large number of people would switch to riding the train would cause a reduction in
traffic congestion for those who continued to drive. This constitutes a social benefit.
While an exact number was not given as to how much time would actually be saved
if the 3C line were to be built, economic theory shows that there would be an
inverse relationship between ridership and traffic commute times. To show this
graphically, refer to the figure below.
Costs
C1
C2
T1
T2
Trips
The figure in red represents the benefit to drivers from people moving away from
automobile travel to train travel. On the vertical axes, note the costs decreasing
because it would be cheaper to ride the train, than to drive, resulting in a decrease
in trips traveled by car (horizontal axis) (TEMS 2007). This reduced congestion
could add value to drivers in the form of increased leisure time, and firms in the
form of reduced employee tardiness and lost hours. While exact numbers are not
known, the above-mentioned figures indicate that they could be significant.
Based on the projected number of passengers diverted from air to rail, the
Ohio Hub estimated that for each major airport, the average delays would be
reduced up to a maximum of fifteen minutes. As a result, they estimated a cost
savings for airlines of $28.13 per air trip diverted to rail (TEMS 2007). Despite
reduced air travel, ORDC projected that airlines would see a net benefit as a result of
cost savings from more efficient production and flight management.
Another environmental impact that has been associated with the Ohio Hub is
in the area of fuel savings. It was estimated that the Ohio Hub trains would use 8.2
million gallons of fuel annually, as compared to the 17.6 million gallons used by
other forms of transportation, thus resulting in a savings of 8.2 million gallons
annually (TEMS 2007). The only other form of transportation that would save a
comparable amount of fuel would be busses. However, because of the fact trains
seem to be more efficient, have cheaper ticket prices, are faster, and seem to
accommodate more people, the net fuel benefits would likely be greater for trains,
especially with increased ridership.
The final important efficiency assessment concerns the environmental
impact of emissions. For the Ohio Hub it was estimated that emissions savings
would be proportional to the number of diverted auto vehicle miles. From this the
resulting auto miles saved was divided by the estimate of emissions benefits.
Emissions benefits, put simply, equalled the dollar amount given to gasses that
directly impact the global greenhouse effect, for an end result yielding a benefit of
$0.02 per vehicle mile (TEMS 2007). This benefit multiplied by vehicle mileage
saved would yield the total emissions benefit. At approximately 500 miles, this
savings would amount to a substantial $20 per round trip from Cleveland to
Cincinnati. Because greenhouse gases appear to cause harm only once they reach a
certain concentration, it is unclear whether rural regions would reap the same
marginal benefit as would cities from a reduction in CO2 emissions. Due to concerns
such as this, not enough evidence appears available at this time to confirm the $0.02
figure or verify the extent to which individuals in different locales would benefit.
While correcting measurement concerns might yield a clearer marginal social
benefit assessment, we find insufficient evidence at this time to justify the public
funding of the 3-C line on efficiency grounds.
Equity
The “3C” rail line’s construction could potentially benefit and attract lower
income riders. At an anticipated ticket price of $80 per round trip ride from
Cleveland to Cincinnati, the 3-C rail is significantly lower, as compared with airlines
($312), and slightly lower than Amtrak service ($99) which, currently lacking a
direct route, takes 15 hours and a layover in Chicago. At a similar price to
Greyhound bus service ($74), it could prove a more desirable option due to likely
amenities such as traditional restrooms, larger seating and the ability to move
around the compartment. At an estimated $.24 to $.37 per trip mile, the cost is
slightly higher than fuel costs for most cars. If we were to factor in vehicle
maintenance and replacement costs, for example, using the IRS figure of $.555 per
mile, then the 3-C would emerge as a far more cost effective option. However,
because, unless prospective riders were to forego automobile ownership altogether,
they would face many of these costs anyway, it makes sense to use fuel cost alone as
the comparison point. Thus, the line might prove a feasible option for low income
riders lacking the means for car ownership, but for those who do own cars, no
substantial savings would be realized.
Transportation Type
Ticket Price:
“3C” Rail Line:
Greyhound Bus:
Megabus:
Airline:
Amrak Train:
About $80.001
$74.002
N/A
$312.003
$99.004
Endorsing the line’s construction, Transport Politics captures the enthusiasm
of some lower income prospective riders, noting that without anticipated
government funding, fares would likely rise by about $35 per trip. According to The
Ohio Department of Transportation, more than 220,000 college students are within
10 miles of the eight proposed train stations. Existing bus routes in major cities and
commuter rail proposals within the Ohio Hub plan would make intercity rail line
stations accessible for the majority of them. ODOT notes that “ridership rates in
1
Ohio Rail Development Commission (2007).
https://www.greyhound.com/farefinder/step2.aspx Round Trip Fare for same day Online booking,
December 10, 2012
3 Delta, airfare for December 20, 2012, returning December 21, 2012. Retrieved from
www.kayak.com/flights?k_adgroup=976&kw=Cheap+Flights+to+Cincinnati&k_clickid=_kenshoo_clic
kid_&k_affcode=312028&origin=Akron%2FCanton%2C+OH+-+Akron%2FCanton++(CAK)&ci=8035272209&origincode=CAK&k_prof=3&k_camp=98&destinationcode=CVG&destination=Cincinnati%2C+
OH+-+Cinci.%2FN.+Kentucky+(CVG)#/CAK-CVG/2012-12-20/2012-12-21 December 10, 2012.
4 Amtrak, December 10, 2012 same day fare, returning December 12.
http://tickets.amtrak.com/itd/amtrak Retrieved December 10, 2012. Note: This trip takes routes
through Chicago and takes 15 hours.
2
other states show this high concentration of colleges and universities will be an
important component in the success of the service” ("3c "Quick start" passenger
rail"). College students can be broadly classified as a lower income riders, and this
affordable option could increase transportation demand for students, although this
impact is likely to be negligible because, barring a rider subsidy not in the current
proposal, the “3c” is not in fact the lowest cost option.
The “3c” rail line might not only interest low income students, but also low
income families. The Ohio Department of Transportation asserts that, “By building a
foundation for economic competitiveness in some of our state’s most economicallydistressed cities. These urban cores are Ohio’s centers of commerce, education and
research, all of which can be better connected to a ready and mobile workforce.”
("3c "Quick start" passenger rail") The claim, analyzed below, is that the 3-C line
could develop a network to make accessible a broader range of work opportunities
(Freemark). Unfortunately, the model does not bear out the claim.
While the 3-C rail service could prove an attractive option to similar cost
alternatives including driving and using Greyhound bus service, it would do so only
at the price of a considerable public tax lay-out, which other transportation options
do not entail (Amtrak does receive a subsidy). Given that most low income people
pay taxes, this makes the 3-C line more, not less expensive than these alternatives.
Also, because high income people are more likely to choose the 3-C over other
options based on non-price preferences, the system fails on equity considerations.
If, like Amtrak and many existing commuter rail networks, the 3-C saw higher
ridership rates among moderate and high income people, it would fail not only a
horizontal equity test, but would in fact be regressive in nature, with lower income
persons funding ridership for those of greater means.
Agglomeration Effects
As a transportation project, one of the main avenues through which the ‘3C’
Corridor might have an economic impact would be by facilitating transportation
between cities. These agglomeration effects are considered last because they have
both efficiency and equity implications. In order to access the possible economic
effects of this change in transportation costs, it is useful to look at other high speed
rail lines and the effects that they had on the economies of the regions they
connected. Vickerman (1997) reviews a number of high speed rail constructions in
Europe, and identifies a number of effects; primarily, he hypothesizes that high
speed rail increased the concentration of economic activity, or agglomeration, in
Europe’s major urban areas, rather than improving economic activity in ancillary
regions. De Rus (2012) notes these agglomeration effects high speed rail might even
exasperate regional inequality in this way, although he mentions that the exact
effect is uncertain and dependent on many other circumstances.
Agglomeration effects from the ‘3C’ Corridor might have possible
productivity benefits, however, even to firms that don’t directly use the rail line.
Graham and Van Dender (2010) mention that possible benefits from agglomeration
include “improved opportunities for labour market pooling, increased scope for
industry specialization, greater efficiency in knowledge or technology sharing, and
improved opportunities for input-output association”, and that overall this results in
lower costs and higher productivity for firms. These benefits, and their relationship
with productivity, have only somewhat recently started to be studied empirically
however, so there are only a few studies for evidence of these effects.
The measure generally used for analyzing agglomeration effects is the
elasticity of productivity with respect to agglomeration – but as Graham and Van
Dender (2010) note, finding a way to empirically estimate this measure is difficult
for a number of reasons such as endogeneity and the nonlinearity of agglomeration
effects. For the impact of transportation in this sector, they specifically use labor
market accessibility as their instrument, since transportation would likely impact
agglomeration through this avenue most directly. While Graham (2007) estimates
these elasticity using firm-level data from the United Kingdom, finding an elasticity
of .119 for the whole economy of the U.K., he mentions that estimates such as these
cannot fully distinguish the effect of transportation from other sources.
Another issue with the potential benefits from agglomeration as a result of
transportation benefit is that they might only really be present with intra-regional,
rather than inter-regional, transportation investments. Graham and Melo (2011)
find that there is only a small of negligible productivity benefit from inter-regional
high-speed rail, even when the decrease in transportation speeds between regions
is as high as 25 or 50 percent. Thus, if these benefits were to be found at all in the
Ohio Hub project, they would likely be found in the more local commuter rail lines
rather than the longer distance ‘3C’ rail corridor. Since this is the case and the fact
that literature on these benefits is still very much in development, the construction
of the ‘3C’ line cannot be justified by agglomeration benefits.
Conclusions
Given large infrastructure costs associated with start-up, we find insufficient
grounds to justify the public funding of the 3-C in terms of either economic
efficiency or equity. Economic impact claims conflate total income and jobs
projections with new income and jobs, the key impact factor. Efficiency assessments
concerning congestion, emissions, and fossil fuel conservation point to legitimate
social benefits, but reliable measures of these are not currently available. Without a
rider subsidy, which is not part of the most recent plan, equity considerations do not
support the construction of the line given similar cost per trip alternatives which do
not entail tax-payer funding. Agglomeration effects could have both equity and
efficiency implications, but the preponderance of literature indicates that, rather
than resulting in increased access to better wage jobs, or increased productivity, the
line would likelier result simply in the redistribution of production to concentrated
regions. While outside considerations, including the possible future development of
a nationwide high-speed network, the implementation of a low-income rider
subsidy, or a population growth induced increase in congestion or pollution could
change the outlook for passenger rail in the future, based on the data and models
available, we find insufficient evidence to support the 3-C rail line as a public
venture at this time.
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