Despite years of planning, the Netherlands’ high-speed railways project has demonstrated that the project appraisal process is of the utmost importance.
After 20 years of calculating, designing and building, the Dutch celebrated the inauguration of their high-speed railways in December 2012.
This railway links the capital of Amsterdam with domestic port cities such as Rotterdam and Antwerp. This line is then connected to the international ports including Brussels and Paris.
The international connection between Amsterdam and Paris is very successful, with full trains and generating good revenues. It is operated by Thalys, a joint venture of the French, German and Belgian state railways.
Despite the success of the international connection, domestic services between Amsterdam, Rotterdam and Antwerp are, however, a major failure. Passenger figures are less than 50% of the number expected.
Trains are unreliable in terms of safety and time, with an absolute low point in December 2012 and January 2013 when it became clear that the brand-new trains could never be operated securely and reliably and had to be taken out of service. This posed tremendous financial problems for the operator NS HiSpeed – an independent subsidiary of Netherlands Railways.
Ultimately, the government stepped in and saved the NS HiSpeed three times because of fears that its problems would also drag the operation of its mother company down – and take the regular railway network along with it. In addition, the construction had a budget overrun of 3.8 billion (190 billion baht), with total construction costs of 7.1 billion (355 billion baht).
How can this misfortune be explained? A closer look shows both the project appraisal and the business model lacked precision in many aspects.
The project appraisal took more than 10 years to complete, and several versions were proposed by the government.
The first version, started in 1987, was severely criticised by politicians, the media and the public. In the end, the studies and planning procedures were rejected by parliament.
The three most important grounds for rejection were that (1) the government could not properly explain why a high-speed train was necessary, (2) the government failed to properly investigate alternative options such as upgrading the existing network for higher speeds and higher capacity, and (3) the government had been overly optimistic about the possibilities of public-private partnerships in financing the project while market parties indicated a high investment risk in high-speed railways.
Dutch law states that all public project appraisals and planning procedures must be open for the public to view related information, and can be challenged at the Council of State by the stakeholders if they have reasonable arguments against the plans.
This resulted in a detailed investigation into the first version of the government’s high-speed train proposal.
After the first version of the proposal was rejected, later versions of the feasibility study became more realistic, showing a steep increase of the expected costs and a worsening of the net present value and cost-benefit ratio.
Ultimately, the decision to build was based on a political compromise, not on a sound weighing of options.
The financial troubles later on demonstrated how it can hurt to ignore the negative outcomes of feasibility studies.
As for the business model, the government expected that public-private partnership would solve most of the financial constraints.
However, the market was much more cautious and saw high risks in building and running the high-speed trains. In the end, the government decided to partially bear the risks of the construction by funding the railway track.
This placed a huge burden on the government budget.
NS HiSpeed, a newly created subsidiary of the state-owned NS, offered to operate a full-revenue service for 160 million per year, 60 million more than the competing offers from the market.
It tried to offset the high concession cost by charging high fees and buying very cheap trains.
However, the high ticket prices kept passengers away and the cheap trains, which were delivered years too late, turned out to be riddled with construction and operation failures.
They were grounded after just a few weeks of service and have never been in service again. The case of high-speed railways in the Netherlands has taught us that the accuracy of the project appraisal and feasibility studies need to be taken seriously.
Optimism is not a good enough reason to embark on such an expensive and risky endeavour.
One possible outcome from the study may suggest an upgrade of the existing network given the cost of construction of new connections and the demand for the service.
In addition, public-private partnerships in such projects may work, but only if the market-sounding process is carried out seriously.
As the Dutch case showed, when markets think that the risks are too high, they could very well be right. The government can negate some of those risks, but in the end society will have to pay a very high price.
Lasse Gerritsis is associate professor at the department of Public Administration, Erasmus University Rotterdam, the Netherlands. He specialises in urban and infrastructure planning. The article was presented at a recent seminar organised by Thailand Development Research Institute.
First published: Bangkok Post, March 1, 2014