Financial Comparison

The capital costs associated with the HSR range from $42 billion to $60.7 billion. The capital costs associated with the Hyperloop range from $52.2 billion to $111.8 billion. A comparison of the upfront costs of each system is not sufficient to suggest a preferable system. The ongoing costs involved in running the system and the potential annual revenue of both systems must also be considered. The payback period and net present values (NPV) of the systems over a given timeline will provide a better comparative tool.

The total maintenance and operation cost of the HSR over a 50-year timeline is projected to be roughly $96 billion for the Sydney-Canberra-Melbourne alignment (AECOM, 2013).

Approximately 50% of this cost is associated with traction power supply; hence, as the Hyperloop is powered by solar arrays, its operational costs are substantially lower. Setting solar array maintenance cost to $400 thousand per year (Vella, 2016) and assuming all other operational and maintenance costs are equivalent for both systems, the Hyperloop is projected to have a maintenance and operations cost of $48 billion over a 50-year timeline. Assuming the maintenance and operations costs are consistent, this equates to a cost of $1.9 billion per year for HSR and $0.95 billion per year for the Hyperloop.

The HSR Phase 2 study suggests an average one-way ticket price of $85 (AECOM, 2013), so this will be assumed as the ticket price for all HSR journeys, regardless of journey distance.

Using the customer markets outlined in Section 2.2, the annual revenue of each service can then be estimated. The Hyperloop offers journey durations approximately one-third that of the time over the same distance taken by the HSR. Given the accessibility of the route it will also be faster than airplane flights, so it is anticipated that the ticket prices will be greater for the Hyperloop. In light of the greater performance, the Hyperloop ticket prices will be approximately 50% greater than HSR. This equates to an average ticket price of $125. In practice, there would be a variety of ticket prices for both systems depending on the route duration and journey type; however, for a financial analysis, average ticket prices will suffice.

For the financial assessment, the following assumptions were made:

1. All capital expenditure costs occur before the operation of the transportation lines, such that the total cost of the system occurs in a lump sum payment in year zero

2. A discount rate of 4%, as suggested in the Phase 2 study (AECOM, 2013) 3. Consistent, annual maintenance and operation costs

4. No asset renewal

5. Expected passenger demand is met in the first year and is satisfied in all operational years

6. Static ticket prices, independent of journey type/duration or year.

74 Assumptions 3 and 4 result in consistent annual expenses and Assumptions 5 and 6 result in consistent annual revenue. The NPV and payback period are primarily being used as a relative, comparison tool, so these Assumptions are acceptable. Table 26 provides a summary of the financial parameters.

Table 26: Financial Summary

System High Speed Rail Hyperloop

Initial Investment 46.7 billion AUD 74.5 billion AUD Annual Revenue 1.65 billion AUD 2.65 billion AUD Annual Expenses 1.90 billion AUD 0.99 billion AUD Annual Net Profit -0.25 billion AUD 1.69 billion AUD

Discount Rate 4% 4%

An implication of this analysis is that the HSR system is not predicted to generate positive cash flow in the 50-year timeline; however, the HSR system proposed by AECOM is predicted to generate annual profit after approximately thirty years (AECOM, 2013). The reason for this discrepancy is that my system does not incorporate the Brisbane-Sydney alignment which will provide significant, additional revenue. The Hyperloop annual revenue would also increase with the inclusion of the Brisbane-Sydney market, so the financial comparison remains valid.

It is worth noting that only one of the Japanese National Railways’ eight Shinkansen high-speed routes (the Tokyo-Osaka line) generates enough revenue to cover the costs of operation and maintenance. Further, this line transports 140 million passengers per year, which represents far more passengers than the Australian line is envisaged to carry. Therefore, it is not surprising that the Australian HSR will not generate a net annual profit (The Economist, 2016).

For the purpose of a direct comparison, the future value of the systems was evaluated. This evaluation assumed that the value of money does not vary with time and the annual net profit is constant for the entire duration of the project.

Figure 39 displays the future values of the HSR and Hyperloop systems, respectively.

Figure 39: Future value of HSR and the Hyperloop

75 Applying the future value model, as per Figure 39, The Hyperloop project is predicted to pay back the initial investment in roughly 44 years, whereas it is predicted that the initial expenditure on the HSR project will never be recovered. The maintenance and operational cost of HSR exceeds the annual commuter revenue, so there is a net annual loss each year over this 50-year timeline. Hyperloop generates a net profit because of the lower maintenance and operational costs and the higher commuter volume and ticket prices.

Although payback period is a frequently used metric to gauge a project’s success, it fails to account for the time value of money. Hence, for long-term investments, like these projects, there is a greater potential for inaccuracy over time and the payback period will not necessarily provide an accurate portrayal of project profitability. For this reason, it is important to consider the NPV of both projects with time. Money in the present is worth more than the same amount in the future because of inflation and the potential earnings that could be made using the money during the intervening time. The NPV accounts for the time value of money and is therefore a more accurate metric for determining a project’s feasibility over a long timeline. If a project has a positive NPV during its lifetime then the project is profitable (Investopedia, 2016).

The NPV of HSR and the Hyperloop are displayed in Figure 40.

Figure 40: Net Present Value of HSR and the Hyperloop

The NPV of HSR plateaus around negative $47.4 billion and the NPV of Hyperloop plateaus around negative $69 billion. Although neither project is predicted to generate a net, lifetime profit, the NPV of the Hyperloop is substantially less than that of the HSR system and, therefore, from an investment point of view, the HSR is the preferable system.

The ticket price for the Hyperloop system was set rather arbitrarily, so a sensitivity analysis was conducted and the future value and net present value of the Hyperloop system is shown in Figure 41 and 42 below. The same discount rate of 4% was used for every NPV model.

76 Figure 41: Hyperloop Future Value (Ticket Price Sensitivity)

Figure 42: Hyperloop Net Present Value (Ticket Price Sensitivity)

Setting Hyperloop ticket prices to the same as the HSR, the Hyperloop will still make a net annual profit due to the lower operational costs. The ticket price has some effect on the NPV of the Hyperloop system; however, it is insufficient to overcome the significant NPV gap between the two systems and, based on this metric, the HSR system is still preferable.

It is important to reiterate that the NPV and payback periods determined in this study are not representative of the actual values of the projects, due to the extent and degree of the assumptions made throughout this analysis. There are a number of other financial factors that need to be considered in a large-scale transportation system’s construction. For instance, current Australian Prime Minister, Malcolm Turnbull proposed that value capture could finance the HSR system (Karp, 2016). Value capture is a form of financing that recovers some of the value that public infrastructure generates for private landowners through land taxes or a levy on

77 developers of new properties. The two transportation systems would connect rural areas to urban access corridors, so there could be a substantial amount of value capture to help fund the HSR or Hyperloop. Considerations concerning value capture, and other sensitive forms of revenue, were beyond the scope of this study.

Although the financial analyses were not comprehensive, they serve as a useful comparative metric in this instance as the assumptions were consistent for both systems. A more thorough and detailed cost analysis is suggested for both of these systems to determine actual project profitability.

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