Welfare costs of coordinated infrastructure investments: the case of competing transport modes

ABSTRACT

Infrastructure investments such as in rail and road networks are often undertaken by different parties that have differing degrees of vertical integration into downstream rolling stock (i.e. train and truck) investments. We analyse the impacts on freight transport and welfare outcomes of different institutional approaches to investment coordination across multiple freight modes (rail and road) in the presence of upstream and downstream cost-reducing investments in each mode. We show that welfare is reduced when a profit-maximising transport infrastructure investor correctly anticipates the advent of a future competing infrastructure. This is because myopically failing to anticipate future competition results in welfare-enhancing over-investment. We further show that presciently anticipating inter-modal competition is not solely responsible for reduced welfare, with additional vertical and horizontal coordination issues also at work. Our model can be applied to a range of applications that deal with multiple competing infrastructure investments.

KEYWORDS:

• Infrastructure investment
• investment coordination
• network competition
• transport

JEL Codes:

• H44
• H54
• L92
• P41
• R42

Acknowledgment

The authors gratefully acknowledge helpful comments from seminar and workshop participants at GEN and Victoria University of Wellington, the journal's editors, and an anonymous referee. They also thank Athene Laws for assistance on a related paper presented at the third ATE Symposium. They acknowledge, with thanks, funding from the Ministry of Business, Innovation and Employment through the Resilient Urban Futures programme. The authors remain solely responsible for the contents.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. NZPC (2012) describes the existing institutional structures – including differing objectives – of road, rail and other infrastructure providers. While the New Zealand Railways Corporation (KiwiRail) is an SOE, it has mixed (profit plus public good) objectives. Rail is expected to deliver a return on capital invested while road investments are charged on a pay-as-you-go (PAYGO) basis. NZPC highlights the existing lack of coordination across modes in terms of investment decisions, while discussing the governance and information difficulties that may arise with greater coordination.

2. An exception is the unpublished PhD thesis of Hyun Chan Kim (2014) who investigates substitutability issues in New Zealand freight using revealed and stated preference data of New Zealand shippers.

3. At the margin, the opposite investment timing may currently sometimes be the case, with (uncoordinated) road investments being taken myopically in advance of rail investments. Nevertheless, the analytical issues are comparable.

4. This raises questions about the welfare implications of vertical separation between infrastructure and rolling stock investments, such as in the UK.

Additional information

Funding

Ministry of Business, Innovation and Employment.