The Economic Feasibility Study for Introduction of Urban Transit Maglev Train

Proceedings of the Eastern Asia Society for Transportation Studies, Vol.6, 2007

THE ECONOMIC FEASIBILITY STUDY FOR INTRODUCTION OF URBAN TRANSIT MAGLEV TRAIN

BAEK, Joo Hyun SUL, You Jin Ph. D. Candidate Master’s Course School of Civil, Urban and Geosystems School of Civil, Urban and Geosystems Engineering Engineering Seoul National University Seoul National University 56-1 Sillim-dong, Gwanak-gu, Seoul 56-1 Sillim-dong, Gwanak-gu, Seoul Republic of Korea Republic of Korea Fax: +82-2-889-0032 Fax: +82-2-889-0032 E-mail: [email protected] E-mail: [email protected]

LIM, Tae Hoon RHEE, Sung Mo Master’s Course Professor School of Civil, Urban and Geosystems School of Civil, Urban and Geosystems Engineering Engineering Seoul National University Seoul National University 56-1 Sillim-dong, Gwanak-gu, Seoul 56-1 Sillim-dong, Gwanak-gu, Seoul Republic of Korea Republic of Korea Fax: +82-2-889-0032 Fax: +82-2-889-0032 E-mail: [email protected] E-mail: [email protected]

Abstract : It is generally acknowledged that economic feasibility study should be preceded when introducing and developing new transit system such as urban transit maglev train. Urban transit maglev train recently known for technology is recognized for potential superiority of environment friendship and maintenance and is selected for one of national projects. Although maglev train is commercially operated at Nagoya Tobu-kyuro line in Japan, it is expected that there are some technical problem for maglev train to alternate the existing LRT market. However, it is expected that economic ripple effect would be great when some problems is settled. Since it is required enormous budget to promote practical-use plan of urban transit maglev train, it is necessary to precede economic feasibility study to attain the reasonability of the project. In this study, the scales of domestic & international market of maglev train are analyzed and the methodology of economic analysis is classified.

Key Words: urban transit maglev train, inter industry analysis, economic feasibility, economic ripple-effect

1. INTRODUCTION

Recently, local autonomous entities in Korea are tend to introduce LRT ( light rail transit) in the limelight more than heavy rail transit. Ministry of construction & transportation has included practical-use plan of urban transit maglev train as '10 major policies of nation', and it reflects attitude of government for reorganization of transportation system.

Magnetic levitation vehicle, or maglev, is a form of transportation that suspends, guides and propels vehicles via electromagnetic force. This type of vehicle can be faster than other wheeled mass transit systems such as heavy rail transit, potentially reaching velocities comparable to turboprop and jet aircraft.

Proceedings of the Eastern Asia Society for Transportation Studies, Vol.6, 2007

If scientific and economic barriers and limitations which have hindered the widespread adoption of the technology are overcome, a lot of cities in Asia could be great markets of magnetic levitation vehicle. The projects of reorganization of transportation system have also been under consideration for about 500 lanes in many countries in Oceania, Southern America and North America.

In this study, the scales of domestic & international market of maglev train are analyzed and the effects of export & import are studied. Also, economic ripple effects such as production and employment are estimated and economic feasibility study for urban transit maglev train is analyzed. In this study, it is analyzed that practical-use plan of urban transit maglev train has economic feasibility for the analysis period.

2. THEORETICAL REVIEW

2.1 Inter Industry Analysis Inter industry analysis of economics uses a matrix representation of a nation's (or a region's) economy to predict the effect of changes in one industry on others and by consumers, government, and foreign suppliers on the economy. Wassily Leontief is credited with the development of this analysis which is also called as input output analysis and multi-sectional analysis. Input-output analysis considers inter-industry relations in an economy, depicting how the output of one industry goes to another industry where it serves as an input, and thereby makes one industry dependent on another both as customer of output and as supplier of inputs. An input-output model is a specific formulation of input-output analysis. The yielding method of input coefficient, value-added coefficient for inter industry analysis and production induced coefficient are explained below.

2.1.1 Input Coefficient and Value-Added Coefficient Input coefficient identifies the percentage or the portion of the total inputs of a sector required to be purchased from another sector irrespective of the geographic origin of this purchase. Input coefficients represent direct backward linkages of an industry to other industries and constitute the "recipe" for production of that industry. Value-added coefficient identifies the percentage or the portion of the total input of a sector consumed by value-added amount. The format of inter industry index is described in Table 1.

Table 1 The format of inter industry index Middle Demand Final Input Income Total 1 2 … … n (Deduction) Production

1 x11 x12 … … x1n Y1 M1 X1 2 x21 x12 … … x2n Y2 M 2 X 2 Middle M M M M M Input M M M M M M M M M M n xn1 xn2 … … xnn Yn M n X n Value-added V1 V2 … … Vn Total Input x11 x12 … … x1n

From the table 1, input coefficient ( a11 , a21 , an1 ) is the percentage or portion of the total inputs of a sector required to be purchased from another sector and it can be attained to divide middle inputs ( x11 , x21 …xn1 ) by total inputs ( X1 ). In the same way, Value-added coefficient(v1 ) can be attained to divide value-added amount(V1 ) by total inputs( X1 ). It can be expressed as numerical formula like below. Proceedings of the Eastern Asia Society for Transportation Studies, Vol.6, 2007

xij input coefficient : aij = (1) X j

V j value-added amount : v j = (2) X j

In the input coefficient index, a summation of input coefficient and value-added amount in any industry in one row become 1. It can be expressed as numerical formula like below. n ∑aij + v j = 1 (3) i=1 ⎡a11 a12 L a1 j L a1n ⎤ ⎢ ⎥ ⎢ M M M M ⎥ input coefficient matrix A = ⎢ai1 ai2 L aij L ain ⎥ (4) ⎢ ⎥ ⎢ M M M M ⎥ ⎢ ⎥ ⎣an1 an2 L anj L ann ⎦

value-added amount V = [V1 V2 K V j K Vn ] (5)

2.1.2 Production Induced Coefficient Production induced coefficient is to identify production amount induced directly or indirectly when a unit demand is increased. It is also called as inverse matrix coefficient since inverse matrix is used when to derive results.

This equation can be expressed as an matrix

a11 X1 + a12 X 2 + K + a1n X n + Y1 − M1 = X1

M M ai1 X1 + ai2 X 2 + K + ain X n + Yi − M i = X i (6) M M

an1 X1 + an2 X 2 + K + ann X n + Yn − M n = X n where, aij : input coefficient X i : production amount of i Yi : total demand of i M i : income of i

This matrix also can be expressed as an matrix equation.

⎡a11 a12 L a1 j L a1n ⎤ ⎡ X1 ⎤ ⎡Y1 ⎤ ⎡M1 ⎤ ⎡ X1 ⎤ ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ M M ⎥ ⎢ M ⎥ ⎢ M ⎥ ⎢ M ⎥ ⎢ M ⎥ ⎢ ⎥ + - = ai1 ai2 L aij L ain ⎢ X i ⎥ ⎢Yi ⎥ ⎢M i ⎥ ⎢ X i ⎥ (7) ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ M M ⎥ ⎢ M ⎥ ⎢ M ⎥ ⎢ M ⎥ ⎢ M ⎥ ⎢a a a a ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎢ ⎥ ⎣ n1 n2 L nj L nn ⎦ ⎣X n ⎦ ⎣Yn ⎦ ⎣M n ⎦ ⎣X n ⎦

Here, A is input coefficient matrix, X is total production amount vector, Y is final demand vector and M is purchased amount vector. AX + Y − M = X (8) This matrix equation can be solved as X Proceedings of the Eastern Asia Society for Transportation Studies, Vol.6, 2007

X − AX = Y − M (I − A)X = Y − M (9) X = (I − A) −1(Y − M ) Here, (I − A)−1 matrix is called as production induced coefficient. This matrix can be expressed like below. ⎡1 0 L 0⎤ ⎢ ⎥ ⎢0 1 L 0⎥ ⎢M M M M⎥ I = ⎢ ⎥ (10) ⎢M M M M⎥ ⎢ ⎥ ⎢M M M M⎥ ⎣⎢0 0 L 1⎦⎥

2.2 Economic Index Before estimating economic feasibility, it is necessary to calculate Benefit-Cost Ratio (B/C ratio). Benefit-cost ratio is a ratio attempting to identify the relationship between the cost and benefits of a proposed project. This ratio is used to measure both quantitative and qualitative factors since sometimes benefits and costs cannot be measured exclusively in financial terms. With a particular project, ifBt /Ct ≥ 1, the project is in the status of cash inflow in the time of t. It means the investment would add value to the firm, then the project should be accepted. n B n C t t Benefit − Cost Ratio (B/C ratio) = ∑ t / ∑ t (11) t =0 (1+ r) t =0 (1+ r)

Where, Bt = present value of benefit

Ct = present value of cost t = the time of the cash flow n = the total time of the project r = the discount rate

Secondly, it is required to calculate Net Present Value. Net present value (NPV) is a standard method for the financial appraisal of long-term projects. With a particular project, if Ct is a positive value, the project is in the status of cash inflow in the time of t. It means the investment would add value to the firm, then the project should be accepted. n B n C t t Net Present Value (NPV ) = ∑ t − ∑ t (12) t =0 (1+ r) t =0 (1+ r)

Thirdly, it is necessary to calculate Internal Rate of Return (IRR). The internal rate of return (IRR) is a capital budgeting method used by firms to decide whether they should make long- term investments. A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternative investments (investing in other projects, buying bonds, even putting the money in a bank account). To find the internal rate of return, find the IRR that satisfies the following equation: n B n C t t Internal Rate of Return (IRR) subject to ∑∑t = t (13) t ==00(1+ r) t (1+ r) find R

3. METHODOLOGY

3.1 Analysis of Scale of Korea Market Proceedings of the Eastern Asia Society for Transportation Studies, Vol.6, 2007

When magnetic levitation vehicle is put to practical use, since it is expected that there will be competitive or mutually complementary relation between magnetic levitation vehicle and Light Rail Transit in Korea market, it is necessary to investigate future plan of Light Rail Transit in order to maximize the effects of Magnetic levitation vehicle. In this study, analysis scenarios are estimated and divided into two parts - positive scenario and negative scenario.

In the case of positive scenario, it is assumed that LRT based on elevated railway would be activated and will expand its market share to 80 percent of premeditated LRT market. In the case of negative scenario, it is assumed that LRT based on elevated railway will occupy its market share to 50% since BRT (Bus Rapid Transit) and LRT based on surface railway would be activated instead.

3.2 Analysis Methodology of the Scale of Global Market It is estimated that the scale of that global rail market is about 7.0 billion dollars per year and the growth rate of market have been recorded about 5% per year. It is recorded that LRT occupy about 5% market share of total railway market share.

Therefore, it is estimated that the market scale of LRT would be 1.4 billion dollars per year in the view of fact that system parts related to vehicles occupy about 40% of total market scale. It is also estimated that the growth rate of market will be approximately 6% per year.

In this study, analysis scenarios of global market are estimated and also divided same as Korean market into two parts - positive scenario and negative scenario - due to the possibility of the introduction of LRT to the third world.

In the global market, LRT based on surface railway which has been constructed occupy about 50%, and it is impossible to alternate LRT based on surface railway to LRT based on elevated railway. With that reason, in this study, LRT which have been constructed is not included in the analysis. In the case of positive scenario, it is assumed that LRT based on elevated railway will occupy its market share to 60% while it will occupy its market share to 50% in the case of negative scenario. It is assumed that the growth rate would be 6% in the positive scenario and 4% in the negative scenario.

3.3 Analysis Methodology of Economic Ripple Effects In this study, in order to analyze ripple effects on the national macro economy from practical use plan of urban transit maglev train, inter industry analysis is carried out considering production induced coefficient and value-added coefficient using inter industry index which have been published every 5 years from the Bank of Korea . In the inter industry index, there are 404 fundamental industries classified by types of industries. In this study, economic effect estimated coefficients are estimated using production induced coefficient and value-added coefficient which are reclassified from inter industry index.

3.4 Analysis of Economic Feasibility In this study, limited analysis of economic feasibility of new technology development is carried out since there is no exact systematic analysis of economic feasibility of construction industry including SOC

The analysis period is usually 30 years in the general railway industry and 20 years in the urban transit maglev train within the framework of new technology. In this study, economic feasibility is conservatively analyzed within 10 years of the analysis period.

Practical use expenses including technology development expenses and exhibition expenses are regarded as cost and value-added creation scale from ripple effects related to the sales of maglev train are regarded as benefit. Proceedings of the Eastern Asia Society for Transportation Studies, Vol.6, 2007

4. RESULTS

4.1 The Scale of Korea Market Based on analysis methodology of the scale of Korea market, in the case of positive scenario with 20 years of analysis period, the scale of Korea market of LRT based on elevated railway would be constructed 18.0km per year (=443km × 0.8 / 20years). Since the occupancy of maglev train is 35%, the market scale of maglev train would be 6.2km per year.

To estimate amount of market of maglev train, considering average construction expenses 46 million dollars per km, it would be 285.3 million dollars. To estimate amount of market of vehicles and vehicle-related system, considering the portion of these parts 40%, it is estimated at 114.1 million dollars per year.

In the case of negative scenario with 20 years of analysis period, the scale of Korea market of LRT based on elevated railway would be constructed 11.1km per year (=443km × 0.5 / 20years). Considering the worst occupancy of maglev train 20%, the market scale of maglev train would be 2.2km per year. In this case, amount of market of maglev train would be 101.9 million dollars per year, and amount of market of vehicles and vehicle-related system would be 40.8 million dollars.

Table 2 Yearly Prospect for Korea LRT Market for Each Scenario Maglev Train Scenario Contents LRT based on elevated railway Occupancy Rate Market Scale Railway- Positive centered 18.0 km 35% 6.2km BRT & Tram- Negative centered 11.1km 20% 2.2km

4.2 The Scale of Global Market Based on analysis methodology of the scale of global market, the scale of global market of LRT based on elevated railway would be 1.8 billion dollars in positive scenario and 1.1 billion dollars in negative scenario. To estimate the scale of market of maglev train, it is assumed that the occupancy of maglev train in the global market is 30% in the positive scenario and 20% in the negative scenario. In the both scenarios, the occupancy of maglev train in the Korea market is 30%. This value is the minimum ratio in the worst scenario considering uncertainty in the future since it is estimated that there would be no competitive country except Japan.

It is analyzed that scale of market of maglev train would be 530 million dollars in positive scenario and 230 million dollars in negative scenario. It is also analyzed that the scale of market which Korea could occupy would be 160 million dollars and 69 million dollars each.

Therefore, considering the average length of LRT lane about 10km, it is analyzed that estimated number of lanes which could be constructed would be 1 per year in positive scenario and 1 per 2 years in negative scenario.

Table 3 Yearly Prospect for Global LRT Market for Each Scenario LRT based Maglev Train Scenario Contents on elevated Market Occupancy of railway Scale Korea Including Developing $ 0.53 Positive Countries $1.8 billion billion $ 0.16 billion Excluding Developing Negative Countries $1.1 billion $ 2.3 billion $ 0.069 billion

Proceedings of the Eastern Asia Society for Transportation Studies, Vol.6, 2007

4.3 Economic Ripple Effects Economic effect coefficients derived using input coefficient of producer price list of inter industry index are described in Table 4. Here, employment-induced coefficients are quoted from the report published Korea Development Institute.

Table 4 Production Induced, Value-added Induced, Employment Induced Coefficient for the Creation of Economic Effects Contents Production Induced Value-added Induced Employment Induced Vehicle 3.59 0.51 2.87 System 3.02 0.57 2.87

Likewise the scale of Korea & global market, economic ripple effects are derived divided from positive scenario and negative scenario using economic effect coefficient. Economic ripple effects for each scenario are described in Table 5.

Table 5 Economic Ripple Effects for Each Scenario Production Value-added Employment Scenario Contents Induced Induced Induced Import-related $ 0.4 billion $ 60 million 3000 person Positive Export-related $ 0.5 billion $ 90 million 5000 person Total $ 0.9 billion $ 150 million 8000 person Import-related $ 0.1 billion $ 20 million 1000 person Negative Export-related $ 0.2 billion $ 40 million 2000 person Total $ 0.3 billion $ 60 million 3000 person

4.4 Economic Feasibility Expenses for practical use can be divided into technology complement expenses and exhibition expenses. Technology complement expenses are for SE (System Engineering), vehicle, signal electronic power, track/railway structure. Exhibition expenses are derived assuming exhibition lane length as 7km. As a result, it is analyzed that total estimated expenses for practical use including technology complement expenses and exhibition expenses would be 449.0 million dollars. These expenses are described in Table 6.

Table 6 Estimated Expenses for Practical Use (7km construction) Contents Expenses ( unit : $ million) Technology Complement 70.3 Exhibition 378.7 Total 449.0

Net value-added is estimated by each scenario considering value-added ratio 0.4 reflecting the sales vehicle parts and vehicle-related system, and this net value-added is regarded as benefit for national economic parts. Although, it is generally considered that benefits increase every year in the economic analysis, it is assumed that benefits of maglev train occur equally for 10 years considering the uncertainty and modification of the project in this study. The results are described in Table 7.

Table 7 Net Value-added Scale in Korea Market (Unit: $ million) Scenario 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Negative 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 45.6 Positive 163 163 163 163 163 163 163 163 163 163

Although the estimation methodology of net value-added of global market is same as it of Korean market, the methodology considered of the uncertainty of increasing rates of global markets and the unpredictability of the prospects for the economy of Korea. In the positive Proceedings of the Eastern Asia Society for Transportation Studies, Vol.6, 2007 scenario, net value-added is estimated considering that increasing rates would be 6% and the share of global market would be 30%. In the negative scenario, net value-added is estimated considering that increasing rates would be 4% and the share of global market would be 20%. The results are described in Table 8.

Table 8 Net Value-added Scale in Global Market (Unit : $ million) Scenario 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Negative 482 511 542 574 608 645 684 725 768 814 Positive 230 239 249 259 269 280 291 303 315 327

After analysis of economic feasibility considering research expenses and related expenses over scale of net value-added, it is analyzed that economic index (Benefit-Cost ratio) could be variable by each scenario, but it still analyzed that practical-use project of urban transit maglev train has economic feasibility. To make certain of economic feasibility, it is desired to reduce of project expenses, but it is insignificant when considering economic ripple effects of practical-use project of maglev train.

It is analyzed that it has good economic feasibility with 1.39 B/C ratio in positive scenario of both Korea and Global market. When considering the life cycle of new technology is generally 10~20 years, analysis period of 10 years is only to find threshold, therefore, it has better economic feasibility when regarding analysis period to 20~30 years. Economic index (Benefit-Cost ratio) of practical-use project are describe in Table 9.

Table 9 Economic Feasibility Analysis of Practical Use Project Korea Market Global Market B/C Ratio Positive Positive 1.39 Negative Negative 0.56 Positive Negative 0.95 Negative Positive 1.00

5. CONCLUSION AND POLICY PROPOSAL

In the case of Germany and Japan which promote practical-use project of urban transit maglev train, they have developed exhibition vehicles and tested their efficiency. In the Japan, the maglev trains have been started their services since 2005, and the project of advance into Asia have been progressed.

In Korea, to promote practical-use project of urban transit maglev train, it is required to develop system based on interface technology insurance, maintenance, safety and convenience of passengers. Although it is also important to develop technology to promote practical-use project, it is more necessary to consider economic feasibility since enormous government budget is expected to required. Therefore, in this study, economic feasibility of promote practical-use project of maglev train is analyzed. In the case of Korea market, analysis scenarios are estimated and divided into two parts - positive scenario and negative scenario. It is analyzed that one maglev lane per 2 years would be constructed in positive scenario while one maglev lane per 5 years would be constructed in negative scenario. In the case of global market, It is analyzed that one maglev lane per every year would be constructed in positive scenario while one maglev lane per 2 years would be constructed in negative scenario.

Since production-induced effects of railway vehicle industry are relatively quite high, it is known that this industry has great ripple impact on other industries. It is estimated that the production induced effects of maglev train are 0.9 billion dollars in positive scenario and 0.3 billion dollars in negative scenario. The production-induced scale through export is Proceedings of the Eastern Asia Society for Transportation Studies, Vol.6, 2007

1.25~2 times than through import alternation. It is analyzed that employment creation is about 3000~8000 person per year.

After analysis of economic feasibility considering practical-use project expenses over scale of net value-added, it is analyzed that economic index (Benefit-Cost ratio) could be variable by each scenario. Particularly, it has good economic feasibility with minimum B/C ration 1.39 in the positive scenario in Korean and global market.

It is concluded that maglev train project could be entrance to the market of LRT based on elevated railway, and it cause to produce vehicle and vehicle-related system with the scale of 110~270 million dollars per year. Since production induced effects of the railway vehicle industry are relatively quite high, it is expected to induce production of other industry with the scale of 1 billion dollars.

The scale of railway vehicle and vehicle-related system is relative small, not more than 5% of the scale of the automobile industry. Since required vehicles of LRT are not plentiful due to short lane length of LRT, it is not expected that LRT cause great national wealth such as the automobile industry. However, since effects of entrance to global transportation market are not only for numerical benefits but also for activation of other industries, it is expected to forster national wealth.

ACKNOWLEDGEMENTS

The authors would like to express their sincere gratitude to Engineering Research Institute in Seoul National University by which they are supported, for giving them the opportunity to carry out this paper.

REFERENCES

Kim, J. H., Lee, S. H., Kho, S. Y. and Kim, D. S. (2001) A Standard Guide Study for Feasibility of Railway Project, Korea Development Institute, Seoul. Shim, S. D., Park, H. (2004) A Standard Guide Study for Feasibility, Korea Development Institute, Seoul. Korea Land Corporation (2005) Understanding of New Transit, Seoul. Lee, S. C., Yoo, J. K. and Lee, J. S. (2005) A Feasibility Study for Practical Use of Maglev Train, Korea Railroad Research Institute, Seoul. Lee, S. C. (2004) A Study for Status and Strategy of Global Railway Enterprise, Conference of Korean Society for Railway, 325-331. Lee, S. C., Na, H. S. (2005) Railway World Market and Marketing Strategies, Conference of Korean Society for Railway, 21-25. Lee, S. C., Bhang, Y. K. and Han, E. Y. (2004) The Survey Analysis of Determinants of Railroad Export, Conference of Korean Society for Railway, 216-221. Min, J. H., Lee, S. C. (2003) Worldwide Railroad Market Survey and Analysis, Conference of Korean Society for Railway, 360-364. Parsons Transportation Group. (2000) California Maglev Project Description, U.S. Department of Transportation, Washington, D.C. Samavedam, G. (2002) Assessment of CHSST Maglev Project Description. Report No. FTA-MD-26-7029-2002.1, U.S. Department of Transportation, Washington, D.C. Sambo Engineering CO.,Ltd (2005) LRT Transit System in Japan, Seoul. Sambo Engineering CO.,Ltd (2005) LRT Transit System in World, Seoul.