ROI for Urban Tunnels

Urban Tunnels for commuters

This article will focus on urban tunnels.

While trucking companies will use urban tunnels too, trucking issues will be better addressed in a separate article focusing on long distance tunnels such as a tunnel running coast to coast following I-10 from Los Angeles, California in the west to Jacksonville, Florida in the east. Here we will focus on specific issues associated with toll tunnels for commuters in urban areas.

Let’s begin by setting forward a few of the important attributes of urban tunnels. This article will focus on the attributes and negative issues associated with a 100 mile long, urban tunnel in an area where the average annual daily traffic is around 300,000 vehicles. In other words, this article will use economic estimates based on a 100 mile long stretch of Interstate freeway I-405 between I-101 in the north and I-5 in the south.

To build a bi directional tunnel pair following this route would cost approximately $2.0 billion. The tunnel, if built commercially, would be a fully automated toll tunnel. There would be entrances and exits approximately every 5 to 10 miles. Commuters using the tunnel would preferentially be those that have longer commutes who desire to escape the stop and go traffic congestion that exists on the surface freeway.

Within the tunnel the traffic will always flow at 120MPH, and travel will be fully automated freeing the “driver” to watch a movie, eat lunch, or do anything one might do in an airplane seat. A 40 mile commute one way would take 20 minutes.

The annual toll revenue from this tunnel would be approximately $330 million. This level of toll income would mean that this single bi directional tunnel would have a net present value of $8.5 billion. If realized, this would mean the tunnel toll income would have generated a net profit, or, Return On Investment (ROI) of $8.5B - $2.0B = $6.5 Billion.

To arrive at this value we used a 15% adoption factor. In other words, we assume that on a daily basis, 45,000 of the 300,000 daily trips would be performed in the tunnel.

We can analyze this a different way. How many vehicles would need to switch from driving in stop and go congested traffic on the surface freeway, to driving in the tunnels and paying a modest toll in order for the tunnel business to break even?

To break even the tunnel must generate around $58 million revenue per year. This means that out of 300,000 daily vehicles on the surface freeway, just 7,945 would need to use the tunnel in order that the tunnel reach breakeven. This is just 2.6 percent of the vehicles using the I-405 corridor. We expect the tunnel adoption percentage to be around 20% meaning that the expected toll revenue should be higher than the figures we’ve used above.

See Business Insider article on why we need a transportation revolution

Imagine for a moment that you are driving in stop and go traffic on an urban freeway. Then, imagine that there exists a transportation tunnel beneath your freeway that you could drop into and travel at 120MPH to your destination, escaping the surface freeway stop and go traffic. Would you be happy sitting in stop and go traffic knowing you could escape?

When around 20% of the surface freeway has switched to using the tunnel, then stop and go traffic on the surface freeway will be eliminated. This reduces the desirability of the tunnels. In other words, it is unlikely that everyone would want to use the tunnels. But as long as there is a significant risk that the surface freeway will degrade into stop and go traffic, many commuters will prefer to use tunnels.

For someone driving an average commute distance of 20 miles each way to and from work, the commute would typically take you between 30 and 60 minutes, depending on the traffic that day. Compare this to the option of a reliable 10 minutes at 120MPH in a tunnel.

The ROI on building the tunnel is so large that a company will be able to build a tunnel for “free” in exchange for ownership of the “hole in the ground”, granted by the local municipality that owns the right of way for the freeway.

Today, to relieve congestion the municipality must pay to add another lane to the existing freeway. The average cost for this in the US is $25 million per lane mile. This means that to add 1 lane in each direction along a 100 mile long route would cost around $5.0 billion.

If a tunnel operator asks the municipality, “Hey, if you give us ownership of a hole in the ground beneath your freeway, we’ll build a bi-directional tunnel for you. We’ll build it for free, in exchange for ownership of the hole in the ground that no one is currently using, and we’ll charge tolls to the commuters using the tunnel to recover our investment. Plus, we’ll also pay you tax income on our revenue above break even after we’ve recovered our investment”.

The single tunnel lane will be capable of carrying 3 surface freeway lanes of traffic. To add 3 surface lanes to the example route above would cost the municipality around $15 billion. So the tunnel operator is suggesting that they will install the equivalent of $15 billion in infrastructure at zero cost. Agreeing to these terms is a pretty simple decision for any municipality to make.

The municipality will benefit by having traffic congestion eliminated on their surface freeway without spending a dime. The transportation tunnel operator will benefit from the large profits associated with the toll revenue. And commuters will benefit from traffic congestion having been eliminated.

Now the above economics are expected to result from the construction of a single bi-directional tunnel, 100 miles long. Within the Los Angeles area there are perhaps 20 similar tunnels that could be constructed and across the US, perhaps 1,000. Every advanced country in the world has traffic congestion problems that tunnels can solve.

Eventually tunnels will become ubiquitous. When this happens the net profit opportunity will disappear. For now, however, there is an 1849 gold rush opportunity waiting to be realized by the first tunnel operators to convert the above vision into a reality.

The net ROI on urban tunnel construction and operation should be around 400% of the cost to build the tunnel. Tunnels built in places with a lot of traffic will be more profitable than tunnels built in places with smaller traffic concentrations. And a good rule of thumb is that it will take around 8,000 daily commuters along a tunnel route to make the enterprise profitable.