Melbourne’s $8 billion tunnel choked with pork

ScreenHunter_06 Jun. 06 09.33

By Leith van Onselen

The Age contains some nice analysis of the East-West Link – Melbourne’s controversial $6 to $8 billion road tunnel project – which appears to have been approved without passing a rigorous cost-benefit analysis:

Although the government has long said that the benefits of the $6 billion-to-$8 billion tunnel far outweigh the costs, it has refused to provide details, insisting the project will produce a return of $1.40 for every $1 spent.

But The Age can reveal this represents a best-case scenario, relying heavily on a controversial branch of analysis known as ”agglomeration economics”, which holds that increased urban density linked to transport projects adds to business productivity.

Infrastructure Australia head Michael Deegan told a Senate committee that the government’s unpublished business case also provided an alternative estimate, showing a benefit-cost ratio of 0.8 when ”wider economic benefits are not included”.

Under this scenario the project would return just 80¢ for every $1 spent, suggesting an economic loss if the ”stock-standard” analysis preferred by Infrastructure Australia is used…

In a submission to a federal infrastructure inquiry, Infrastructure Australia targeted Victoria for failing to submit a ”robust” business case for the east-west link, singling the project out as an example of why the public are cynical about ”big ticket” infrastructure announcements.

With the mining capex boom about to unwind, Australia needs to find ways to fill the void to both growth and jobs.

One obvious option is to boost investment in productivity enhancing infrastructure – i.e. projects whose expected benefits far outweight their costs and whose cost of financing can be funded by the increased productivity (and therefore tax revenue) that they create, making the project’s debt “self liquidating”.

Unfortunately, the East-West Link appears to fail this most basic test, with the project instead looking more like a politically motivated “white elephant” that risks undermining Australia’s productive capacity and living standards.

Surely there are a wide array of projects that could for the same outlay provide far bigger pay-offs to the economy and society as a whole? All of which highlights why rigorous cost-benefit analysis of alternative projects, along with an objective decision making framework, are required to ensure that scarce taxpayer funds deliver the greatest benefits at the lowest cost.

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Comments

  1. the fact that the project would return just 80¢ for every $1 spent is not surprise at all. And not because it will not be used or will not create economic benefits but because of cost.

    It will cost – $6b or $8b for 4.4km tunnel ($15b-$18b for total of 18km).

    That’s $1.5-2m per meter of tunnel or $1m per meter of free-way (by far the most expensive per km free-way in the world).

    It’s the same situation with Sydney’s North-West Light Rail (street level tram) that will cost twice as much per km than the most expensive heavy underground rail ever built.

    At these costs (the highest per km in history), no wonder our infrastructure is not providing returns.

      • I know you can’t directly compare, but…

        http://en.wikipedia.org/wiki/Gotthard_Base_Tunnel

        The Gotthard Base Tunnel (GBT) is a railway tunnel in the heart of the Swiss Alps expected to open in 2016.[3] With a route length of 57 km (35.4 mi) and a total of 151.84 km (94.3 mi) of tunnels, shafts and passages,[2] it is the world’s longest rail tunnel, surpassing the Seikan Tunnel in Japan.

        Total cost of the project is 9.8 billion Swiss francs, or US$10.3 billion.[6]

  2. With a massive shortage of housing, a looming Capex cliff, likely surpluses of engineers, surveyors, environmental specialists and earthmoving equipment, a major government sponsored programming to develop and release tens of thousands of developed blocks to people who could pay for them immediately, might be an idea.

    Given that such a project using unemployed existing resources (or they will be unemployed when the cliff hits) and with concurrent economies of scale, would strip huge chunks off the cost of each block, you would wonder how the benefit cost would be less than one no matter how you look at it.

    Also, politically, any government, State or Federal that did this would surely reap a nice dividend from gen Y and some of Gen X.

    • Good idea.

      I am particularly pleased to discover a boomer (emess) who actually wants to build something. Congratulations.

  3. Build it. Over coming decades Victorians will be pleased they did.

    It has become one of the Nimby Green centres for protest. Ensure all project work is not screwed by the unions. Keep tight control with appropriate clauses over main contractors. Probably means not run by public sector.

    Hurry up.

    • +100

      We could get BHP to build it, they could utilise the engineers that built the briquette factory.

    • dumb_non_economist

      2d,

      It would appear the screwing is being done by the companies.

      ” Probably means not run by public sector.”

      Yeah?

      BHP: Hot Briquette Plant, Port Hedland, cost 1 life and 750mil what 15-20 yrs ago.
      Manga Copper, 1bil 20 yrs ago
      RIO offer @ > $120 a share, 3 yrs ago
      I’m sure there’s more!

      Telstra: PCCW 1-2 bil 13 yrs back

      NAB: US Home, was it, UK, how did that go?

      ANZ: first effort in India

      LEI: M.E.

      B & B: hahahaha
      .
      I doubt the PS can screw it up any better than any other Australian company.

      Maybe CSL or COH could give it a go? I realise they’re not into engineering, but considering the above couldn’t get it right in their own fields maybe being outsiders will be a benefit!

    • “Build it. Over coming decades Victorians will be pleased they did.”

      Funny how you’re often complaining about government waste but happy to throw away billions of taxpayers hard-earned dollars just to piss off the Greens.

      Surely if it’s actually worthwhile then government should stand back and let private industry work its magic…without any additional funding, debt guarantees or future payments based on magically estimated traffic figures.

  4. Like most government projects, the benefit lies in the money made to build it. Building ‘infrastructure’ in the cities is preferred as those involved don’t want to travel too far from their multi-million dollar mansion to get to worksite.

    The most productivity enhancing infrastructure Australia can undertake is a water canal network to create an inland, navigable river system and also bring water from Northern Australia to the South. China is building a water canal bring water from the south to Beijing, so it’s not a ‘pie in the sky’ idea.

    The biggest issue is cost. The 1400km section of the South-North canal cost China 40 billion dollars, so around 30 million per km. I cannot imagine Australia building it for that price. Maybe we should stop spending 100K each locking up asylum seeker, and put them to work on the project instead.

    • China has a huge portion of its population lifting its living standard, happy to work for less.

      We have unions inflating wages and reducing productivity.

      IR reform required (not to become like China though)

      • Klogg

        Strange how these “unions inflating wages and reducing productivity” employment conditions are Agreed to by the civil engineering employers.
        Suppose it really doesn’t matter if they can then just add a “healthy” margin to cost when screwing us all by infrastructure tenders.

        IMO Spending $1 on transport infrastructure in either Melb. or Sydney is a total waste.
        If we just keep stuffing more and more people into these cities we will be right back here in five years, and every five years.

        For a start we need new cities similar to the size of Geelong in Vic, NSW, & WA ,possibly Qld. built on the coasts ( think Portland Vic. ) with unrestricted residential development, industry and automated container ports so that this here “revitalized industrial base” that we are going to transition into ( will definitely happen by !/4/2014 apparently ) can get internationally competitive product to market. Get our hands on these mining camp residential structures and open the tenders internationally – bring your own labour. Maybe we need to do the China thing and kick the ball rolling with the odd ghost city
        initially.

        Also heard some wishful talk of some PTTH thingy, that might be worth a shot.

  5. Strange Economics

    This is also Commonwealth govt funded – Corporate Welfare (for the construction companies). And ironically it goes to their highly unionised and highly paid construction employees.
    The “age of entitlement” continues. If all they want to do is create 2000 jobs, there are many options with a better ROE. Couldn’t they build a railway or start a business (car? factory) with the $800 million of funding.
    Still the selected motorway does go direct to the right 5 marginal state electorates. What other project gives such a great and immediate political return on investment? A western motorway wouldnt fix the election.
    Public transport projects don’t win votes. Or could they just build a railway to the south east?

    • I don’t understand why the Govt doesn’t nationalise the Ford, Holden and Toyota plants in compensation for the $100+million paid in grants over the past 10 years.

      Surely someone could think of a genuine use for them?

  6. Is anyone surprised?

    $350m budgeted for just three railway grade separations in Melbourne

    The Springvale one alone is expected to cost nearly half of that figure.

    More producer capture and corporate welfare for domestic building interests.

  7. The current government must be getting paid off under the table for the east-west link. The way they are rushing it thru and trying to get it set in stone before the next election is nothing short of dodgy. Given the fact a large proportion of the population don’t want it and are screaming for better public transport infrastructure…

  8. I was sitting in traffic in Kew yesterday waiting to get across the one-lane-each-way bridge across the Yarra at the Chandler Highway. As I went past the Eastern Freeway on-ramps I cast a glance to see how much of this traffic I was stuck in was actually getting on the freeway. Answer: not much.
    It took me almost 15 minutes to travel less than 1km through this awful stretch of road that I do everything I can to avoid. The East-West link would do nothing to alleviate this. Very little of the traffic was heading towards the city. If anything, the East-West link will attract more traffic onto the freeway through this region.
    I can see that the East-West link would be nice to have. It would shorten my trips to the airport (maybe 4 times a year max). I’m sure there are some people that would gain regular benefit, but there are so many inadequate chokepoints like this one all over Melbourne that would be so trivial to fix in comparison to buildling this monster! Rebuilding the bridge with 2 lanes each way would make a massive difference here (I’m sure it wouldn’t eliminate all the issues, but it would be a huge help).

    I regularly encounter dozens of similar chokepoints like this in my travels around Melbourne, which means there are probably hundreds of them. Areas with significant, regular traffic problems and obvious solutions (level crossings anyone?). If you have to spend money on roads in preference to public transport then the money being spent on this tunnel would probably cover the cost of just about all of these problem spots and provide orders-of-magnitude greater benefit. Instead, the coffers are going to be drained and these traffic snarls will still be there a decade from now (unless everyone’s unemployed and doesn’t have to go to work any more)

    • agreed the inner/mid NE of Melbourne is full of them and this tunnel will make SFA difference. Not enough and/or inadequate crossings over the Yarra as you suggest. Creating the missing link between Western Ring Road and Eastern Freeway by upgrading Bulleen Rd, Greensborough Highway and bypassing Heidelberg would have been better but lacks the ‘monorail’ factor our pollies love…

    • spot on! the chandler hwy is a disaster @ peak hour. typical 1 minute trips take 30 mins.
      princess st from kew junction is part of the problem – people coming thru richmond / kew to get onto the eastern / or head north.
      plus people getting off the monash and getting onto the eastern….cos they all want to avoid elliot ave….

    • I can never get any sense from anyone in government anywhere on the following question:

      What is superior about sunk costs of some 20 cents plus per person km of travel in subsidies to mass transit riders, in perpetuity; when roads once built are there for good and cost well under 1 cent per km of car travel done on them in terms of subsidies. Roads and driving are an absolute bargain from the point of view of public finances.

      How much more road infrastructure could be paid for by the next 100 years of 20 cents per person km of sunk-cost subsidies to proposed commuter rail systems?

      BTW, Google and find the TomTom Annual Traffic index data collations on congestion delays in cities around the world. Australian and NZ cities are a laughing stock. And the myths about sprawling low density US cities are nonsense – they have the least traffic congestion delays of anywhere. BTW LA and SF do not qualify as low density – that is another nonsense myth. They are actually close to the average Euro city density, and only Toronto in the Anglo New World is denser.

      Compare truly low density cities like Philadelphia and Indianapolis with Aussie ones for congestion delay.

  9. UE,

    Projects below the value of $10 Billion are not big enough to justify the time, effort and cost of a through cost benefit analysis. They are just too small.

    On the other hand $36 Billion projects …