Why infrastructure business cases often don’t stack up

Cross-posted from The Conversation:

Infrastructure Australia’s latest infrastructure priority list has been criticised for being “too Sydney-centric” and for giving Melbourne’s East West Link, cancelled in 2014, “high priority” status. The cancelled Roe 8 project in Perth was removed from the list.

So how does a project get onto Infrastructure Australia’s list? This requires submission of a full business case, which then needs to be “positively assessed” to be given priority status.

But our research, yet to be published, has found these business cases leave out highly significant costs. This article looks at three prominent projects – the WestConnex and East West Link motorways in Sydney and Melbourne respectively, and Cross River Rail in Brisbane – to illustrate how business cases submitted to Infrastructure Australia do not follow its requirements in key respects. This casts serious doubt on the business cases used to justify major motorway projects, as well as on how priority projects are selected.

What do business cases assess?

Ensuring business cases are completed before investment decisions are finalised is critical to “good planning”. Part of Infrastructure Australia’s remit is to head off concerns that projects are committed to before business cases are fully evaluated. This can help minimise “optimism bias” and ensure investments deliver community benefit.

But we must also examine what the business case is actually showing us. The main part of each business case is the cost-benefit analysis. This compares the money value of project benefits and project costs. Economically viable projects should have a benefit-to-cost ratio above 1:1.

Infrastructure Australia requires project business cases to consider non-monetised benefits and costs, including community impacts. These benefits and costs are required to be quantified in some other way, or at least described. The basis used to estimate “external costs” must also be provided.

The cost-benefit methodology requires any significant positive or negative impacts on third parties – externalities – to be included. Examples include air quality, carbon emissions, noise, biodiversity and climate adaptation.

Social impacts to be covered include equity or the distribution of benefits (which Infrastructure Australia says need to be identified since cost-benefit analysis does not explicitly take these into account), and affected local communities and other individuals/groups. The non-monetised benefit and cost categories listed as relevant are: social impacts, cultural impacts, visual amenity/landscape, biodiversity and heritage impacts.

In support of monetary estimates, proponents must “describe and provide supporting material that demonstrates how land use, population and employment projections are modelled”.

The guidelines stress that the supporting conditions for expected land use impacts will be in place – for instance, necessary infrastructure investment where densification is assumed. Factors that can hinder the realisation of such benefits (such as local opposition to increasing density) must also be included.

This process would seem to produce a rational prioritisation of national infrastructure projects. The problem is that the business cases submitted to Infrastructure Australia do not follow its requirements.

High-priority projects with problematic business cases

To illustrate this, we analysed the business cases of three projects designated as “high priority” for Commonwealth funding:

  • East West Link, to which the Commonwealth allocated A$1.5 billion before the new Victorian government cancelled the project
  • WestConnex, which has been allocated A$3.5 billion
  • Cross River Rail, which is yet to receive funding.

A key problem in these business cases is that significant project cost items have not been monetised. These include costs relating to environmental effects such as noise and visual amenity and to other impacts on businesses, households and property values.

For example, none of the three cases includes a valuation of the costs of lost business and disruption to household travel and amenity during construction. (This is a big issue with Sydney’s southeast light rail project.)

There is also no costing of the loss of property values along motorways, especially around exhaust emission vents. The East West Link and Cross River Rail business cases make some allowance for this by including the value of general changes in amenity from noise, urban landscape and visual amenity. None of these are costed in the WestConnex case.

Another significant omission relates to the costing of land use impacts. The WestConnex and East West Link business cases both forecast more, and longer, road trips across the network as a result of the projects.

The WestConnex scheme will increase vehicle kilometres by 600,000 per day and make outer suburbs more accessible relative to the inner city. The potential extra costs from greater sprawl are high, estimated at A$4.99 billion for Sydney over 25 years from 2011 if greenfield housing was 50% of new dwellings rather than 30%.

The opposite is the case for Cross River Rail. Increased higher-density development around rail stations would produce infrastructure savings, but the business case does not give these a value.

Furthermore, the valuation of changes in transport mode resulting from each project is inconsistent.

The Cross River Rail business case includes savings resulting from motorists switching from road to rail after the line is built.

The WestConnex project will have the reverse effect, with 45,000 public transport trips per day being switched to the motorway. But the business case does not put a value on the costs of this. These include bus and train revenue losses, or reduced service frequency and increased waiting time to reduce losses.

Debatable ‘wider economic benefits’

The most contentious business case component is wider economic benefits. These are productivity improvements arising from increased central city job density as a result of the projects improving access.

These benefits needed to be included to lift the East West Link benefit-cost ratio above one. But this is only achieved through sleight of hand – public transport improvements into central Melbourne are included as part of the full project cost. As the public transport component of the business case had low costs compared to its benefits, including these wider economic benefits was enough to push the overall ratio above 1.

Similar benefits are part of the WestConnex cost-benefit analysis. However, these benefits are to be achieved from extra car trips to the centre. This takes no account of the disincentives of road congestion and lack of parking.

Current central Sydney planning controls allow a maximum of one new parking space per 75 square metres of floor area for not-so-tall offices – or one space for about five new workers – and even fewer spaces relative to floor area for higher buildings. This means most increased job density will not come from people driving to work.

By contrast, the wider economic benefits of the Cross River Rail resulting from increased job density in central Brisbane are not valued for inclusion in the cost-benefit analysis.

Rethinking the business case

Our work points to several real concerns:

  • a lack of consistency in what is included in business cases
  • questions about how cases can be reasonably compared across projects
  • discretionary inclusion or exclusion of critical items that bias results in favour of projects.

We need more holistic and integrated analysis of projects. This will take into account not only the “nation-building” aspects – the jobs and growth projects might inspire – but also the disrupting and displacing effects they produce across transport modes, land uses and people’s experiences of the city.

Article by Glen Searle and Crystal Legacy from Melbourne University

Comments

  1. Crystal Legacy? Catchy name.

    I’d be interested in Leith’s take on the arguments used in the piece that “The opposite is the case for Cross River Rail. Increased higher-density development around rail stations would produce infrastructure savings, but the business case does not give these a value.” and “By contrast, the wider economic benefits of the Cross River Rail resulting from increased job density in central Brisbane are not valued for inclusion in the cost-benefit analysis.”

    The authors of the article seem to assume that there are significant [] [edit: benefits] in infrastructure that increases the density of city living and working as opposed to urban sprawl. My impression is that Leith has a different opinion to that (?).

  2. I read some infrastructure business case the other day whihc was supported by analysis of 30 years of back data
    that is bullsh1t
    I challenge any one to develop a business case which doesnt include AI robotics and the threat that the outcome of the RC into the FIRE mob, will be the first sweep of the scythe.
    the future will be as radically different to yesterday as windows 10 is to dos.
    already game changing infrastructure NBN is being rolled. What next?? Stadiums

  3. seasonedcycling

    It’s an elegant theoretical approach to planning, in practice not so easy. There is a degree of judgement here that can’t be quantified, and to a large extent a leap of faith. I understand wanting to minimise the political equation from a rational decision making point of view, but really, infrastructure decisions are always political to a degree. Sometimes you just need to live the experience of driving through a city, say, Brisbane, and you know that investment into a project like Cross River Rail makes long-term sense. No-one is going to look back on that 50 years hence and think it was a bad idea. They will question your judgement in 50 years if you haven’t done anything, though.

  4. The whole business case is a farce. The issue isn’t even in the methodology, it’s what is a structural problem with the public service – they are scared out of their wits and can no longer give frank and fearless advice thus paving the way for short term pork barreling.

    On the wider ‘economic benefits’ this should be done at the immigration policy level rather than trying to deal with the problem at an infrastructure level afterwards.

    Dog, tail ,something about one wagging the other.

    • I was in the tugun pub for lunch the other day and on the TV was a video of a tiger hogging a swimming pool to keep all the other cats out
      another tiger snuck around behind the hog tiger and bit it on the bum then bit the end of its tail
      a major row erupted.
      I think a panther jumped into the pool after all that.

    • The Traveling Wilbur

      If only there was some kind of… I don’t know… Authority that we could turn to impartially assess and implement our Nation Building needs… hmmmm… But that’s probably just some Utopian Public Service thought bubble no one who works for their state or country is capable of implementing. Or maintaining. Or restoring when its flooded, burned, buried or shaken to bits. Shame we don’t have *anyone* capable of holding the place together…

  5. you mentioned assesment of business cases to try to overcome ‘optimism bias’ – but did not touch on ‘strategic misrepresentation’ which is at the heart of why politicians/vested interests do not want a more rigorous infrastructure business case/assessment process

  6. Stephen Morris

    You could reduce the answer the a single word . . . . Corruption.

    Not corruption of the old-fashioned brown paper bag variety. But widespread corruption of a more insidious kind, a kind of corruption that is far more difficult to police and prosecute.

    Politicians of all major parties promote (and guide their public servants into promoting) those projects which offer huge private profits to firms which can credibly offer them a future kickback in the form of a million-dollar-a-year directorship, or a consultancy, or some other payment when they retire from politics (or are booted out).

    There can be no remedy to this unless the underlying problem of corruption in Australia’s system of government is resolved.

    And – like it or not – that will require some form of more directly democratic accountability for politicians.

    • Yep. We need to A) get the Electoral Commission to fund the political parties and B) stop politicians from working as lobbyists as soon as they lose an election.

      10-15 years ago, I used to think lobbying means private sector guys constantly meeting politicians to try and change the mind of the politician – without actually giving money to the politician. Little did I know that the MPs are given money directly by the private sector while the MPs are in parliament!

      In the first half of 2006, Ziggy Switkowski was meeting PM Howard to try and legalise nuclear power stations and Jon Faine said “who is running the country, Ziggy or Howard?”

      Probably in 2007 or so it was said “why would private firms give money to politicians and expect nothing in return”.

  7. The corruption in NSW is clear:

    Instead of road tunnels, London got these:

    Channel Tunnel opened on 6 May 1994.
    The Congestion Charge began on 17 Feb 2003.
    High Speed One began commercial service on 28 Sep 2003.
    The £14.8 billion Crossrail is to open progressively from Dec 2018.
    The £55.7 billion High Speed Two is slated to open progressively from 2027.

    http://www.bbc.com/news/magazine-13924687

  8. Nah, let’s have more immigration. With enough desperately poor people we can use 4-person gold litter carriers for the wealthy and rickshaws as a mass public transport system. In Sydney the workers can live in mud huts in industrial areas valued at $1 million each with the teachers and nurses. It’ll be great for diversity. Shoe shine boxes and street noodles. Who needs infrastructure when you have an underclass? Let’s get half of China and India here ASAP and let the good times roll!

    • The Traveling Wilbur

      You are not wrong actually. I was pilloried when I tried to articulate the doily led recover that was, and is, with some help from the NDIS, leading the jobs ‘boom’. However your chair carriers have already been preceded by a bevy of beauticians, a coven of cuticlists and a mound of massagers occupying previously hideously expensive prime retail rental spots. And then there are the unctuous ubers, the fiddly foodoras and the rampant ridesharers.

      And no one should forget the hastening of the hapless hairdressers. All require bodies to deliver to or work on and low cost bases from whence to do it. Immigration is their only hope.

  9. You cannot assess the value of projects in an economy that is being distorted by an A$ that has been , consistently, over 60 years, overvalued by between 30 and 100%. Any project that stacks up in A$ and cents fits the distorted model of selling assets to foreigners to pay for our living standard. Any project that would stack up as productive enough to contribute to paying off foreign debt is extremely unlikely to stack up valued in A$. If it is positive it would be less positive than a whole raft of urban (read Sydney/Melbourne) projects that contribute to our increased foreign debt and asset sales to foreigners.
    Until this problem is squarely faced the rest is just BS window dressing.