critique of canberra capital metro

8/18/2019 Critique of Canberra Capital Metro

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Acquisition & Logistics Services (ALS), Canberra

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Copyright of Acquisition & Logistics Services Printed: 25-Nov-14

MEDIA RELEASE - CRITIQUE OF CAPITAL METRO BUSINESS CASE

Purpose

This is a summary of a critique by Max Flint, Principal Consultant, Acquisition and Logistics Services, of theCapital Metro Stage 1 Business Case, released by the ACT Government on 31 October 2014.

The critique was done to independently evaluate the content of the Case and to apply findings to a revision of

the independent assessment of the project costings, distributed to interested parties on 23 October 2014.Key findings

The most important deficiency of the Business Case is that it is NOT a ‘full’ Business Case as claimed by theGovernment:

• It does not provide anywhere for the very substantial cost of capital investment, which is independentlyestimated to be an absolute minimum of $398 million and which could be as high as $600 million or more,in today’s prices.

• It does not state what the annual repayments would be on the $783 million borrowed capital, over the planned 20 years repayment period, or give details of the annual subsidies over the 30 year period.

• It fails to give total costs in actual 2014 prices, opting instead to present estimates in heavily discounted prices, which completely distort the financial liability facing taxpayers.

• The Case claims a discounted Benefit Cost Ratio (BCR) of 1.2 but, in ignoring the cost of capital, thisfigure is grossly in error. At best, a ratio of 0.81is most likely, after inclusion of the cost of capital in theequation. Thus, the Government claim that the project is cost-effective cannot be sustained.

• Estimates given in the Business case are not complete, there being several components acknowledgedtherein but not costed and so not included in project estimates.

The Government needs to clearly explain why such a large proportion of the expected total cost of constructionhas been excluded from the Business Case, especially seeing that all Canberra taxpayers are expected to foot the

bill. Several tables of data in the Case make it quite clear that the $873 million construction cost is the starting point and nowhere is the cost of capital estimated or included in that figure.

Given detailed study of the Case, the revised, independent assessment of Project costs are summarised in thefollowing table.

Conclusion

The Government has failed to provide a coherent or compelling Business Case for Capital Metro Stage 1.While riddled with inconsistencies, its most important failing is to ignore the substantial cost of capital which,when included, drops the claimed benefit-cost ratio to well below unity to 0.81 at the most optimistic. TheGovernment claim that the project is cost-effective cannot be sustained.

All Canberra taxpayers should be made aware of the gross failings of the Business Case and of how theGovernment has apparently ignored them in deciding in October to proceed with the project.

M.R. FlintPrincipal Consultant, Acquisition and Logistics Services

25 November 2014

The Author: Max Flint has specialised for many years in providing logistics services for defence-related majorcapital project acquisitions, including life-cycle costing. He is well qualified in this field, having extensiveexperience as a logistician in the RAAF, the Department of Defence and as a consultant, as well as possessing adiploma in electrical engineering from RMIT and a Master of Science (Logistics Management) with Distinction

from USAF Institute of Technology.

In the preparation of this critique, the author has not received funds from any external source nor preparedit on behalf of any other entity.

Taxpayer Liabi lity (2014 prices) 30 year 20 year l iabil i ty

Liabil i ty Total pa O&M Part [1] per household

$m $m $m pa Number $ pa

Min 1,890 85 19 145,000 586

+20% risk 2,280 102 24 145,000 705

1. O&M part is the net annual subsidy, after deduction of estimated revenues.


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CRITIQUE OF CAPITAL METRO BUSINESS CASE

In the preparation of this critique of the Capital Metro Business Case, the author has not received funds

from any external source nor prepared it on behalf of any other entity. It has been prepared only as a public

service to properly inform the voters and taxpayers of Canberra of the most probable financial liability they

face if this project proceeds, as their Government intends.

SUMMARY This document is a detailed critique of the Business Case for Capital Metro Stage 1 that the ACT Governmentreleased on 31 October 2014, concurrently with the request for Expression of Interest to potential suppliers ofthe tramway system.

In general, the Business Case is a highly confusing document, riddled with inconsistencies and errors and poorlyorganised in content. It is extremely difficult for a professional analyst to comprehend, let alone for otherreaders. Even the authors of the Business Case could be challenged to clearly explain what they have written.The Case is far from persuasive but, evidently, the ACT Government has ignored its serious deficiencies.

The most important deficiency of the full Business Case is that it is NOT a ‘full’ Business Case as claimed bythe Government. It does not provide anywhere for the very substantial cost of capital investment, which therevised, independent assessment estimates at a minimum of $398 million and which could be as high as $600

million, in 2014 prices. Nor does it state what the annual repayments would be on the $783 million borrowedcapital, over the planned 20 years repayment period, or give details of the annual subsidies over the 30 year period. Tables 1, 15 and 17 of the Case make it quite clear that $610 million (risk-free, before adding acontingency allowance of $173 million) is the starting point and nowhere is the cost of capital estimated orincluded in that figure.

The Case claims a discounted Benefit Cost Ratio (BCR) of 1.2 but, in ignoring the cost of capital, this figure isgrossly in error. At best, a ratio of 0.81is most likely, after inclusion of the cost of capital in the equation. Thus,Government claims that the project is cost-effective cannot be sustained.

Estimates in the Business case are not complete, there being several cost components acknowledged therein butnot costed and so not included in project estimates, eg for survey work, changes to utilities, some park & ridefacilities and bus/tram interchanges.

The whole document has a major problem with how escalation, inflation and discounting are applied. While itis acceptable practice to use validly produced Present Values (PV) of quantified benefits and costs to establish a

benefit-cost ratio for comparison of options (using a cost of capital or an Internal Rate of Return figure), it is anerroneous practice to use these discounted costs as the actual costs of a project at a given Base Date. A netresult is that the Business Case fails to give total costs in actual 2014 prices, opting instead to present estimatesin heavily discounted prices, which completely distort the financial liability facing taxpayers.

The Government needs to clearly explain why such a large proportion of the expected total cost of constructionand other project costs have been excluded from the Business Case, especially seeing that all Canberrataxpayers are expected to foot the bill.

Given detailed study of the Business Case, findings were used to revise the independent assessment of Capitalmetro Stage1 costs, as shown in the following table. While the overall 30-year estimates have reduced (a lowerinterest rate on capital was used), the annual subsidy has risen moderately and is quite substantial at $19 million

to $24 million.

The Government has failed to provide a coherent or compelling Business Case for Capital Metro Stage 1. Itsmost important deficiency is to ignore the substantial cost of capital which, when included, drops the claimed

benefit-cost ratio to well below unity to 0.81 at the most optimistic. The Government claim that the project iscost-effective cannot be sustained.

All Canberra taxpayers should be made aware of the gross failings of the Business Case and of how theGovernment has apparently ignored them in deciding in October to proceed with the project.

Taxpayer Liabi lity (2014 prices)

30 year 20 year l iabil i ty

Liabil ity Total pa O&M Part [1] per household


Min 1,890 85 19 145,000 586

+20% risk 2,280 102 24 145,000 705



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CRITIQUE

This document is a detailed critique of the Business Case for Capital Metro Stage 1 that the ACT Governmentreleased on 31 October 2014, concurrently with the request for Expression of Interest to potential suppliers ofthe tramway system.

In addition, the basic results are included an independent assessment by Acquisition and Logistics Services(ALS), as revised after study of the Business Case. The original independent assessment “ A case againstCapital Metro Stage 1- what every Canberra voter and taxpayer should know” was released to interested parties

on 22 October 2014 and made accessible on www.canthetram.org.Qualification: This critique looks principally at the integrity of the Business Case, in particular the costestimates except that it does not challenge the construction cost of $783 million. Also, it makes no attempt tovalidate or critique the estimated values of benefits claimed therein; except for the way they may have beendiscounted in the several tables, the nominal values have been accepted as they are. However, experts in the

field could well disagree with some or all of the estimates for claimed benefits. It is also highly probable thatquantification of benefits have been on the optimistic side and cost estimates minimised, so as to give anacceptable Benefit Cost Ratio (BCR). The opinion piece “Proposal built on fantasy” by David Hughes (TheCanberra Times, 17Nov14), clearly lays out a case against the claimed benefits for the project.

General deficiencies

In general, the Business Case is a highly confusing document, riddled with inconsistencies and errors and poorly

organised in content. It is extremely difficult for a professional analyst to comprehend, let alone for otherreaders. Even the authors of the Business Case could be challenged to clearly explain what they have written.The Case is far from persuasive but, evidently, the ACT Government has ignored its serious deficiencies.

A detailed critique of the Business Case is provided at Appendix 1, along with a list of definitions that mayassist readers of this document. General deficiencies are as follows:

• It provides no assistance in how estimates for either costs or benefits are arrived at. It is as if readers areexpected to believe what is said and the figures given - “trust us!”

• It is not consistent and is highly confusing in its use of discount-related terminology, eg the use of‘nominal’, ‘real’, ‘raw’, ‘NPC’, ‘total’, ‘constant’ and ‘present value’ dollar estimates, without providingdefinitions. It is virtually impossible to determine which discount rates are being used for whichestimates, there being no indication of values used or their related timeframes.

• It is not even clear whether the Business Case is estimating the cost of the planned Public, PrivatePartnership (PPP) contract or the total project cost, which includes important components excluded fromthe contract.

• It does not contain a list of acronyms or definitions to assist the reader. This is sometimes donedeliberately to confuse readers.

Most important deficiencies

The most important deficiencies of the full Business Case are considered to be as follows:

• It is not a ‘full’ Business Case as claimed by the Government. It does not provide anywhere for the verysubstantial cost of capital investment, which the revised, independent assessment estimated at a minimum

of $398 million (could be as high as $602million) in 2014 prices. The Government needs to explain whysuch a large proportion of the expected total cost of construction is not included in the Business Case. In

particular, Tables 1, 15 and 17 make it quite clear that $610 million (risk-free, before adding acontingency allowance of $173 million) is the starting point and nowhere is the cost of capital estimatedor included in that figure.

• Given the current case of a capital investment of $783 million ($610 plus P75 risk allowance of $173m),at 7% reducible over 20 years, an annual repayment, in arrears, would be $72.85 Million (comprised ofvariable values each year of principal and interest). While the sum of payments is $1,457 million, theBase Date Value (BDV) of total repayments, discounted at assumed average escalation rate of 3.16% perannum is $1,070 million, giving a net BVD of interest paid of $287 million (1,070 – 783). However, theaccrued cost of capital during the three-year construction period (independently estimated at $111

million, at 7%), has to be added giving a minimum BDV for interest (cost of capital) paid of $398 million(total interest could be $602 million at 9% and even higher allowing for risk). See Table 1below.


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Table 1 – Twenty year interest estimates

The whole document has a major problem with how escalation, inflation and discounting are applied. While itis acceptable practice to use validly produced Present Values (PV) of quantified benefits and costs to establish a

benefit-cost ratio for comparison of options (using a cost of capital or an Internal Rate of Return figure), it is anerroneous practice to use these discounted costs as the true costs of a project in Base Date Values (BDV). This

point is illustrated in Table 2 below. A net result is that the Business Case seriously underestimates the projectcosts.

Table 2- Bank Loan Example – Base Date Values

• For a reason not understood, several of the tables in the Business Case discount the basic estimate of $610million, over 3 years, to a lower figure, at various discount rates. Why, when it itself is an estimateescalated up from some earlier estimate? What Base Dates are used in the Business Case and what are thedates of various estimates?

• Throughout the Business Case, estimates are given predominantly for 23 years (3 years construction plus20 year operating period, while ignoring the costs of years 21-30 of operations.

• The capital cost estimate (Tables 1, 15, 17, 38, 41, 43 and 44) all give a basic estimate of capitalinvestment of $610 million (2014 prices), to which is added the $173 million, P75 risk allowance(contingency). It is clear from these tables that the cost of capital is not included in the $783 million. Itis noted, however, that the figure includes a profit component of $59 million, being 8% on cost. This is avery small profit margin given that it must account for the cost of capital to the firm/consortium, anallowance for risk in addition to the ‘transferred risk’ included in the contingency, plus a normal profitmargin. The basic capital cost of the project has not changed significantly from the 2011 estimate of$614 m, in spite of three years of project definition. This result tests credibility of the Business Caseestimate.

• The Business Case claims a Benefit Cost Ratio (BCR) (discounted) of 1.2 (Table page 17, Tables 18 and29). However, the equation ignores the cost of capital investment, the minimum estimated at $398

Capital Metro Stage 1

Twenty Year Interest estimates 2014 prices Loan ($M) 783

Assumed Interest Rates

BDV Interest Burden [1] 6% 7% 8% 9%

$M $M $M $M

Actual BDV 20 Year Interest [2] 447 533 623 715

Net BDV 20 Year Interest [3] 206 287 372 459

3 year BDV capital carrying cost 95 111 127 143

Total Capital Cost (risk free) 301 398 499 602

Total Capital Cost (+ 20% risk ) [4] 361 478 599 722Notes:

1. BDV (Base Date Value)= values discounted at the assumed escalation rate of 3.16%

2. Actual BDV of interest component.

3. Net BDV interest is $783 less BDV of principal component of annual repayments.

4. Risk is +20% (reduced from 50% because $783 includes $173m contingency).

Bank Loan example

Data

In Abbrev Value

Principal $P 50,000

Interest Rate %Ipa 7.00%

Inflation rate %Infpa 2.75%

Years Y 5

Outputs Total

Abbrev Form ula at Base Year

Date 1 2 3 4 5

PV of a $ pa PV$pa (1-(1+%Ipa) (̂-y))/%Ipa 4.10

Repayment pa $Rpa $P/PV$pa 60,973 12,195 12,195 12,195 12,195 12,195

PV Repayments @ 7% PV$P@%Ipa Same as $Principal 50,000 11,397 10,651 9,954 9,303 8,695 PV Repayments @ 2.75 PV$P@%Infpa $Rpa/(1+%Infpa) ŷ 56,248 11,868 11,551 11,241 10,941 10,648

Base Date Value interest paid PV$Int Actual cost of loan 6,248

Notes:

1. PVs discounted at full interest (discount) rate are not what has to be paid. They are used only for comparison of investments.

2. Once investment decision is made, the Base Date Value (BDV) is what has to be paid.

3. The BDV of the loan is the sum of repayments discounted at the assumed inflation rate.

4. Repayments are made in arrears, at end of each year.


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million (could be as high as $602 million) in 2014 prices. The figure of 1.2 is grossly in error and theratio will be more like 0.81 at best. Therefore, Government claims that the project is cost–effectivecannot be sustained. A detailed comparison of BCRs derived using figures from different tables in theCase and including the cost of capital is given in Table 3 below.

Table 3-Claimed Benefit Cost Ratio (BCR

• Estimates in the Business Case for operating and maintenance costs (Tables 16, 22 and 42) bear no

resemblance to those in the revised, independent assessment of the 30 year Operations and Maintenancecosts yet the Present Values of the two assessments almost agree at about $23m-$24m per annum. Norare the bases of estimates explained in the Business Case. Both assessments agree on a 20 % contingencyas being appropriate.

• The graph for Capex distribution Profile (Figure 23) is recognised as an @Risk® output, but the BusinessCase does not give any detail of the risk profiles of each component of the capital cost modelled. Thecomponents are presumed to be those comprising the Public Sector Comparator (PSC) point estimate of$610m plus Transferable Risk ($81m) and Retained Risk ($68m) for a Mean (P50 of $759m). The graphgives a P75 figure of $783m, which is only 3% higher than the Mean. This is an extremely smallincrement. The Case offers no idea of what inputs and respective risk profiles were input to the model

but the assumed risk profile of each component cost must have been very small. Even taking the

transferred and retained risks into account, the P75 figure using the base estimate of $610m is only 28%above the Mean. This is far too conservative for the capital investment, especially given that the risk onO&M costs is assumed at a reasonable 20%. The revised independent study assumes a risk of plus 20 percent on the point estimates (down from the +50% on the $610 million in the initial, independentassessment).

• The Business Case gives the cost of the Capital Metro Agency during the three-year construction periodat $45m. However, it neglects to include the cost of the Agency during the three years prior to theconstruction phase. The independent assessment estimated the cost of the Agency at $60m for the sixyears.

• The Business Case identifies several costs excluded from a PPP contract that will need to be met by theACT Government but does not attempt to quantify them. These have been included in the revised,

independent cost estimates at a nominal (not justified) $60 million for six years of CMA project officecosts, plus an additional $60 million for project costs outside the scope of the PPP contract, eg

Cost Benefit Ana lysis (PV, $m)

Copy of Tables 18 & 29 Business Case [0] Includi ng Tab 43 figures

$Cost Capital & $Cost Capital

Cost Scenario Value Value [8] Value [9]$m PV Notes $m PV $m PV

1 2 3 4 5

Project Bene fits [1] [2]

Transport Benefits (of which:) 406 406 406

Time Savings 222 222 222

Public transport operating savings 54 54 54

Other transport benefits 129 129 129

Land Use Benefits 381 381 381

Wider Economic Impacts 198 198 198

Total Project Benefi ts 985 985 985

Project Costs [10]

Capex 619 [3] [4] 619 507

$Cost-Net Capital 0 [5] 398 398

Opex 204 [6] 204 269

Total project Costs 823 1221 1174

Project Economic Indicators

BCR (transport and land use) 1 [7] 0.64 0.67 Net Present Value (transport, land use & WEIs) 161

BCR (transport, land use & WEIs) 1.2 [11] 0.81 0.84

Notes:

0. Figures fro Table page 17 and Tables 18 an29 [all the same]

1. No derivation of quantified benefits offered in the Business Case.

2. No discount rates shown.

3. PV figures copied from Table 23

4. Different to Table 43. Why?

5. $Cost-Net Capital not included in Business Case calculation

6. Different to Table 43. Why?

7. BCR at Column 2 is actually 0.96 , not 1.

8. Column 2 figures plus net Base Date Value of cost of capital.

9. Table 43 figuresincluding net Base Date Value of cost of capital.

10. Different figures probable due to use of different discount rates

11. Inclusion of net cost of capital reduces BCR to 0.81


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consultancies, survey work, changes to utilities, new trees, some park & ride facilities and bus/traminterchanges. Land acquisition costs have not been included.

• The assumption of $1.01 for the average tram fare is very low and seems to go against the Governmentcase. The current Single trip, adult fare for ACTION is $4.50. The Gold Coast tram has a flag-fall fare of$3.50. The revised, independent estimate has reduced its assumed average fare from $4 to $3.

• Residual values of benefits are estimated within the ‘transport’ benefits (Table 24) and are presented as‘net’ residual benefits, being (presumed) residual benefits for years after the 30 year contract period less

residual costs for the same post-30 year period. This is an erroneous calculation that serves to inflate theoverall benefits and benefit-cost ratio. It is not a valid inclusion, given that the ‘cost’ side of the equationstops at 30 years.

• The Business Case cites (8.3.5.3, page 122) “…participants recommended the ACT Government providean affordability signal to the market during the RFP stage..” This content of the Business Casecontradicts the ACT Government’s oft-stated position that release of such information would prejudicetendering. The independent assessments refute the Government’s position as a ‘self-servicing fallacy’.

• In respect of costs in excess of affordability (9.9.2), two optional strategies are offered, neither of whichwould provide a suitable compromise for most Canberran taxpayers and voters. Other more acceptableoptions would be to either to cancel the project, or to defer the project until after the next ACT electionwhen the current Government can test its claimed mandate for the project.

Revised, independent assessment

After release of the Business Case, its detailed study has led to revision of the following assumptions that have been incorporated in a revision of the initial independent assessment:

• The assumed cost of capital has been revised down from 9% to 7% per annum.

• The Base Date Value (BDV) has been calculated for the total capital investment cost (including cost ofcapital) over 20 years at an assumed average escalation rate of 3.16% pa; ie the BDV of the sum of theannual repayments over 20 years, has been discounted to the Base Date year of 2014 at the assumedescalation rate. The 3.16% is an equally weighted average of the assumed wage and material indexes(0.5*3.75% + 0.5*2.27%)1. Although the assumed inflation rate of 2.75% is included in nominal

discount rates used in the Case, it is not appropriate as an escalation factor for costs.• Given that the basic P75 estimate of $783 million, includes $173 million of contingency (28%), the

maximum risk of capital investment has been reduced from 50 % to 20 %.

Consequently, the revised independent assessment is summarised at Table 4 below. The expected annualrepayment of loan and interest (availability payment) will be between $85 million and $102 million over 20years and the overall cost over 30 years is now estimated at from $1,890 million to $2,280 million including aresidual, annual operating subsidy of from $18.9 million to $23.7 million (all values in 2014 prices). Revised,estimated taxpayer liabilities per Canberra household are given in Table 5 below. Note that these revisedestimates are considered rock-bottom estimates. Given the history of cost blow-outs on other major projects inthe ACT (the dam, the gaol, Gungahlin extension and probably the Majura parkway), final costs could well bemuch higher.

1 Taken from Table 62 of the Case.


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Table 4 – Summary of revised, independent assessment

Table 5 – Revised, estimated taxpayer liabilities per household (costs only)

Conclusion

While the total cost estimate has been revised down from a range of $2,138 million to $3,064 million to a probable range of $1,890 million to $2,280 million, the net, annual O&M subsidy has risen moderately to arange of $19 million to $24 million, excluding the assumed value of benefits that may not be realised for manyyears if ever.

The Business Case gives the 30 year value of benefits at $984 million against an estimate of $823 million incosts (2014 prices), claiming a BCR of 1.2. However, when the ignored cost of capital of a minimum of $398million is added (could be as high as $602 million), the best BCR drops to about 0.81 and possibly as low as0.61.

M.R. FlintPrincipal Consultant, Acquisition and Logistics Services

Canberra, ACT

25 November 2014

Max Flint has specialised for many years in providing logistics services for defence-related major capital project acquisitions, including life-cycle costing. He is well qualified in this field, having extensiveexperience as a logistician in the RAAF, the Department of Defence and as a consultant, as well as

possessing a diploma in electrical engineering from RMIT and a Master of Science (Logistics Management)with Distinction from USAF Institute of Technology.

Capital Metro Stage 1

Estimated Life Cycle Cost - Summary

Total Cost Total Cost Total Cost

Cost Component [1] 30 Years Years 1-20 Years 21-30

All costs in 2014 dollars $m $m $m

Probable Up-front payment [2] Assumes 20 Y loan

BVD-Probable Up-front payment 184

BVD-Probable Up-front payment + 20% 242

Average Annual Cost Assumes 20 Y loan

BDV Annual Cost [3] 85 19

BDV Annual Cost + 20% 102 24

Total Project Cost (2014 $) 30 Year Life 30 20 10

BDV Project Cost 1,890 1,701 189

BDV Project Cost + 20% 2,280 2,043 237

CMA Project Management [4] 120 na

System Cost

BDV System Cost [5] 1,269 33

BDV System Cost + 20% 1,549 50

Net Operating &Logistics Costs

BDV of Nominal Estimates [6] 312 156

BDV of Nominal Estimates + 20% [7] 374 187

Notes:

1. All figures in Base Date Values (BDV). Base Date is 2014.

2. Assumes Government will not avoid an up-front payment at System Acceptance.

3. Assumes repayment of capital cost over 20 years under PPP funding arrangements.

4. CMA costs prior to System Acceptance.

5. BVD of System capital cost ($783m) + BVD of Loan Interest.

6. Allows for deduction of fare and other revenue.

7. Risk on through-life costs is assumed +20 % based on personal experience.

Taxpayer Liabi lity (2014 prices)

30 year 20 year l iabil i ty

Liabil ity Total pa O&M Part [1] per household


Min 1,890 85 19 145,000 586

+20% risk 2,280 102 24 145,000 705



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Appendix 1 toCMetro_BCase_Ctritique_1.2

SPECIFIC COMMENTS ON BUSINESS C ASE

Reference Pri Subject Query/Comment

1.2, 1.3 1 Full Business

Case

It is not a Full Business Case. It does not provide:• for the cost of capital investment [independently assessed at no less than

$398m in 2014 prices]; or• any idea of the annual availability fee that will need to be paid.It is a patent error to give Present Values (discounted) estimates as actualcosts, as done in this (and other tables).

Table 1 1 Capital costestimate(P75),$mnominal

It is clear that the $610 estimate does not include the cost of capital.Includes ‘Contractor’s overhead and profit of 8% on cost (most probably toolow).It Includes escalation by $65m from an initial estimate of $545m to $610m. Butwhy? Was this not a new estimate made in 2014?This is stated to be a new estimate, not one updated from 2011, or is it? If anupdated estimate, the escalation rate is 3.8%pa over 3 years.Contingency (P75) of 28% [most likely too low].

The estimate has not changed much from 2011, in spite of three years ofadditional project definition. Amazing!

Table 2and notes

1 Comparison Totalcost ($m NPC) ofPSC and PPPProxy

Neither estimate is ‘total’; both exclude the cost of capital.It is a patent error to present Present Values (discounted) estimates as actualcosts, as done in this (and other tables).Notes: PPP Proxy discount rates used are not given anywhere in the Case(unless the figure of 5.52% given under Table 21).Capex rate independently evaluated at 8.69%. Opex rate independentlyevaluated at 12.27%.

1.6.3 andtable p17

1 Benefit cost ratio BCR (discounted) of 1.2 claimed but is grossly in error, given that the cost ofcapital is excluded from the equation.

3.1.1Table 4

2 Park & RideInterchanges

Enabling works

These imply additional costs outside contract scope but which should beincluded in the project cost.

3.1.2.3 2 Establishmentworks

Some imply additional costs outside contract scope but which should beincluded in the project cost.

3.1.2.6 2 Park & RideInterchanges

These imply additional costs outside contract scope but which should beincluded in the project cost.

3.1.2.8 3 Tram capacity =200

Yes – but seating for only 85. A lot of commuting standing up, hanging onto astrap to be done.

3.1.3.2 2 Travel Timeclaimed is 25minutes.

Independent modelling shows travel time more likely to be from 30-35 minutes.

4.2.2.2Figure 12

3 Canberra’s lowdensity

At least acknowledged. Currently about 450/m2

Table 11Problem 3

1 Light rail creates jobs

Yes, but so would comparable infrastructure development. This is not alegitimate benefit for Capital Metro (except in respect of permanent operations

and maintenance jobs created).4.3.2 3 “… housing in Australia …”

Accepted, but where is the forward planning for transit corridors in Canberra?None for the huge development of Molonglo is a good example.

4.3.2.1 2 Patronage Independent modelling shows that the 2021 estimate is feasible but that the2031 estimate is not feasible with 12 operational trams (or even 17, themaximum that could be physically managed on the corridor).

5 Keymessages& 5.1.2

2 “… current capitaldelivery costestimate is inorder of earlier$614m…”

Capital Metro claims that these are new estimates, unrelated to the 2011estimates.

Absolutely remarkable, given three years of project definition since thatestimate in 2011!Few if any project costing experts could accept such a result.

Table 15[also Table1]

1 Capital deliverycost estimates($m, nominal,P75)

See comments for Table 1The whole document has a major problem with mixing discount-related

terms, eg ‘nominal’, ‘real’, ‘rae’, ‘NPC’‘total’, ‘constant’ and ‘presentvalue’ prices.


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5.1.5.2 2 Opexbenchmarking

It is quite feasible for experienced operational and maintenance professionalsto make a good estimate of operations and logistics costs and the Case claimsto have engaged costing experts. The independent assessment of Opex costswas not that difficult.

Figure 21,p83

1 Discount rate of5.52%; escalationrate of 2.75%

These discount rates do not seem to be used anywhere.

Figure 22 2 Comparison ofcost estimates

There does not seem to be a need for Figure 22, which serves only to confuse.

Table 16 1 Operating,maintenance andlife-cycle costs($m nominal)

There has been no basis offered for the estimates or why operations costs areso much higher than maintenance costs.Costs are for 30 years but later tables use only the 20 year totals.These estimates for each of operating costs and maintenance costs bear noresemblance to those in the independent assessment of the 30 year O&L costsyet the PVs of the two assessments almost agree at about $23m-$24m perannum.Both assessments agree on a 20 % contingency.The figures in this table do not agree with those in Table 22, althoughestimates in the latter are in ‘real’ $m they agree with those in Table 38 whichare ‘nominal’ estimates.Error : The yearly totals do not even add up correctly.The following table give Table 16 totals (not actually in Table 16) and thedifferent, apparent discount rates used in other tables, as an example ofinconsistent use of discount rates.

5.1.8 1 Capital Metro Agency costs

This paragraph gives the cost of the CMA during the three-year constructionperiod at $45m. However, it neglects to include the cost of the Agency duringthe three years prior to the construction phase.The independent assessment estimated the cost of the Agency at $60m for thesix years.

This has to be considered an error in the Business Case.While a project cost, it should not be included in the contract cost estimate.

Figure 23 1 Capex distributionProfile ($mnominal)

The graph for the PSC Capex distribution Profile is recognised as an @Risk ®output.The components are presumed to be those comprising the PSC point estimateof $610m plus Transferable Risk ($81m) and Retained Risk ($68m) for a Mean(P50 of $759m).The graph gives a P75 figure of $783m, which is only 3% higher than theMean. This is a very small increment. The Case offers no idea of whatinputs and respective risk profiles were input to the model but the assumed riskprofile of each component cost must have been very small.Even taking the transferred and retained risks into account, the P75 figureusing the base estimate of $610m is only 28% above the Mean. This is far tooconservative for the capital investment, especially given that the risk on O&M

costs is assumed at a reasonable 20%.Note: The author of this critique is an experienced cost risk analyst, includinguse of @Risk® and having developed cost-risk models validated by @Risk®.

O&M Total (Y) $Nom inalComponent 20 30

Op Cost 484 848

Mnt Cost 96 161 LCC 48 83

Total O&M 1.66 628 1,092

Risk 116 197

Total $Nominal 744 1,289

BDVs Less Risk 625

Discounted @

BDV esc Rate 1.03 3.16%

BDV Total (Y) 445 445 657 BDV $pa (Y) 22 22

Tables 22&23 Less Risk 665

Discounted @ 665PV nominal Rate Table 43 1.12 12.34%

PV Total (Y) 204 204 230

PV $pa (Y) 10 8

Table 43 Less Risk 625 Discounted @

PV nominal Rate Table 43 1.09 8.67%

PV Total (Y) 269 269 327 PV $pa (Y) 13 11

Table 44 Less Risk 625

Discounted @

PV nominal Rate Table 44 1.12 12.27%

PV Total (Y) 205 205 231

PV $pa (Y) 10 8


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6KeyMessages

2 …benefits to thecommunity ofaround $3,587b(nominal) over 30years…

$3.587b in nominal terms is a very interesting figure but not explained in anyway . Given a claimed BCR of 1.2, the corresponding 30 year nominal costwould be $3.000b over 30 years.The independent assessment put the 30 year cost at between $1.900b and$2,300b (in 2014 prices). These would escalate up to a total of $3.270b over30 years @ 3.16% pa.The two estimates are quite close.

6KeyMessages

1 .. an anticipatedBCR of 1.2…

This figure does not include the cost of capital investment.Therefore, a figure of 1.2 is grossly in error; the ratio would be more like 0.81 atbest (using Business Case estimates).

Table 18 1 Cost Benefit Analysis ($m PV)

There are no bases offered for the dollar estimates of so-called benefits.Presumed to be over 30 years.Cost figures (3+30 years) taken from Table 23,The whole document has a major problem with how escalation, inflation anddiscounting are applied. While it is acceptable practice to use validly producedPV for quantified benefits and costs to establish a Benefit-cost ratio and forcomparison of options, it is erroneous practice to use the discounted cost asthe true cost of a project in Base Date prices (see text for detailed explanation).

top Page90

1 Economic benefitsare discounted at7%, …(in contrastto PSC and PPPProxy discount

rates)

There seems to be an inconsistency here. Also, later in the Case, the PSC is discounted at 7% but the PPP Proxy at adifferent figure.

Table 19 1 Economicassumptions -discount rate

Error: The discount rate is given as a ‘real’ rate of 7%, whereas the nominalrate is 7%.The ‘nominal’ rate comprises the ‘real’ rate and the assumed inflation rate(2.75% ?).This is one example of confusion caused by inconsistent and unexplained useof different discount rates.

Table 19 2 Value of time realescalation.1% per year

There is no definition offered for this term (or for any other for that matter), norhow it is applied.

Table 19 2 Annualisation andextrapolation

There is no definition offered for this term or how it is applied.

Table 21 1 Summary ofoperating,maintenance andlife cycle costs(real $m)

Error: Table is incorrectly headed “Summary of operating, maintenance andlifecycle costs (real $m, year ended 30 June)’. The index of Tables is also inerror. The title should be perhaps “Anticipated real capital costs associated withdelivering the project”.The purpose of this Table is unclear; but it serves to further confuse.Why does it include CMA costs of $45m (really higher) yet ignores additionalcosts of the project outside the PPP capital investment estimate?While these are part of the project cost, they are not part of the capital cost ofthe potential contract.The Business Case is not in fact clear on whether it is estimating theproject cost of the contract cost, although the latter is presumed.This table is a classic case of getting ‘real $m’ and ‘nominal $m’ mixed up. Thesame problem occurs throughout other tables. Quite confusing!

6.2.5.2,para 3 1 O&M costs In reference to Table 22, O&M costs over 30 years, in ‘real $m’, is estimated atan average of $22.2m per year.The independent estimate is $24m per year (2014 prices).The term ‘real $m’ is not defined.The figure of $22.2m per year does not appear directly n Table 22 butindirectly as the total $665m divided by 30.

Table 22 1 O&M costs There is no basis offered for O&M estimates .These estimates for each of operating costs and maintenance costs bear noresemblance to those in the independent assessment of the 30 year O&L costsyet the PVs of the two assessments almost agree at about $23m-$24m perannum.Both assessments agree on a 20 % contingency.Error: ‘Operating costs’ should read ‘Operating and maintenance costs’.

The figures in this table do not agree with those in Table 16, although latter are

in ‘real’ $m.


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Table 23 1 Summary ofProject costs (real$m…)

Error: The table claims ‘real’ $m but the totals are the same as ‘nominal’ $mfigures. Another example of confusing terminology.Why are capital expenditures being discounted over 3 years, given that thebasic $610m is an escalated figure?What is the Base Date used in the Business Case?While it is acceptable practice to use validly produced PV for quantifiedbenefits and costs to establish a Benefit-cost ratio and for comparison ofoptions, it is erroneous practice to use the discounted cost as the true cost of aproject once the option is selected (see text for detailed explanation).What is the Base Date?

Table 23note under

1 …financingcosts…

Cost of capital finally acknowledged, but is not estimated or included anywherein the Business Case.

6.2.8.2 1 Residual Values Residual values are estimated within the ‘transport’ benefits and are presentedas ‘net’ residual benefits, being (presumed) residual benefits for years after the30 year contract period less residual costs for the post-period.This is an erroneous calculation that serves to inflate the overall benefits andbenefit-cost ratio.

Table 24 2 Summarytransport benefits(total and PV $m)

‘total’ cost is presumed to mean ‘nominal’ cost.This table is quite strange. The ratio of ‘Total’ to ‘PV’ values should be muchthe same but vary considerably.

Also, the table takes into account ‘residual value’ of benefits [forever after the30 year period]. This is not a valid inclusion, given that the ‘cost’ side ofthe equation stops at 30 years.

Page 100 3 Urban

densificationbenefits

The Case covers claimed benefits of densification but not any of the

disadvantages, as if there were none. Yet, there are people who prefer not tohave such densification.

6.2.12.3 3 Additional taxrevenue…

This claim is rather doubtful and open to challenge.

Table 29 1 Cost Benefit Analysis

This table excludes the cost of capital investment. Therefore, a figure of 1.2 isgrossly in error and the ratio will be more like 0.81 at best.Yet another example of presenting fully discounted PVs of costs as the truecost of a project, which is patently in error (see text for detailed explanation).

7.0Table 31

1 Ticketing and faresetting.

Later in the Case, it assumes an average fare of only about $1. The currentSingle trip, adult fare for ACTION is $4.50.The Gold Coast tram has a flag-fall fare of $3.50.The assumption of a $1.01 fare is for the tram is somewhat difficult tounderstand.

8.1.1 1 • Not free money Cost of capital acknowledged but is not estimated and is totally ignored in the

Business Case.Table 36 2 PPP (Availability) Who owns the infrastructure created by the project? The Case implies that the

Contractor does.8.3.5.2, dotpoint 3

3 Key risks, costsand commercialprinciples

This paragraph, talking about preferences of operators and equity providers,seem to be at odds with Federal Government guideline documents.

8.3.5.3,page 122,dot points3-5

1 … the ACTGovernmentprovide anaffordability signal

This content of the Business Case contradicts the ACT Government’s claimthat release of such information would prejudice tendering.The independent assessment refuted the Government’s position as a ‘self-servicing fallacy’.

9.1 3 Methodology The independent assessment is essentially a PPP Proxy and done for thesame reason.

Table 38 1 Raw costestimates

(nominal $m)

This table needs review for accuracy and consistency with previous data.Estimates are for the 20 year operational period only (see Tables 39 and

62). NPC of $507m from $610m is 6.4% over 3 years. 7% would give $503m.But why is the $610m discounted when it was escalated over three years from$507m?The $610m does not include the cost of capital.O&M costs $625m discounted over 20 Years to $269m, being a discount rateof 8.7%. Where did this apparent rate come from?Fully discounted costs are again being presented as Base Date project costswhen they are not.Yet another example of mixing ‘apples’ and ‘oranges’ and cause of confusion.

9.1.4last para

1 PSC and PPPProxy

CMA has made PSC and PPP discount rate assumptions, implying differentrates for the two methods. However, while paragraph 9.1.4 implies these areused for PPP Proxy estimates, the Case does not show how or why for eithermethod.

Table 39 1 Timing

assumptions

Note that the Operational period is set at 20 years, and not 30 years.

9.2.5 1 Base date First mention of a Base Date set at May 2016 (not 2014) but does not seem tobe applied consistently in the Business Case.


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Table 41 2 Risk adjustedPSC…

This table again uses the basic cost of $610m, but why discounted at all? Whatis the Base Date?

Table 43 1 Total Costs 23 Year costs (3 construction + 20 O&M)The $610m does not include the cost of capital.Fully discounted costs are again being presented as true project costs whenthey are not.Total O&M Costs discounted from $625m to $269m over 20 Y, giving adiscount rate of 8.7% (where from?).See also Comments on Table 44.Why discounted at all? What is the Base Date?

9.3 1 PPP Proxy, dotpoint 2.‘Bid costs andfinancing costs(including…)

This statement implies that the subsequent PPP Proxy estimates includefinancing costs, but the Business Case excludes the cost of capital inpreceding tables.

Table 44 1 Base Case P75Cost estimates

$610m Capex is now discounted to $475m (instead of $507m for PSCestimate). Why discounted at all given that it was escalated over three yearsfro $507m? What is the Base Date?This means a discount rate of 8.7% pa over 3 years and O&M costs arediscounted at 12.27% pa over 20 years. Why?Fully discounted costs are again being presented as true project costs whenthey are not.

Also, figures are for 20 years only.

Table 44,Note 3

1 PPP Proxydiscount rate

The different discount rates used for the PPP Proxy calculation is neither givennor explained.

9.4, para 2 1 “…ACTGovernmentoption of making acontribution equalto 50% of projectdebt…”

The independent assessment discusses in some detail this probable course ofaction and gave details of interest savings achieved.

Table 45 1 Total Cost ($mNPC) of PSC andPPP Proxy

Error: Presented as PPP Proxy estimate but NOT in the title.This is the most confusing of all the tables. While the PSC nominal anddiscounted figures are know from previous tables, the is no explanation of howthe PPP figures were arrived at and presented only as NPCs. Where are thenominal PPP estimates?

Neither the PSC nor the PPP Proxy includes the cost of capital.Note that the fully discounted costs are again being presented as true projectcosts when they are not.

Also, figures are for 20 years only.Table 45Note 1

1 NPC of availabilitypayments

This note says that the $804m is the NPC of the availability payments[presumed over 20 years].This cannot be the case, because cost of capital is not included and, otherwisethe PPP Proxy would be much greater than that shown.Nowhere does the Business Case give a figure for the 20-year availabilitypayment, which the independent assessment estimated to be a minimum of$85m to $102 m per year (in true 2014 prices).Note that the transferred risk component of the PSC needs to be included inthe project cost, yet excluded from the PPP Proxy estimate for the contractcost.

9.7.1.1 2 Cash flow impact This paragraph contradicts earlier statements about contribution to lowerproject debt.

Table 46 1 Potentialrevenues ticketsales;

Average fare

Later in the Case, it assumes an average fare of only about $1.01. The currentSingle trip, adult fare for ACTION is $4.50.The Gold Coast tram has a flag-fall fare of $3.50.

Although the average of the foregoing rates would be somewhat lowerbecause of concession fares and interchanges with bus fares, the assumptionof a $1.01 fare for the tram seems extremely low.It is also difficult to understand, given that it goes against the Governmentscase by significantly increasing the operating subsidy.

Table 46andNote 2

1 Potentialrevenues ticketsales;

Average fare

Estimated average fare is actually cited as $1.35, but reduced to $1.01.Neither figure is explained.


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9.8.3 1 Other Costs This paragraph discusses other costs that need to be added to the overallproject cost to the ACT taxpayers, in addition to the contract cost.

9.9.1 1 Affordability signal In respect of an affordability signal, the Business Case contradicts the ACTGovernment’s claim that release of such information would prejudice tendering.The independent assessment refuted the Government’s position as a ‘self-servicing fallacy’.

9.9.2 1 Costs in excess ofaffordability;strategies thatcould be adopted.

Two optional strategies are offered, neither of which would provide a suitablecompromise.Other more acceptable options would be to either:• to cancel the project, or

• to defer the project until after the next ACT election when the currentGovernment can test its claimed mandate for the project.

Table 62 1 Key Assumptions Model period is 23 years. There is potential for confusion in estimates base on20 years versus 33 years.Costs shown are ‘raw’ PSC costs from Table 38.Other assumptions for Consumer Price Index (2.75%), Wage price Index(3.75%) and Construction Cost index (2.77%) seem about right and areacceptable for the analysis. However, while paragraph 9.1.4 implies these areused for PPP Proxy estimates, the Case does not show how.

DEFINITIONS REQUIRED (NO DEFINITIONS OFFERED IN THE BUSINESS C ASE)

Term Definition QuerySource

[otherwise by author]

‘ownership of the project’[Table 36; p117 ofBusiness Case

No definition offered in Business Case.Who in fact will own the infrastructure during and after theconcession period of 20 years? The ACT Government or thecontractor?

‘total’ values[Table 24 of BusinessCase]

No definition offered in Business Case.Presumed to be the same as ‘nominal’ values.

Annualisation andextrapolation[Table 19 Business Case]

No definition offered in Business Case.Presumed to be values of daily modelled outputs convertedto annual outputs, by multiplying by 345 for car-related

outputs and 315 for public transport-related outputs. Average Escalation Rate The Business Case gives a Wage Price Index at 3.75% and

the Construction Cost Index at 2.77%. Assuming a ratio of60%-40% wages/construction, an average of 3.16% is usedas the escalation rate in the revised, independentassessment to obtain Base Date Values (BVD).

figures from Table 62 ofBusiness Case.Weighting by author.

Base Date Value Future date values discounted to the Base Date by theassumed Average Escalation Rate.

Not to be confused withthe Present Value (PV)qv

Base Date-Business Case May 2016 for the Business Case mentioned at paragraph9.2.5 but no explanation on how used.

Base Date-independentassessment

2014

Constant prices No definition offered in Business Case.

All costs and benefits estimated in constant 2014-15 pricesand discounted to the present year.

[Table 19 of Business

Case]

Daily modelled outputs[Table 19 Business Case]

No definition offered in Business Case.Presumed to be those outputs (eg boardings, revenue) forwhich values are estimated on a daily basis.

Life cycle cost[as used in Business Case]

No definition offered in Business Case.Presumed to comprise costs of upgrades to infrastructureand even purchase of additional trams if necessary, butexcludes costs of routine operations and logistics(engineering, maintenance and supply).

Different to normallyaccepted definition

Net Present Cost (NPC)[Table 2 of Business Case]

No definition offered in Business Case.Presumed to be the total PVs of nominal costs, asdiscounted at the given rate.

Nominal $m

[used in Business Case]

No definition offered in Business Case.

Costs or revenues to be met or received at a future date.Same as ‘then year’ dollars.


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Present Value (PV)[Table 24 of BusinessCase]

No definition offered in Business Case.Future values discounted to a base date at a given discountrate.

Raw cost estimates Definition? Nominal less risk and adjustment for competitiveneutrality (para 9.2.2).

Real $m[Business Case Table 22]

No definition offered in Business Case.

Residual value[6.2.8.2 of Business Case]

“… discounted net economic benefits of extending thelifetime of the project beyond the 30 year horizon (note: theeconomic analysis period reflects economic analysisguidelines, not the proposed operating term). This assumesa continuing stream of project benefits, renewal of the rollingstock and ongoing operating, maintenance and replacementcosts.”

The description givenunder 6.2.8.2 is clearexcept that it does notsay that it is for 30years after the initial 30year period. Thedefinition implies‘forever’.

Value driver assumption[9.3, p132 of BusinessCase]

No definition offered in Business Case.No presumption offered.

Value of time realescalation[Table 19 Business Case]

No definition offered in Business Case.Presumed to mean an assumed escalation rate with time ofcosts and benefits.Table 19 sets this at 1%.

critique of canberra capital metro

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