neil douglas, douglas economics - changes in project evaluation

Neil Douglas Douglas Economics

Trends in Transport Project Appraisal

Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014

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Also NZ report

Julieta Legaspi TfNSW Peter Bannister & George Karpouzis helped Not an official view of course!


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Also in 2013 – this NZ report which reviews alternative evaluation approaches And parameter values (mainly public transport but includes some road values)


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Cost Effectiveness Analysis

Multiple Criteria Analysis

Economic Impact Analysis

Social Cost Benefit

Analysis

Financial Appraisal

The ‘same answer’ Special Case


Focus of this talk

Gut feel!

The starting position and finishing position?

Toll Roads

1. A Brief history of transport appraisal in NSW/Australia

Bradfield meets Lang for ‘tea and scones’ early 1920s Personal briefings to discuss alternative plans, costs toll charges and forecast revenue “I remember” John Lang

The Harbour Bridge


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Gut feel?

1960s Agriculture applications (after USA)

1966 “Investment Analysis” Commonwealth Government

1970s Vernon Commission – a high point after ‘60s credit squeeze

1972 Whitlam Gov’t States Grants: 2/3rds grants to States having done CBA


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Roads

“Engineering Economy” 1970s = Design, speed, discounting NASRA/ARRB – advocate approach at conferences But Treasury involvement minor


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Manuals/Guidelines

1st = Water/Electricity 1970s

NSW 1988 NSW Capital Works Committee >$5m CBA Only Stipulation 7% discount rate NSW Treasury: “Guidelines on Economic Appraisal of Assets”

workshops , accredited list of evaluators 1990s Total Asset Management Process (TAM) >$1m Process included “Value Management” Early 1990s Roads and Traffic Authority 1993 State Rail Authority


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NZ History Project Evaluation 1970 Ministry of Works 1982 Cost Benefit Appraisal the standard approach for road eval 1986 National Roads Board set up – developed TR9 a CBA Manual 1988CBA required for all roads 1991 Project Evaluation Manual developed BCR>4 1991 Resource Management Act – land use effects of roads 1995 Transfund set up (efficient alternatives) 1996 Review of alternatives – CBA selected 1997 Alternative to Roading Eval. Methodology – Efficiency Ratio 2002 Value of Time Study – WTP values for road and PT 2003 Package evaluations 2004 Land Transport NZ set up 2006 Economic Evaluation Manual developed 2008 Green Party instigates move away for CBA 2008 Roads of National Significance


2. Transport funding

$4.3b Petrol /Diesel Tax

$1.3 billion investment


10 Who collects the money WHO determines how it’s spent?

800,000 sq kms 1/10th 7.3 million people 1/3rd

State

Federal

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60

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1900 1920 1940 1960 1980 2000

Tota

l Tax

Tak

e %

States

Federal

Wider – vertical fiscal “imbalance

Henry tax review > land tax suggested


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Applications for Commonwealth funding

Commonwealth Department of Infrastructure Transport (DoIT)

National Building Program – roads/rail (& cycleways)

$37 billion 4 years 2009- $10b per year NSW $3billion per year 33%

Infrastructure Australia projects >$100 million advice to Minister

Northern Sydney Freight Corridor No NSW public urban transport project so far But Parramatta Epping $2.1b approved ?!


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Infrastructure Australia assessment framework

Priority List 1. Early Stage 2. Real Potential 3. Threshold 4. Ready to Proceed

Framework Strategic Alignment Problem definition Solution development

CBA – required at 3 and 4 stages 7% discount rate Best practice/standard parameters Non monetized impacts appended – 7 point scale Wider economic benefits not in core evaluation Non monetized impacts appended – 7 point scale

Seven National Priorities +

Align with State Plans


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Economic appraisal manuals guidelines

Australian Economic Appraisal Guidelines

NSW Road Evaluation Manual

NSW RailCorp Capital Project Evaluation Manual

ATC National Guidelines

TfNSW Principles Guidelines for Economic Appraisal


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No shortage of manuals!

Recent developments in economic appraisal techniques

Gateway reviews

2004 Assurance to Gov’t –process as well as project

George Karpouzis: Engineering / recurrent cost focus Much less on scope /benefits

Misunderstanding of financial versus economic

A UK Treasury import


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“a number of major projects that have been selected have either been delayed or cancelled – notably the Sydney metro, a $400 million bill for taxpayers for nothing at all. The underlying failures leading to these outcomes have been poor planning and project selection rather than an inability to deliver”. Infrastructure NSW

Still can blow $400 million on Metro project - INSW


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Bloated business cases – escalating cost Retrospective Advocacy One way progression Secrecy

Business Case Problems


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Centralisation of transport planning in NSW

Integration - road rail buses ferries………..

BUT

Separation from grass roots & history shows evaluation most useful at middle level?

(Top level – all politics?)

For economists: One ‘value of time’– a return to the 1970s


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Mackie v Nash

Continuing Transport Economics Boxing Match


Value of Time

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“There is no reason for the value that the

individual is willing to pay to reduce travel time to

be equal to the value that society as a whole

attaches to the reassignment of time of that

individual to other activities”.

Mackie concluded that “using individuals’ or

groups’ willingness to pay as their value of time

savings is inappropriate for social evaluation”

and therefore Mackie supports the UK practice of

adopting an ‘equity’ approach to the valuation of

non-working time, Mackie et al (2003).

Peter Mackie


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“the British approach, again like many others, attempts to allow

for equity considerations by using common values of time, risk of

accidents and environmental amenity regardless of income.

Nash:

This might have been reasonable at a time when appraisal was

mainly applied to road schemes which were paid for by the

government but gave time savings to users,

but now that appraisal is often applied to schemes which trade-off

time savings against money cost (e.g. whether to replace buses

with higher priced light rail services, whether to reduce road

congestion by means of road pricing), it may be highly misleading.

It would be quite possible for the appraisal to conclude that the

scheme was desirable on the basis of a standard value of time,

when according to the actual values of the users it was not (or vice

versa).” (Nash, 2010, p. 9)


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In March 2013, TfNSW released “Principles and Guidelines for Economic Appraisal of Transport Investment and Initiatives” (PGEATII),

TfNSW Harmonised (same) value of time for equity reasons of $13.76/hr for ‘private’ road & PT. Dates to a 1997 AusRoads working group (40% wage)

I recommend: Income standardisation – considers income differences Allows for differences in mode (hence quality), mode, travel time component, journey purpose See Douglas & Jones ATRF 2013


NZTA announced move to a common value of time in July 2013

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Declining Discount Rates (except in NSW) Makes discounting (and economists) less important! Longer evaluation period (bigger spreadsheets) Greater importance in forecasting the future – ‘mugs game’ The ECONOMIST

Country Discount Rate Evaluation Period

England 3.5% for first 30 then 3% 60 years

Germany 3% nk

Netherlands 2.5% plus 3% risk premium varies 100

years/infinite

Sweden 3.5% changed from 4% recently 40-60 years

USA 7% Federal with State rates varying from 3-7% 25-30 years

NSW Australia 7% - never changed for nearly 20 years 30 years

QLD Australia 6% varies

WA Australia No official position – looking at it NK

New Zealand 10% for decades then 8% around 2010

Now 6% from July 2013 40 years

from July 2013



Wider Economic Benefits – needed to offset cost increases?

Sydney Airport Rail Link 1990s Urban consolidation benefits

Since mid 2000s Factoring for agglomeration etc Eddington – origins in London Cross Rail project Now Infrastructure Australia but ‘not in core evaluation’

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Neither is Macro Economic Modelling of projects But IA NSW used it to evaluate CW and other projects NZTA commissioned Deloittes to evaluate RONS using CEG model

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NZ Roads of National Significance


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Significance and RONS

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Wellington Northern Corridor RONS comprises 7 projects

Five have BCRs < 1: Airport to Mt Victoria, Terrace tunnel, Peka Peka to Otaki,

Transmission Gully MacKays Crossing to Peka Peka

Two BCR > 1 (and only just) Basin Reserve Flyover & Aotea Quay to Ngauranga upgrade

How come they are getting built?

Projects rated on "strategic fit" and "effectiveness“

Green / Labour Party changed funding rule from largely CBA basis requiring a BCR of 4 for Transfund funding to one based on MCA.


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So how justified economically? Answer: as a corridor package. The 7 projects have a combined BCR just >1 with ‘wider economic benefits’ included


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Transmission Gully

27kms

26kms


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Linden

Wainui Saddle 262m

Height of Ngauranga Gorge Summit 130 metres

Proposed Transmission Gully Route

McKays Crossing

170m

Pukerua Bay

Existing SH1

SH 58 Intersection

SH 58 Intersection

Transmission Gully


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Escalating Cost – “build it now or the cost will go up” It has! -A politician’s argument not an economist’s -but the politician has been proved right


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Transmission Gully

Two consortiums –

Wellington Gateway Partnership Positive Connection New Zealand-based and international organisations. Each consortium was made up of a construction firm with road designers, investors and companies able to maintain and operate the road.

The road will be built and operated by a consortium for 25 years in a PPP which ensures the government retains ownership of the road. Availability Toll – amount of time road is available for Toll – patronage risk


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Transmission Gully

Pros Existing Route is Unsafe Congested esp bank holidays/peak Alternative earthquake route – ‘resilience’

Cons Terrain - Escalating Cost Few would use TG especially if tolled HGVs use flatter coastal highway (Tolling wrong road) How effective in earthquake? (crosses fault lines) Environmental impact - Pauatahanui Inlet (tree planting) So argue improve coastal route Improvements have been done -BCR now close to 1


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Wellington Basin Reserve Flyover ($90-$100 million)


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Amenity Value v Cost – Flyover (Bridge) or Tunnel?


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NZTA argues Flyover is a Public Transport enabler WTN can’t have BRT/LRT if WCC does not agree to NZTA’s Flyover Bargaining chip or blackmail?

$10 m Cycle lane included not wide enough very low BCR $10 m New stand at Basin Reserve Road designation – SH v local road Social Media – eg Scoop

Flyover & PT


Conclusions: Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014

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CBA only a tool – can’t select options Bigger models and fatter reports But technique not much different Forecasting future still a mugs game

Costs escalating – easy roads built! Search for WEBs to cancel out (but WECs?) Equity values of time Discount rates lowered

Environmental impacts Still can’t value amenity And probably never will

Economists not the high priests of decision making Politicians still ‘kings and queens’

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Can economics help in the argument over what’s a good structures?

“Beauty in things exists merely in the mind which contemplates them” David Hume Essays, “Moral and Political”, 1742


Ross Hayward the ‘hands dirty’ transport manager

How does government decide on projects such as Transmission Gully

Such projects certainly do not stack up in terms of economic appraisals. So what? All this means is Government understands perfectly the value of economic appraisals. People vote, economic appraisals don't. The government gives its customers what they think they want to ensure it stays in power. That is the lesson pure and simple.

Is an economic appraisal really important?

Not really and that is as it should be. If you want Ross’s ‘no prisoner’s taken view’ on project evaluation I can email you the report (it got censored)


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neil douglas, douglas economics - changes in project evaluation

Business

s roads

public transport

transport funding

toll roads

cba trends

land transport nz

project evaluation manual

national roads board