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Infrastructure: do politicians care about the truth?

Claims made last week about High Speed Rail and the East-West Link show yet again just how blithely and contemptuously Australian politicians treat the facts – integrity is optional

Retro-fitting infrastructure increases costs and makes it harder to get positive Benefit Cost Ratios (Source: Tunnel Talk)

I’ve noted before that honesty in public discourse is an immeasurably important civic virtue, yet it increasingly seems like its value is being trashed.

Regrettably, there were two more examples last week that illustrate the disregard with which politicians treat the truth.

High Speed Rail and jobs

The first is the Green’s South-East Australia Stimulus Package announced on 12 February. The package proposes to axe $12 billion of corporate welfare spending in the fossil fuel sector and redirect it to boost jobs in clean industries.

The money will be applied to a range of actions, including building 77,500 new houses, putting $3.5 billion into urban public transport, and constructing an east coast High Speed Rail (HSR) line.

Just how The Greens think they could do all this with just $12.5 billion when HSR alone has an estimate capital cost of $114 billion isn’t explained.

However the aspect that disappoints me is the outrageous claim that HSR would provide:

228,000 manufacturing, construction, engineering, planning and assessment jobs over the life of the High Speed Rail project that will link up the eastern seaboard.

That’s a preposterous number of jobs to claim against one project! Nearly 230,000 jobs sustained over the circa 20 years it would take to construct a Melbourne-Sydney-Brisbane HSR line? (1)

Of course 99.9% of readers won’t delve into how The Greens arrived at this figure but if they went to the supporting information they’d find The Greens claim “a general rule of thumb is that around 20,000 jobs are created from each $1 billion of investment”.

Since the capital cost of HSR was estimated in the former Federal Government’s feasibility study to be $114 billion, The Greens somehow arrive at a figure of 228,000 jobs for the “life time of the High Speed Rail project”. (2) (3)

Yet even after spending $20 million on an in-depth feasibility study, former Federal Transport Minister, Anthony Albanese, only claimed HSR would provide 10,000 jobs over the construction period.

Applying The Green’s ‘20,000 jobs per $1 billion’ rule of thumb to the Victorian Governments $8 billion East-West Link indicates it should create 160,000 jobs for the four years it’ll take to build it. Yet even the Victorian Government, which is no stranger to spin (see below), claims it will only create 3,200 jobs.

Apart from the outlandishly over-cooked figures, The Greens also don’t recognise that if the $114 billion or so of public money were not spent on HSR, it would be invested in something else that would also create jobs.

East-West Link net economic benefits

The other example of how politicians regard the truth as dispensable also comes courtesy of The Green, although this time they’re exposing the lies rather than telling them.

Thanks to persistent questioning in Senate Estimates by the Green’s Lee Rhiannon, clear evidence emerged last week that the Victorian Government has played fast and loose with the truth about the benefits of the proposed East-West Link Motorway in Melbourne.

In answer to a question from Senator Rhiannon, the chief executive of Infrastructure Australia, Michael Deegan, confirmed what many observers had long suspected; the business case for the motorway is suspect (see e.g. Is there actually a sensible case for the East-West Link?).

Dr Deegan provided the following answer on notice:

The Victorian Government provided Infrastructure Australia with a ‘short form business case’ for the East West Link Stage One in June 2013. In this document, the Victorian Government claims the project has a Benefit: Cost Ratio of 1.4:1 if wider economic benefits are included and 0.8:1 if wider benefits are not included.

That’s enlightening because the Victorian Premier, Denis Napthine, has consistently refused to say what the Benefit Cost Ratio (BCR) is without so-called Wider Economic Benefits (WEBs). Now we know it’s just 0.8.

The crucial point is that Infrastructure Australia assesses requests for funding from the States and Territories without WEBs. It insists on comparing projects that compete for Federal funding on the basis of familiar benefits like travel time savings, accident reductions, and lower pollution.

On Infrastructure Australia’s preferred metric, the BCR for the East-West Link is only 0.8. In other words, it will actually cost the community considerably more to provide the motorway than it will return in benefits over its lifetime.

Moreover it’s a great deal less attractive than the proposed Melbourne Metro rail line which it competes against for funding. The Metro has a Benefit Cost Ratio of 1.2 without WEBs i.e. the benefits are higher than the costs.

WEBS are mostly about agglomeration economies. These are a real benefit of high density concentrations of employment. They’re why firms choose to locate in the dense CBD even though rents are an order of magnitude higher than they’d pay even a few kilometres away.

Such high density concentrations can only be supported by mass transit. According to this study, agglomeration economies would increase the benefits from the Melbourne Metro by around $1.7 billion. Based on an estimated lower bound construction cost of $9 billion, that would lift the BCR from 1.2 to around 1.4.

That’s a great deal less than the claim made by the Victorian Government that WEBs would raise the BCR for the East-West Link from 0.8 to 1.4 i.e. that they’d increase benefits by a massive 75%.

Yet the motorway is a much less plausible driver of agglomeration economies than the Metro because it will function as a bypass of the CBD and is located 5 km away. Frankly, the claimed contribution of WEBs to the benefits of the East-West Link look ludicrous; Dr Napthine should release the full business plan publicly so we can all see how the numbers were constructed.

The facts matter

I’ve noted before that there’s a seemingly forgotten tradition in public debate that the truth – being honest about the facts – really matters. Iit’s especially regrettable though when even the “good guys”, whose appeal is ostensibly built on a commitment to principle, are heedless of the facts.

__________________________________

  1. I’m taking “lifetime of the project” to mean the construction period, not the economic life of the rail line.
  2. $114 billion is an awfully convenient because The Greens have previously claimed that East Coast HSR would only cost $80 billion to construct (see What are the economic benefits of east coast High Speed Rail?).
  3. I don’t know how The Greens arrive at the specific figure of 228,000. 114 x 20,000 = 2,280,000. Yet they’ve divided the product by 10?
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  • 1
    Brian Feeney
    Posted February 17, 2014 at 10:06 am | Permalink

    There are fundamental problems with the assessment of all passenger transport projects because the claimed travel time savings are on average just ‘spent’ in travelling further rather than in non-travel activities. Claimed travel time savings typically make up most of the ‘benefits’ in the benefit-cost analysis – see http://bjfeeney.wordpress.com/road-planning-needs-a-new-systems-approach/

  • 2
    Austin M
    Posted February 17, 2014 at 11:05 am | Permalink

    I don’t think you can right off WEBs just because it’s a freeway bypass type project. Over the 30 year life of a project these could be significant. For example the M80 is getting upto the typical 30year life time from its inception and it is probably a good time to reflect on the impacts other than traffic and accidents it has had on Melbourne in that time. The project has arguably helped facilitate land values increases, the development of interlinked industrial estates, housing access, growth in the west, and all the jobs that go with these activities etc.
    Eastlink is another example whos WEB impact started during construction (all the warehousing that started springing up along the alignment and the relative land value increases) and I would expect this to continue for some time.
    The view on agglomeration economies shouldn’t be limited to the ability of a few lawyers to share a latte in the city.
    The follow up questions on PPPs are should BCRs be calculated on the entire cost of a project or only against the part the public kicks in after all the public is still getting said benefit from its contribution? Following on from that question should entirely privately funded enterprises including things like manufacturing have to satisfy a particular BCR to be allowed to proceed?

  • 3
    Alan Davies
    Posted February 17, 2014 at 11:42 am | Permalink

    Austin M # 2:

    I’m not saying the EWL wouldn’t generate some WEBs, just saying they wouldn’t come within cooee of adding 0.6 to the BCR as Dr Napthine claims.

    In looking at WEBs, need to be careful to distinguish between what is a redistribution as distinct from a real metro-wide increase.

  • 4
    Smith John
    Posted February 17, 2014 at 11:50 am | Permalink

    Austin M: ‘Eastlink is another example whose WEB impact started during construction (all the warehousing that started springing up along the alignment and the relative land value increases’

    In a cost benefit analysis, increase of land value is not an economic benefit. It’s a proxy for the value of the future benefits of better access etc that will accrue to the buyer. Including travel time savings and land value increases is double counting.

    Also remember that (correct me if I’m wrong), agglomeration benefits aka wider economic benefits are an externality. If factory A relocates to an industrial park beside Eastlink, it does so because the private benefits of better access etc make it worth it. If factory B ditto ditto. These are not agglomeration benefits.

    If the decision of factory B gives a *extra* benefit to factory A (maybe factory B makes parts that an input to factory A), that is an agglomeration benefit.

    In the case of densification of CBD jobs, the idea is that putting knowledge workers near each other gives some mutual benefit. In the case of industrial parks beside the motorway I suppose the same is possible, but I’d be interested in any research on how significant it actually it.

    Because agglomeration benefits are hard to calculate, it’s easy to use that heading as a fudge factor to boost politically desired but economically unjustified projects.

    I think agglomeration benfits from the East West link are implausible and should not be believed unless the government releasees detailed calculations. The absence of full information in the public domain, for such an important project, is a disgrace.

  • 5
    CHooper
    Posted February 17, 2014 at 1:31 pm | Permalink

    I believe that when quoting BCR’s (especially those below 1.0) that the discount rate should be published. Infrastructure Australia recommend using at least several different discount rates (from memory: 4%, 7% and 10%), but it is not clear what rate was being used to get the quoted BCR of 0.8 (or 1.4) for East West Link and 1.2 for Melbourne Metro. A discount rate of 4% should result in a bigger BCR, while 10% will do the opposite.

    At least we are not quoting Negative BCR’s. Check out Postwick Hub interchange on the A47 in the UK:
    http://www.bettertransport.org.uk/node/3606/

    :)

  • 6
    CHooper
    Posted February 17, 2014 at 1:48 pm | Permalink

    Smith John # 4:

    If you are technically minded, please take the time to check out this paper “Agglomeration and Labour Productivity in Australian Cities” from SGS economics and planning, they are probably the Agglomeration experts in Australia:

    http://www.sgsep.com.au/system/files/Agglomeration_and_Labour_Productivity_in_Australian_Cities.pdf

  • 7
    Austin M
    Posted February 17, 2014 at 5:38 pm | Permalink

    Smith John I think your understanding is correct to an extent but in a large city I think its more like company Y positioned itself or exists only because of supplier/company A-X which are also in decent travel proximity in the city along with adequate access to employees and customers. Company Z can’t yet exist because there is not yet the right location in terms of economic access to suppliers, workforce, and customers. Fundamentally I understand agglomeration to be a measure that reflects the current access conditions in a particular area. One side of the argument is a positive impact on an area with a currently high agglomeration score will have the greatest financial impact however conversely an area with a low score could more easily and rapidly facilitate and respond to a changed condition (i.e. tunnel of east west link v.s. the above ground regional rail link or outer freeway project).
    I think land value is absolutely a measure of agglomeration as it reflects what value is placed on the surrounding condition including access (an open grazing paddock would be the result where there is not enough agglomeration benefit for residential, commercial or industrial users). An increase in residential, commercial or industrial value encourages new uses that will ultimately better utilise the changed conditions and cause yet further agglomeration/value rise until some sort of relative balance is reached.
    WEBs I imagine would also include items like noise disturbance, air pollution and associated health impacts that would not normally be considered etc.
    The question about east west links WEB depends on how you view the change it will have on the city as a whole and the northern part of the inner city in particular. If you think it will have little to no impact beyond its traffic carrying function then you would be right to question its WEBs particularly when they are so great and not openly disclosed.
    I say even if the BCR is 0.8 at $8b it is still competing at a 2.14 BCR ($6.4b/$3b) from a pure taxpayer perspective (the community still gets the entire benefit of the $8b project from their $3b investment after all).

  • 8
    Alan Davies
    Posted February 17, 2014 at 6:28 pm | Permalink

    Austin M #7:

    I say even if the BCR is 0.8 at $8b it is still competing at a 2.14 BCR ($6.4b/$3b) from a pure taxpayer perspective (the community still gets the entire benefit of the $8b project from their $3b investment after all).

    That would be attributing no community benefit whatsoever to that proportion of the project funded privately.

  • 9
    Austin M
    Posted February 17, 2014 at 7:46 pm | Permalink

    Why should we attribute any benefit to the private component? Without the project the people of Melbourne, Victoria and Australia would have no entitlement to receive any benefit from any private funding and there is no evidence to say we otherwise would receive any.
    The private funding is a financial decision that really has no consideration for the economic benefits of the project.
    Just because we have got away with large benefits from previous toll roads largely only incurring administrative type costs doesn’t mean we will continue to do so. It should be the cost to the tax payer against the benefits.

  • 10
    Michael Tandora
    Posted February 17, 2014 at 8:01 pm | Permalink

    Austin, because we’re paying for the private component in the end – the East-West Link will be ‘shadow tolled’: that is, the State Government will pay an amount each year for it. A bit like the desalination plant!

  • 11
    Austin M
    Posted February 18, 2014 at 9:51 am | Permalink

    Michael Tandora. Shadow tolls were used for peninsula link where the government pays a monthly access charge for the next 30odd years to access the road (as opposed to user tolling). The desal plant has a similar arrangement… No shadow tolls are proposed as far as I am aware for East-West. Only a $3b government contribution (either upfront or through construction progress payments) and an as yet unknown private funding amount (probably $6b plus) which is to be recovered through user charges… If there was proposed to be ongoing payments from government above the $3b then this should absolutely be included as it would be an additional tax payer cost.
    The desal plant also technically cost the government/tax payer nearly nothing as the money is recovered through water billing. However this is a bit sketchier as unlike a toll road people don’t have much choice in the source of the water that comes out their tap and paying accordingly.

  • 12
    Alan Davies
    Posted February 18, 2014 at 10:10 am | Permalink

    Austin M #11:

    If you’re only going to consider the government’s financial contribution to the project, I don’t think you can continue to assign all the benefits of the project to the government. The lion’s share of the benefits – travel time savings – will be internalised; motorists will pay the private investor a toll in order to get faster trips.

  • 13
    rossmcg
    Posted February 18, 2014 at 1:30 pm | Permalink

    OK, I know I am a pedant but hundreds of newspaper sub editors have lost their jobs in the last few years, how about you hire one so we don’t have to put up with the Green’s, The Greens, the Greens. At least there wasn’t a reference to the fact’s and the author seemed to have the apostrophe right when he wrote it’s.
    It’s all very well to just pick up some random blogger and publish them but when you do it without even a basic check of the grammar and style you bring yourself down. I thought you people were slightly better than that.
    rant over.

  • 14
    Alan Davies
    Posted February 18, 2014 at 3:32 pm | Permalink

    rossmcg #13:

    Thanks, my door is always open to pedants; I love ‘em. But if there’s a problem with my use of “Green’s” surely the issue isn’t the use of an apostrophe (since I only used it in the possessive) but with the location i.e. should it have come at the end, as in “Greens’”?

  • 15
    Waffler
    Posted February 18, 2014 at 9:04 pm | Permalink

    Politicians don’t seem to care about he truth anywhere, but especially when it comes to infrastructure.

    Napthine was blathering on the other day (http://www.youtube.com/watch?v=vdfkXxnU4d8) about the “massive” (used about 10 times) benefits for north south trams crossing Alexandra Parade due to the EW link diverting (a massive) 30% of traffic – and it only cost $108m (oh, plus $8-9B!). And this also pays for a bike path up the middle of the road as well.

    Of course he forgot to say that the bike path will require one of three lanes to be lost along part of the route to make the median wide enough. Hang on – a 30% drop in traffic combined with a 30% drop in capacity doesn’t leave much spare capacity for “massive” benefits for trams. Sounds like pure media spin (putting it politely) to me!

  • 16
    Austin M
    Posted February 20, 2014 at 12:02 pm | Permalink

    Alan #12 the lions share of the benefits would occur regardless of if a toll was imposed or not. Yes I agree the toll will have an impact on the benefits/utilisation of the route and this would have already been considered when equating the benefit (I assume this would have a negative impact on the benefit as it would lower utilisation).
    My fundamental issue with this is the driving reasons for investment of the various parties. Private investment is underpinned by a financial return on that investment. The publics investment is underpinned by the benefit to the public of that investment (improved efficiency, safety, political, social). Just as you wouldn’t attribute a direct financial benefit to the public component of the investment (as there is no entitlement to a direct financial benefit as far as I am aware). There is no entitlement to the private investor to receive any of the publics benefits (efficiency, safety, political or social).
    The drivers of both partners are different and its important separate them. If the private investor fundamentally has no interest in the benefits of the project beyond its own financials why should any of these benefits be attributed to their involvement. These benefits should be attributed to the work, investment or cost government needs to undertake to secure the outcome.

  • 17
    Anthony Horan
    Posted March 16, 2014 at 1:27 pm | Permalink

    What is astonishing about the job claims for the East coast Very Fast Train proposals is for it to be successful it will come at the expense of the airline industry and the jobs in that industry.
    It is hypocritical for those politicians (eg Anthony Albanese) expressing concern about the future of Qantas and their employees, to propose spending tens of billions of dollars to subsidise a competitor in the routes Qantas (and Virgin) make most of their revenue.
    Even with large subsidies it is hard to see how Very Fast Train could compete with airlines. The travel time between Sydney and Melbourne would be at least 3 hours, significantly more than the flying time. Melbourne to Brisbane would be at least 7 hours. And the fares would be unlikely to be cheaper than an airfare on Jetstar or Tiger.
    Additionally there is the opportunity cost of the Federal Government spending upwards of $70 billion on a project when this could be spent on numerous public transport or new road projects.

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