Economic metrics of the East-West Link, stage one

A few weeks ago I discussed the summary business case submitted to Infrastructure Australia for stage one of Melbourne’s East-West Link freeway (Is there actually a sensible case for the East-West Link?), noting some factors that might possibly explain how the government arrived at an unexpectedly high Benefit Cost Ratio (BCR) for stage one of the project.

Those factors included counting Wider Economic Benefits even though that’s contrary to Infrastructure Australia’s rules; and attributing agglomeration benefits to the freeway even though roads are the enemy of density.

There’s something else about the summary business case, however, that still puzzles me. The exhibit above, taken from page 9 of the summary document, indicates the net present value of the claimed benefits of the project is $1.476 billion and the BCR is 1.4.

Given these two numbers, simple arithmetic indicates the present value of the benefits must be $5.166 billion and the cost of construction must be $3.69 billion (Fn 1). The latter is surprisingly low because elsewhere in the document it’s reported that “the total cost of the project is $6-8 billion”.

It’s likely the report states the cost in  nominal terms. If construction were staged progressively over 7 years (say 2013-2019), then the present value of the cost of building the project would be around $4.5-5.9 billion. That’s still a lot higher than $3.69 billion, especially in the case of the more likely upper estimate.

I can’t offer a plausible theory that reconciles these numbers and neither can those I’ve consulted who’re more knowledgeable in this area. It doesn’t add up. I expect there’s every chance the government can provide a simple and acceptable explanation (is it just a typo?) and if so I’d like to hear it.

But given the blatantly political intent of the document and the government’s failure to date to provide adequate information, I can’t help wondering if it indicates the government’s getting caught out by its own spin.

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Fn 1: The $3.69 billion PV cost of construction relates to a BCR of 1.400 precisely. If it’s deemed acceptable to round to one decimal place, the PV of the cost of construction could as low as $3.29 billion (BCR = 1.449) or as high as $4.21 billion (BCR = 1.351).