$5 billion Bus and Train Tunnel has unimpressive benefit-cost ratio

BaTThe Environmental Impact Statement (EIS) for the Bus and Train (BaT) Tunnel from Dutton Park to Spring Hill is out for comment, and I’m rather unimpressed by the benefit-cost ratio, estimated by Deloitte at 1.16. That is, benefits are estimated to be only 16% higher than costs over the life of the project. That’s pretty concerning for a $5 billion project that is likely to be subject to the same risks of cost blowouts and demand shortfalls as other mega-projects.

Given the possibility of large forecast errors in costs and demand, you’d probably want a much higher benefit-cost ratio (i.e. definitely higher than, say, 1.5) to be confident it’s worth committing $5 billion – or over $1,000 for every Queenslander – to this project. Indeed, Deloitte’s own sensitivity analysis shows that, under some scenarios, the benefit-cost ratio is less than 1 and costs exceed benefits over the life of the project (see Table 14-16 in Chapter 14 of the EIS).

The risks of mega-projects are well known. As mega-projects expert Bent Flyvbjerg observed in his book Megaprojects and Risk:

At the same time as many more and much larger infrastructure projects are being proposed and built around the world, it is becoming clear that many such projects have strikingly poor performance records in terms of economy, environment and public support. Cost overruns and lower-than-predicted revenues frequently place project viability at risk and redefine projects that were initially promoted as effective vehicles to economic growth as possible obstacles to such growth.

There is a risk that the BaT project will turn out to be another poorly performing mega-project, and hence the EIS warrants close scrutiny over the six week consultation period that commenced today.

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7 Responses to $5 billion Bus and Train Tunnel has unimpressive benefit-cost ratio

  1. Gavin says:

    But should we judge infrastructure project by project or as a bundle? We have benefited enormously from companies, but the vast majority fail, and professional investors can’t (on average) pick winners. Individual companies generally fail but the market keeps gaining. For instance, does one mega project over-performance make up for many losses? And if so, are we missing great opportunities due to rational analysis (which is invariably wrong)?

    • Gene Tunny says:

      An interesting perspective, Gavin. Thanks for your comment. I’d say the market keeps gaining even though individual companies fail because competition is weeding out poor performers and promoting good performers. Governments, however, can go on, even though they may have a succession of bad projects. Of course, people can vote out the current government every three years, but the public service typically remains the same and it can keep proposing costly, over-engineered solutions funded by taxpayers’ money. Once you bring in vested interests lobbying for projects, optimism bias and the desire of politicians to cut ribbons on big projects, you can end up with too many poorly performing projects in the public sector. Hence there is a great need for rigorous cost-benefit analysis of public projects.

  2. KT says:

    thanks for the article and some very good comments. This is a tough project it seems necessary but the numbers are weak. having said that the private sector are no better with Clem7 and Airport link being grossly exaggerated compared to Councils traffic forecast. Well done to Council for off loading the risk.

  3. Katrina Drake says:

    One of the basic tenants of all major projects is that no project would ever commence if the real costs and time were known at the start. Hence the term budget – a Badly UnDerestimated Guess-EsTimate.

    Time and Cost Budgets are used to get a mega project started.

    The only projects that will ever commence are ones were the benefits are over-stated, and the costs under-estimated. Always a good start.

  4. KT says:

    I agree Katrina – very good

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