I am very grateful to Jim Binney, Principal of Mainstream Economics and Policy, for preparing the guest post below on the economics of the Kingsford Smith Drive upgrade. I share Jim’s suspicion that the project is an “economic dud.”
Brisbane ratepayers, taxpayers and investors (often unknowingly via superannuation) have not done particularly well out of major transport infrastructure projects in Brisbane in the past decade. As investors, we would have lost less by putting a few lazy billion on black at the roulette table (when you expect to get about 95c back for each $1 gambled).
So we should reasonably expect Brisbane City Council (BCC) to be more risk averse and transparent when it comes to the next major transport project. Remember, it is our money they are investing (or gambling).
After reading the articles in the Courier Mail and Brisbane Times about the project, I began to suspect that the project looked like an economic dud. How did they possibly come up with those numbers, even the modest benefit-cost ratio of 1.13? Remember a project needs a benefit-cost ratio of at least 1 to be viable.
The major benefits of the project are the value of time savings for commuters. There will also be some fuel savings (less stopping and starting), and perhaps some road safety benefits. The costs are the $650 million capital cost plus the (probably) higher future maintenance costs (bigger roads = higher maintenance costs).
We only have the commuter numbers and time savings to calculate the benefits and the capital costs to work with, but that should be enough to get a result within the same ballpark as the figures in the press (assuming the analysis was over the typical 30-year period used for project benefit-cost analysis).
Based on the estimated traffic volumes, time savings (including the increase in benefits over time), and the value of time (based on average weekly earnings data from the ABS), I estimated the annual economic value of the time savings. They would currently be around $10.8 million, increasing to around $29.7 million after 15 years. In the absence of any more information, I have assumed the growth rate in traffic numbers and benefits is the same throughout a 30 year period (to around $49 million after 30 years providing the new road doesn’t start to get congested!).
So a back-of-the-envelope benefit-cost analysis using those numbers and a 5% discount rate indicates a benefit-cost ratio of 0.61 (net present value of -$239 million). That is a long way short of the 1.13 in the press. I doubt the fuel savings, road safety benefits, or any defensible changes in assumptions during the sensitivity analysis process would make up the shortfall in benefits. The project is looking a lot like a dud based on the information at hand.
Christmas is a time for giving. The gift I’d like to see from BCC is more transparency when it comes to investment decisions. Unfortunately, the gift from BCC to Brisbane’s residents this Christmas could be a poor road investment with a net cost to the community of about $200 million. To put that into perspective, that equates to about $320 for every Brisbane household.