Jim Binney, Principal of Mainstream Economics and Policy, has undertaken further analysis of the proposed Kingsford Smith Drive upgrade, following up his guest post from yesterday, and I am very happy to publish his critique of the business case below. I have been very lucky this week to have had three high quality guest posts, two from Jim and one from Rod Bogaards on competition policy I published last night.

More transparency, but KSD upgrade still looks like a dud

Last night, a copy of Brisbane City Council’s business case for the KSD upgrade landed on my desk. While it is incredibly short on detail, it is clearly based on a lot of previous work (BCC has expended about $18.46 million to date on the project). To BCC’s credit, they did do a lot of the right things such as sensitivity analysis of some basic parameters (different discount rates, changes to capital costs, with and without the wider economic benefits, etc.). But the business case is still way short of a reasonable benchmark for such a major investment. For example:

• Shortlisted options were not assessed against a ‘do nothing more’ option. Doing nothing more should always be an option, particularly if ‘doing something’ might be questionable or risky.
• The costs of additional congestion during the construction phase seem to have been ignored. Anyone who has endured a major road upgrade for years understands the reality of such a cost.
• The benefits assessed are vehicle operating benefits. Typically this includes time savings and reduced vehicle operating costs to motorists (but it is never actually clearly articulated). In addition, road safety benefits (less crashes) are also included. Details of how these benefits were estimated are not provided despite the fact they are the primary justification for the project in the first place. Fortunately these benefits can be estimated based on information from the business case and elsewhere.
• Non-monetised benefits and costs (e.g. amenity, pedestrian safety) are not included. They should be for a major project.
• The wider economic benefits (agglomeration economies, labour supply impacts, and changes to imperfectly competitive markets) are simply assumed to be 20% of the direct benefits without any real justification.

I expanded the scope and improved the input data for the back-of-the-envelope model I used yesterday. Specifically:

• A 30-year period is still used (like BCC).
• A 7% discount rate is used (like BCC).
• Costs are based on cash flow for the four-year construction period (direct from business case).
• Benefits start immediately after construction is finished and grow in line with increases in road usage and the increasing marginal costs of congestion (presumably like BCC).
• Time savings are based on the data in the business case and grow in line with BCC’s estimates.
• Vehicle operating savings are based on the length of the upgrade, the changes in average speeds and the AUSTROADS estimates of changes in vehicle operating costs in Brisbane at different congestion conditions.
• Road safety benefits were derived from the historical costs in the business case. I‘ve unitised them (expected cost per trip) and then assumed they will reduce by 80% from business as usual as most crashes on roads like KSD occur at congested intersections.

Surely my results should be in the same ballpark as the BCC figures now that I’ve broadened the scope and used better input data? Unfortunately not. The benefit-cost ratio has barely changed (it is now 0.62). While the scope of benefits included has broadened to include road safety and vehicle operating costs, the present value is actually lower because they don’t start until the upgrade is finished (i.e. in year five). The decrease in the present value of the benefits is almost identical to the decrease in the present value of construction costs (which are now spread over four years).

And when I did sensitivity analysis I still struggled get to a benefit-cost ratio of 1.13 unless I assume a very low discount rate and benefits are the same even on the weekends (they aren’t).

The fundamental issue is that I cannot see how BCC got such high estimates of vehicle operating benefits using the accepted methods and data typically used for analysing road projects. Unfortunately, the business case does not really enhance transparency at all in this area. Benefit-cost analysis is the primary tool of my trade and I’ve worked as the Chief Transport Economist, Director of Transport Planning and Manager of Road Safety interstate, so I’m pretty sure I’ve got the basics right.

The last line of the economic assessment section of the business case says…. “Overall, under the assumptions that have been adopted, the results present a robust economic justification to proceed with the Project.” The problem is that the business case doesn’t appear to be terribly robust, some assumptions are questionable, and it certainly isn’t transparent. So how does it provide a robust economic justification to spend $650 million of our money? Simple. It doesn’t.

Jim Binney is Principal of Mainstream Economics and Policy.