Terminating KSD contract probably provides a better return for ratepayers than proceeding

Jim Binney returns to the topic of the controversial $650 million Kingsford Smith Drive upgrade in a new guest post.

From an economic point of view, avoiding costs is akin to a benefit. In fact this is the logic that underpins Council’s business case for the KSD upgrade in the first place (avoiding congestion and road safety costs are the main benefits). So, if the net cost of the project were $197 million (my estimate the other day), the ratepayers of Brisbane would actually be better off by that amount if the proposed KSD project didn’t proceed.

It was revealed at the Council meeting last night that contracts had already been signed. And the cost to ratepayers of stopping now would be a staggering $90.2 million according to the shopping list here: http://www.brisbanetimes.com.au/queensland/labor-could-bypass-tender-process-for-kingsford-smith-drive-plan-harding-20151202-gldxsu

But, of the $90.2 million of costs outlined, most costs relate to work that would be undertaken prior to the end of March 2016 if the project goes ahead (e.g. the $18.8 million in contract payments to Lend Lease, and the bulk of the $57.1 million direct Council expenditure). These costs can be avoided, and the resources could be channeled into projects that stack up. Costs such as reimbursement of bid costs to unsuccessful bidders ($6 million) are both sunk and irrelevant to the contract with Lend Lease. So the true cost to ratepayers of stopping the project is probably little more than the $8.3 million termination fee in the contract between Lend Lease and Council.

On this basis, my (free) advice to Council would be to:

  • Very quickly do a robust, transparent and peer reviewed cost-benefit analysis of the proposed KSD upgrade. If it stacks up, proceed with the project. Clearly I have my doubts, but I’m more than happy to be proved wrong.
  • If it doesn’t stack up, terminate the contract with Lend Lease immediately. Then find some congestion-busting projects that do stack up.

On the face of it, terminating the contract with Lend lease would appear to have a benefit-cost ratio for ratepayers of about 23.7 ($197 million / $8.3 million). That is a much better return than the implausible benefit-cost ratio of 1.13 in Council’s Business Case.

Jim Binney is Principal of Mainstream Economics and Policy.

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