Neil Douglas, Douglas Economics - Changes in project evaluation

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Neil Douglas, Managing Director, Douglas Economics delivered the presentation at the 2014 Major Road Projects Conference.

The Major Road Projects Conference brings together government officials with those responsible for the planning, financing and construction of Australia’s critical road infrastructure to discuss future plans. It offers a practical assessment of the strategy necessary to ensure Australia’s current and future major roads projects are successful.

For more information about the event, please visit: http://www.informa.com.au/roadprojectsconference

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Neil Douglas, Douglas Economics - Changes in project evaluation

  1. 1. Neil Douglas Douglas Economics Trends in Transport Project Appraisal Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 1
  2. 2. Also NZ report Julieta Legaspi TfNSW Peter Bannister & George Karpouzis helped Not an official view of course! Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 2
  3. 3. 3 Also in 2013 – this NZ report which reviews alternative evaluation approaches And parameter values (mainly public transport but includes some road values) Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  4. 4. 4 Cost Effectiveness Analysis Multiple Criteria Analysis Economic Impact Analysis Social Cost Benefit Analysis Financial Appraisal The ‘same answer’ Special Case Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 Focus of this talk Gut feel! The starting position and finishing position? Toll Roads
  5. 5. 1. A Brief history of transport appraisal in NSW/Australia Bradfield meets Lang for ‘tea and scones’ early 1920s Personal briefings to discuss alternative plans, costs toll charges and forecast revenue “I remember” John Lang The Harbour Bridge Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 5 Gut feel?
  6. 6. 1960s Agriculture applications (after USA) 1966 “Investment Analysis” Commonwealth Government 1970s Vernon Commission – a high point after ‘60s credit squeeze 1972 Whitlam Gov’t States Grants: 2/3rds grants to States having done CBA Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 6
  7. 7. Roads “Engineering Economy” 1970s = Design, speed, discounting NASRA/ARRB – advocate approach at conferences But Treasury involvement minor Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 7
  8. 8. Manuals/Guidelines 1st = Water/Electricity 1970s NSW 1988 NSW Capital Works Committee >$5m CBA Only Stipulation 7% discount rate NSW Treasury: “Guidelines on Economic Appraisal of Assets” workshops , accredited list of evaluators 1990s Total Asset Management Process (TAM) >$1m Process included “Value Management” Early 1990s Roads and Traffic Authority 1993 State Rail Authority Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 8
  9. 9. 9 NZ History Project Evaluation 1970 Ministry of Works 1982 Cost Benefit Appraisal the standard approach for road eval 1986 National Roads Board set up – developed TR9 a CBA Manual 1988CBA required for all roads 1991 Project Evaluation Manual developed BCR>4 1991 Resource Management Act – land use effects of roads 1995 Transfund set up (efficient alternatives) 1996 Review of alternatives – CBA selected 1997 Alternative to Roading Eval. Methodology – Efficiency Ratio 2002 Value of Time Study – WTP values for road and PT 2003 Package evaluations 2004 Land Transport NZ set up 2006 Economic Evaluation Manual developed 2008 Green Party instigates move away for CBA 2008 Roads of National Significance Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  10. 10. 2. Transport funding $4.3b Petrol /Diesel Tax $1.3 billion investment Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 10 Who collects the money WHO determines how it’s spent? 800,000 sq kms 1/10th 7.3 million people 1/3rd State Federal
  11. 11. 0 10 20 30 40 50 60 70 80 90 100 1900 1920 1940 1960 1980 2000 TotalTaxTake% States Federal Wider – vertical fiscal “imbalance Henry tax review > land tax suggested Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 11
  12. 12. Applications for Commonwealth funding Commonwealth Department of Infrastructure Transport (DoIT) National Building Program – roads/rail (& cycleways) $37 billion 4 years 2009- $10b per year NSW $3billion per year 33% Infrastructure Australia projects >$100 million advice to Minister Northern Sydney Freight Corridor  No NSW public urban transport project so far  But Parramatta Epping $2.1b approved ?! Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 12
  13. 13. Infrastructure Australia assessment framework Priority List 1. Early Stage 2. Real Potential 3. Threshold 4. Ready to Proceed Framework Strategic Alignment Problem definition Solution development CBA – required at 3 and 4 stages 7% discount rate Best practice/standard parameters Non monetized impacts appended – 7 point scale Wider economic benefits not in core evaluation Non monetized impacts appended – 7 point scale Seven National Priorities + Align with State Plans Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 13
  14. 14. Economic appraisal manuals guidelines Australian Economic Appraisal Guidelines NSW Road Evaluation Manual NSW RailCorp Capital Project Evaluation Manual ATC National Guidelines TfNSW Principles Guidelines for Economic Appraisal Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 14 No shortage of manuals!
  15. 15. Recent developments in economic appraisal techniques Gateway reviews 2004 Assurance to Gov’t –process as well as project George Karpouzis: Engineering / recurrent cost focus Much less on scope /benefits Misunderstanding of financial versus economic A UK Treasury import Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 15
  16. 16. “a number of major projects that have been selected have either been delayed or cancelled – notably the Sydney metro, a $400 million bill for taxpayers for nothing at all. The underlying failures leading to these outcomes have been poor planning and project selection rather than an inability to deliver”. Infrastructure NSW Still can blow $400 million on Metro project - INSW Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 16
  17. 17. Bloated business cases – escalating cost Retrospective Advocacy One way progression Secrecy Business Case Problems Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 17
  18. 18. Centralisation of transport planning in NSW Integration - road rail buses ferries……….. BUT Separation from grass roots & history shows evaluation most useful at middle level? (Top level – all politics?) For economists: One ‘value of time’– a return to the 1970s Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 18
  19. 19. 19 Mackie v Nash Continuing Transport Economics Boxing Match Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 Value of Time
  20. 20. 20 “There is no reason for the value that the individual is willing to pay to reduce travel time to be equal to the value that society as a whole attaches to the reassignment of time of that individual to other activities”. Mackie concluded that “using individuals’ or groups’ willingness to pay as their value of time savings is inappropriate for social evaluation” and therefore Mackie supports the UK practice of adopting an ‘equity’ approach to the valuation of non-working time, Mackie et al (2003). Peter Mackie Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  21. 21. 21 “the British approach, again like many others, attempts to allow for equity considerations by using common values of time, risk of accidents and environmental amenity regardless of income. Nash: This might have been reasonable at a time when appraisal was mainly applied to road schemes which were paid for by the government but gave time savings to users, but now that appraisal is often applied to schemes which trade-off time savings against money cost (e.g. whether to replace buses with higher priced light rail services, whether to reduce road congestion by means of road pricing), it may be highly misleading. It would be quite possible for the appraisal to conclude that the scheme was desirable on the basis of a standard value of time, when according to the actual values of the users it was not (or vice versa).” (Nash, 2010, p. 9) Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  22. 22. 22 In March 2013, TfNSW released “Principles and Guidelines for Economic Appraisal of Transport Investment and Initiatives” (PGEATII), TfNSW Harmonised (same) value of time for equity reasons of $13.76/hr for ‘private’ road & PT. Dates to a 1997 AusRoads working group (40% wage) I recommend: Income standardisation – considers income differences Allows for differences in mode (hence quality), mode, travel time component, journey purpose See Douglas & Jones ATRF 2013 Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 NZTA announced move to a common value of time in July 2013
  23. 23. 23 Declining Discount Rates (except in NSW) Makes discounting (and economists) less important! Longer evaluation period (bigger spreadsheets) Greater importance in forecasting the future – ‘mugs game’ The ECONOMIST Country Discount Rate Evaluation Period England 3.5% for first 30 then 3% 60 years Germany 3% nk Netherlands 2.5% plus 3% risk premium varies 100 years/infinite Sweden 3.5% changed from 4% recently 40-60 years USA 7% Federal with State rates varying from 3-7% 25-30 years NSW Australia 7% - never changed for nearly 20 years 30 years QLD Australia 6% varies WA Australia No official position – looking at it NK New Zealand 10% for decades then 8% around 2010 Now 6% from July 2013 40 years from July 2013 Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  24. 24. Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 Wider Economic Benefits – needed to offset cost increases? Sydney Airport Rail Link 1990s Urban consolidation benefits Since mid 2000s Factoring for agglomeration etc Eddington – origins in London Cross Rail project Now Infrastructure Australia but ‘not in core evaluation’ 24 Neither is Macro Economic Modelling of projects But IA NSW used it to evaluate CW and other projects NZTA commissioned Deloittes to evaluate RONS using CEG model
  25. 25. 25 NZ Roads of National Significance Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  26. 26. 26 Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 Significance and RONS
  27. 27. 27 Wellington Northern Corridor RONS comprises 7 projects Five have BCRs < 1: Airport to Mt Victoria, Terrace tunnel, Peka Peka to Otaki, Transmission Gully MacKays Crossing to Peka Peka Two BCR > 1 (and only just) Basin Reserve Flyover & Aotea Quay to Ngauranga upgrade How come they are getting built? Projects rated on "strategic fit" and "effectiveness“ Green / Labour Party changed funding rule from largely CBA basis requiring a BCR of 4 for Transfund funding to one based on MCA. Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  28. 28. 28 So how justified economically? Answer: as a corridor package. The 7 projects have a combined BCR just >1 with ‘wider economic benefits’ included Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  29. 29. 29 Transmission Gully 27kms 26kms Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  30. 30. 30 Linden Wainui Saddle 262m Height of Ngauranga Gorge Summit 130 metres Proposed Transmission Gully Route McKays Crossing 170m Pukerua Bay Existing SH1 SH 58 Intersection SH 58 Intersection Transmission Gully Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  31. 31. 31 Escalating Cost – “build it now or the cost will go up” It has! -A politician’s argument not an economist’s -but the politician has been proved right Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  32. 32. 32 Transmission Gully Two consortiums – Wellington Gateway Partnership Positive Connection New Zealand-based and international organisations. Each consortium was made up of a construction firm with road designers, investors and companies able to maintain and operate the road. The road will be built and operated by a consortium for 25 years in a PPP which ensures the government retains ownership of the road. Availability Toll – amount of time road is available for Toll – patronage risk Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  33. 33. 33 Transmission Gully Pros Existing Route is Unsafe Congested esp bank holidays/peak Alternative earthquake route – ‘resilience’ Cons Terrain - Escalating Cost Few would use TG especially if tolled HGVs use flatter coastal highway (Tolling wrong road) How effective in earthquake? (crosses fault lines) Environmental impact - Pauatahanui Inlet (tree planting) So argue improve coastal route Improvements have been done -BCR now close to 1 Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  34. 34. 34 Wellington Basin Reserve Flyover ($90-$100 million) Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  35. 35. 35 Amenity Value v Cost – Flyover (Bridge) or Tunnel? Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  36. 36. 36 NZTA argues Flyover is a Public Transport enabler WTN can’t have BRT/LRT if WCC does not agree to NZTA’s Flyover Bargaining chip or blackmail? $10 m Cycle lane included not wide enough very low BCR $10 m New stand at Basin Reserve Road designation – SH v local road Social Media – eg Scoop Flyover & PT Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  37. 37. Conclusions: Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 37 CBA only a tool – can’t select options Bigger models and fatter reports But technique not much different Forecasting future still a mugs game Costs escalating – easy roads built! Search for WEBs to cancel out (but WECs?) Equity values of time Discount rates lowered Environmental impacts Still can’t value amenity And probably never will Economists not the high priests of decision making Politicians still ‘kings and queens’
  38. 38. 38 Can economics help in the argument over what’s a good structures? “Beauty in things exists merely in the mind which contemplates them” David Hume Essays, “Moral and Political”, 1742 Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014
  39. 39. Ross Hayward the ‘hands dirty’ transport manager How does government decide on projects such as Transmission Gully Such projects certainly do not stack up in terms of economic appraisals. So what? All this means is Government understands perfectly the value of economic appraisals. People vote, economic appraisals don't. The government gives its customers what they think they want to ensure it stays in power. That is the lesson pure and simple. Is an economic appraisal really important? Not really and that is as it should be. If you want Ross’s ‘no prisoner’s taken view’ on project evaluation I can email you the report (it got censored) Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 39

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