Channel Deepening Supplementary Environmental Effects Statement Expert Witness Presentation
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1 Channel Deepening Supplementary Environmental Effects Statement Expert Witness Presentation 17 July, 2007 Planning Panels Victoria Department of Sustainability and Environment
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Channel Deepening Supplementary Environmental Effects Statement Expert Witness Presentation. 17 July, 2007. Planning Panels Victoria Department of Sustainability and Environment. The Rules of the Game. - PowerPoint PPT Presentation
Transcript of Channel Deepening Supplementary Environmental Effects Statement Expert Witness Presentation
1
Channel Deepening Supplementary Environmental Effects StatementExpert Witness Presentation
17 July, 2007
Planning Panels VictoriaDepartment of Sustainability and Environment
2
Neo-classical economics is the standard theoretical framework for assessing the net worth of projects
Economic analysis is conducted according to an established body of theory and practice
This standard is exemplified by the Economic Analysis of Investment Operations, World Bank (WB, 2001) and the Handbook of Cost-Benefit Analysis from the Commonwealth Department of Finance (DOF, 2006)
The Rules of the Game
3
Meyrick has used cost-benefit analysis (CBA) - we agree that this is the appropriate framework.
Meyrick cites DOF, 2006 as their guide - we agree - and also include WB, 2001 guidelines as a even more relevant guide
SEES section 5.3 refers to a PWC/COPS economic model - it is based on data from the Meyrick CBA - inbound data determines the outbound results
Rules of the Game - Methodology
Economic impact analysis is not relevant here - CBA data has provided the input that drives the economic model - same result could have been achieved with a export based toy factory!
4
DOF handbook agrees with our conclusion - no evidence presented to privilege CDP over other transport infrastructure investments at the macro-economic level.
“Employment multipliers seldom measure actual benefits or opportunity costs and should generally not be included in cost-benefit analyses. Likewise, ‘secondary benefits’ are often another way of presenting primary benefits that have already been included in the analysis or that represent transfers. While secondary effects of a project may be important for distributional analysis or for planning purposes, their inclusion in a cost- benefit analysis involves inappropriate double counting.”
If the CBA is negative the economic impact is negative & vice versa - the focus should be on the CBA analysis
Rules of the Game - Methodology continued
DOF, 2006, pg 47
5
Meyrick agrees’ “the project would only proceed if benefits exceed costs” SEES, Technical Appendix 4, Section 2.1.
What is the objective of the project? To create value in the Victorian/Australian economy, and hence to improve the welfare of Victorians & Australians.
Meyrick CBA says benefits>costs - the World Bank says:
Cost Benefit Analysis Rules! Ok
“Good economic analysis should leave no doubts about the project’s contribution to the country’s welfare”. WB, 2001, pg 3.
WB, 2001, pg 3
6
There must be a high probability that the CDP will deliver net benefits, relative to doing nothing & net benefits equivalent to any project of comparable commercial risk
Setting the goal posts
Direct financial beneficiaries are commercial operators who will save money (much of it overseas), have a history of cartel behaviour & are subject to strong economic cycles
Paid for by taxpayers, without repayment, it serves a commercial enterprise. It is the marine equivalent of extending the Sydney airport runaway - but without the landing charges
7
Can the CDP confidently deliver: a efficient shipping market AND sufficient cost savings per TEU, in the period 2008 to 2035 to repay a commercial return on the estimated $500 to $1000m capital investmentcompared with any other project(s) that could have been made and/or business as usual?
Is this a high probability outcome?
Meyrick seeks to demonstrate that the net benefits are positive (that is they have positive NPV) that is at least equal to what else could have been earned in another, equivalent investment.
8
Economists@Large have used the same economic model with more conservative assumptions and industry standard methods of calculation resulting in an NPV of -$0.54bn
The SEES’ cost-benefit analysis forecasts net project benefits or net present value (NPV) of $1.35bn
SEES financial calculations, modelling assumptions and cost omissions have caused the Channel Deepening Project’s (CDP) NPV to be overstated
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
9
Economists@Large have used the same economic model with more conservative assumptions and industry standard methods of calculation resulting in an NPV of -$0.54bn
The SEES’ cost-benefit analysis forecasts net project benefits or net present value (NPV) of $1.35bn
SEES financial calculations, modelling assumptions and cost omissions have caused the Channel Deepening Project’s (CDP) NPV to be overstated
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
10
The SEES’ cost-benefit analysis forecasts net project benefits or NPV of $1.35bn
SourceExtrapolated from data from SEES
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
Channel Deepening Project Benefits & Costs (SEES)
0
11
Economists@Large have used the same economic model with more conservative assumptions and industry standard methods of calculation resulting in an NPV of -$0.54bn
The SEES’ cost-benefit analysis forecasts net project benefits or net present value (NPV) of $1.35bn
SEES financial calculations, modelling assumptions and cost omissions have caused the Channel Deepening Project’s (CDP) NPV to be overstated
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
12
Economists@Large have reworked the economic model with more appropriate assumptions resulting in an NPV of -$0.54bn
SourceExtrapolated from data from SEES and analysis by EcoLarge
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
Channel Deepening Project Benefits & Costs (EcoLarge)
-500
0
13
Economists@Large have used the same economic model with more conservative assumptions and industry standard methods of calculation resulting in an NPV of -$0.54bn
The SEES’ cost-benefit analysis forecasts net project benefits or net present value (NPV) of $1.35bn
SEES financial calculations, modelling assumptions and cost omissions have caused the Channel Deepening Project’s (CDP) NPV to be overstated
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
14
The method of calculating of Net Present Value (NPV) is not to accepted industry standards
SEES financial calculations, modelling assumptions and cost omissions have caused the CDP’s NPV to be overstated
Assumptions within the economic model are non-conservative
Significant costs that should be in the economic model have been omitted or under-estimated
15
The method of calculating of Net Present Value (NPV) is not to accepted industry standards
Assumptions within the economic model are non-conservative
Significant costs that should be in the economic model have been omitted or under-estimated
SEES financial calculations, modelling assumptions and cost omissions have caused the CDP’s NPV to be overstated
16
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
17
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
18
Use of an inappropriately low discount rate, 6%, overstates the net present value of the project.
-500
0
500
1,000
1,500
2,000
2,500
4% 6% 8% 10% 12% 14% 16% 18% 20%
• World Bank uses discount rate of 10-12%.2
Notes1. Source: Extrapolated from data from SEES2. Source: Beli, et al, 1997. Handbook on economic analysis of investment operations, World Bank
NPV ($m)
Discount Rate
NPV decreases as Discount Rate increases 1
19
Use of an inappropriately low discount rate, 6%, overstates the net present value of the project.
-500
0
500
1,000
1,500
2,000
2,500
4% 6% 8% 10% 12% 14% 16% 18% 20%
Meyrick & Associates
NPV ($m)
Discount Rate
NPV decreases as Discount Rate increases 1
• World Bank uses discount rate of 10-12%.2
Notes1. Source: Extrapolated from data from SEES2. Source: Beli, et al, 1997. Handbook on economic analysis of investment operations, World Bank
20
Use of an inappropriately low discount rate, 6%, overstates the net present value of the project.
-500
0
500
1,000
1,500
2,000
2,500
4% 6% 8% 10% 12% 14% 16% 18% 20%
Meyrick & Associates
Economists@Large
NPV ($m)
Discount Rate
NPV decreases as Discount Rate increases 1
• World Bank uses discount rate of 10-12%.2
Notes1. Source: Extrapolated from data from SEES2. Source: Beli, et al, 1997. Handbook on economic analysis of investment operations, World Bank
21
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
22
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
23
Cost of D X (1 - tax rate)
In the valuation of any project, the WACC is the appropriate discount rate to use1, which is approximately 12% for PoM’s case
WACC = Weighted Average Cost of Capital = discount rate
Notes1. FINSIA, Financial Analysis and Valuation Handbook 20072. Port of Melbourne Annual Report 2007 3. Systematic Risk of PoM / Beta value may be higher than 1.2 4. Industry standard for Equity Risk Premium rate is 6%. E.g. Grant Samual, Qantas Target’s Statement (p6) p153
WACC =Equity (E)
Debt (D) + EXCost of Equity[ ] +
E
D + EX[ ]
Cost of Equity = Risk-free rate of return + Systematic Risk of PoM X Equity Risk Premium
Cost of Equity = 6.25% + 1.23 X 6%4 = 13.5%
6.34%2 X (1 – 30%)WACC =$758m 2
$837m 2X13.5%[ ] + X[ ]$78m 2
$837m 2
= 12.6% => discount rate ~12%
24
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
25
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
26
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
SourceExtrapolated from data from SEES
Channel Deepening Project Benefits & Costs (6% discount rate)
If we use a 12% discount rate, NPV reduces to $0.25bn
27
If we use a 12% discount rate, NPV reduces to $0.25bn
2,000
1,500
1,000
500
NPV ($m)
Channel Deepening Project Benefits & Costs (12% discount rate)
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
SourceExtrapolated from data from SEES
Project Benefits Project Costs Net Project Benefits
28
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
29
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
30
• Forecasting is inherently difficult. It is difficult to forecast 5 years into the future, let alone 25 years.
• Projects benefits are usually forecast 5-10 years into the future and then a terminal value for ongoing benefits is included.
“Discounted Cash Flow analysis requires forecasting a company’s free cash flow over a determined period,often 10 years”1
“Grant Samuel has prepared a high level discounted cash flow analysis of Qantas based on a 10 year forecast model”2
Calculating the value of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Notes1. FINSIA, Financial Analysis and Valuation Handbook 2007 2. Grant Samuel, Qantas Target’s Statement
31
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
32
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
33Notes
1. Source: Extrapolated from data from SEES2.
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces to $1.02bn
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
SourceExtrapolated from data from SEES
Channel Deepening Project Benefits & Costs (25 yr benefits, 6% discount rate)
34Notes
1. Source: Extrapolated from data from SEES2.
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces to $1.02bn
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
SourceExtrapolated from data from SEES
Channel Deepening Project Benefits & Costs (10 yr benefits + TV, 6% discount rate)
35
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
36
Forecasting the benefits of the CDP over 25 years is against the industry standard of 10 years plus a terminal value
Use of an inappropriately low discount rate, 6%, overstates the net present value (NPV) of the project
If we use a 12% discount rate, NPV reduces to $0.25bn
In the valuation of any project, the WACC is the appropriate discount rate to use, which is approximately 12% for PoM’s case
If benefits are forecast for 10 years and a terminal value is used, the NPV reduces from $1.35bn to $1.02bn
Using both a 12% discount rate and a 10 year forecast period leads to the NPV reducing to $0.07bn
The method of calculating of NPV is not to accepted industry standards
37
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
SourceExtrapolated from data from SEES
Channel Deepening Project Benefits & Costs (25 yr benefits, 6% discount rate)
Applying a 12% discount rate to a 10 year forecast with a terminal value, the NPV reduces to $0.07bn
38
Applying a 12% discount rate to a 10 year forecast with a terminal value, the NPV reduces to $0.07bn
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
SourceExtrapolated from data from SEES and EcoLarge analysis
Channel Deepening Project Benefits & Costs (10 yr benefits + TV, 12% discount rate)
39
The method of calculating of Net Present Value (NPV) is not to accepted industry standards
Non-conservative assumptions and omissions have led to overstating the economic case for the CDP
Assumptions within the economic model are non-conservative
Significant costs that should be in the economic model have been omitted or under-estimated
40
The method of calculating of Net Present Value (NPV) is not to accepted industry standards
Non-conservative assumptions and omissions have led to overstating the economic case for the CDP
Assumptions within the economic model are non-conservative
Significant costs that should be in the economic model have been omitted or under-estimated
41
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
42
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
43
Shipping industry forecasts based on world economic growth over 30 years must be conservative
• All forecasts are based on world economic growth, trade growth and container growth for 30 years
• A conservative rate of world growth has been used. General trend – increase in shipping and an increase in ship sizes globally
• Detailed predictions are difficult
• Container shipping industry is only 40 years old, a 30 year forecast seems inappropriate
• The nature of the shipping industry
44
“Shipping is cyclical and to a certain extent depends on trade cycles. Currently seen is a worldwide boom …This (boom) has prompted warnings from shipbrokers that the charter market could collapse”
(Deloittes Touche Tohmatsu, Key Issues in Global Shipping, Nov 2005)
"The market is hugely vulnerable to a downturn in demand. A renewed surge of ordering activity in the opening months of the year appears to have exposed the containership industry to the threat of collapse. It may be possible to get through the next three years undamaged, but there are huge risks.”
(Howe Robinson, Quaterly Analysis, as reported in Lloyds List 25/4/2005)
“After four years of buoyant shipping markets, giving statistics never seen before, there are a number of disquieting voices being heard predicting a severe correction of the markets or even a new crisis recalling the sad days of the 80s”
(Barry Rogliano Salles (BRS) Shipping and Shipbuilding Markets in 2006, 2007)
Shipping industry forecasts based on world economic growth over 30 years must be conservative
45
Increase in average container vessel size over time1
2005 2010 20202015 20302025 2035
TE
U
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p7
Shipping industry forecasts based on world economic growth over 30 years must be conservative
46
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
350,000,000
400,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 252010 2015 2020 2025 2030 2035
$50m
$100m
$150m
$200m
$250m
$300m
$350m
“(Vessel size) can be speculatively evaluated by reference to the past relationship between trade volumes and ship size – though this does require some fairly imaginative analysis.” 2
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p492. Drewry Shipping consultants, Port of Melbourne Channel Deepening Study, 2001, p69
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Container Vessel Operating Cost Savings Due to Channel Deepening1
47
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
48
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
49
Assumptions in forecasts of fleet composition have not been conservative
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
1500-
1999
2000-
2499
2500-
2999
3000-
3499
3500-
3999
4000-
4499
4500-
4999
5000-
5499
5500-
5999
6000-
6499
6500-
6999
7000-
7499
2005
2010
2015
2020
2025
2030
2035
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
50
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
1500-
1999
2000-
2499
2500-
2999
3000-
3499
3500-
3999
4000-
4499
4500-
4999
5000-
5499
5500-
5999
6000-
6499
6500-
6999
7000-
7499
2005
2010
2015
2020
2025
2030
2035
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
51
Fleet composition, 2005
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
0-1499 1500-
1999
2000-
2499
2500-
2999
3000-
3499
3500-
3999
4000-
4499
4500-
4999
5000-
5499
5500-
5999
6000-
6499
6500-
6999
7000-
7499
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
52
Forecast fleet composition with CDP, 2020
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
0-1499 1500-
1999
2000-
2499
2500-
2999
3000-
3499
3500-
3999
4000-
4499
4500-
4999
5000-
5499
5500-
5999
6000-
6499
6500-
6999
7000-
7499
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
53
Forecast fleet composition with CDP, 2020
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
0-1499 1500-
1999
2000-
2499
2500-
2999
3000-
3499
3500-
3999
4000-
4499
4500-
4999
5000-
5499
5500-
5999
6000-
6499
6500-
6999
7000-
7499
•Drewry (2001) - 11 container vessels servicing Melbourne were launched in 2000, with an average capacity of 1760 TEU.
•Deloittes (2005) note that “The market for smaller vessels remains buoyant” and offer detail on orders for vessels as small as 850TEU
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
54
Forecasts fleet composition, with CDP 2035
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
0-1499 1500-
1999
2000-
2499
2500-
2999
3000-
3499
3500-
3999
4000-
4499
4500-
4999
5000-
5499
5500-
5999
6000-
6499
6500-
6999
7000-
7499
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
55
Forecasts of fleet composition, with CDP 2035
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
0-1499 1500-
1999
2000-
2499
2500-
2999
3000-
3499
3500-
3999
4000-
4499
4500-
4999
5000-
5499
5500-
5999
6000-
6499
6500-
6999
7000-
7499
Meyrick&Associates’ forecast that no ships under 3000 TEU will be involved in servicing Melbourne is not conservative.
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
56
Forecasts of fleet composition, without CDP
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-
1999
2000-
2499
2500-
2999
3000-
3499
3500-
3999
4000-
4499
4500-
4999
5000-
5499
5500-
5999
6000-
6499
6500-
6999
7000-
7499
2005
2010
2015
2020
2025
2030
2035
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
570%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999
2000-2499
2500-2999
3000-3499
3500-3999
4000-4499
4500-4999
5000-5499
5500-5999
6000-6499
6500-6999
7000-7499
2005
2010
2015
2020
2025
2030
2035
Forecasts of fleet composition, without CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
580%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
Forecasts of fleet composition, without CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
590%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
Forecasts of fleet composition, without CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
600%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
Forecasts of fleet composition, without CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
610%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
We estimate this limit will lie at or below 4500 TEU.” (Meyrick & Assoc, p10)
There is no explanation of this assumption.
Drewry (2001) assume that ships of over 7000 TEU will use the port, although experiencing restrictions of draft
Forecasts of fleet composition, without CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
62
• A report commissioned by PoMC by London analysts, Drewry Shipping Consultants Ltd, forecast that ships of over 7000 TEU will come, albeit with draft restrictions affecting 90% of their sailings.1
• Drewry Shipping consultants found that costs to container shipping of draft restraints in 2030 would total nearly $31 million, in contrast to Meyrick and Associates estimate of $381 million.2
• Despite making reference to this report, Meyricks and Associates offer no explanation for this disparity.
Sources: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p49 2. Drewry Shipping consultants, Port of Melbourne Channel Deepening Study, 2001, p75
Assumptions in forecasts of fleet composition have not been conservative
630%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
Forecasts of fleet composition, without CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
640%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
Forecasts of fleet composition, without CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
650%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
Drewry (2001) Ships of 3-4000TEU “have been specifically designed for long term deployment to Australia and New Zealand, and have been optimised to conform with current physical restrictions (specifically draft, LOA, and air draft at the schedule ports. Melbourne, as a must call port – and one that cannot be economically served by feedering – has consequently played a large part in shaping the vessels’ design and configuration”
Forecasts of fleet composition, without CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
660%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
“The willingness of shipowners to deploy somewhat larger vessels, and work around the inefficiency that results from draft constraints, is evidenced by the introduction (of 3900 – 4100 TEU vessels in the Asian and European trades)” Meyrick&assoc p10.
Forecasts of fleet composition, without CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have not been conservative
67
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
68
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
69
Fleet composition, 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-1499 1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
70
Fleet composition, 2010
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
71
Fleet composition, 2015
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
72
Fleet composition, 2020
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
73
Fleet composition, 2025
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
74
Fleet composition, 2030
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
75
Fleet composition, 2035
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
76
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
0-1499 1500-
1999
2000-
2499
2500-
2999
3000-
3499
3500-
3999
4000-
4499
4500-
4999
5000-
5499
5500-
5999
6000-
6499
6500-
6999
7000-
7499
Fleet composition, 2005
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
770.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Fleet composition with CDP, 2010
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
780.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Fleet composition with CDP, 2015
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
790.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Fleet composition with CDP, 2020
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
800.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Fleet composition with CDP, 2025
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
810.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Fleet composition with CDP, 2030
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
820.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Fleet composition with CDP, 2035
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
83
• These estimates are of great importance to the cost-benefit analysis of the CDP, as nearly all calculated benefits are derived from the forecast use of larger ships.
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0% Meyrick&Assoc no CDP
Meyrick&Assoc with CDP
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%Conservative estimate no CDP
Conservative estimate with CDP
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative estimate of fleet composition
84
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
85
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
86SourceExtrapolated from data from SEES
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
Channel Deepening Project Benefits & Costs (SEES)
0
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
87SourceExtrapolated from data from SEES and EcoLarge analysis
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Channel Deepening Project Benefits & Costs (Conservative Ship Size Composition, 25 yr forecast, 6% discount rate)
0
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
88
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
89
Shipping industry forecasts based on world economic growth over 30 years must be conservative
Assumptions in forecasts of fleet composition have not been conservative
Economists@Large have forecast a more conservative estimate of fleet composition
Applying this conservative forecast to just container vessel operating costs causes a reduction of NPV from $1.35bn to $0.71bn
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
Assumptions within the economic model are non-conservative
90SourceExtrapolated from data from SEES
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
Channel Deepening Project Benefits & Costs (SEES)
0
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
91SourceExtrapolated from data from SEES and EcoLarge analysis
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Channel Deepening Project Benefits & Costs(Conservative Ship Size Composition, 10 yr forecast + TV, 12% discount rate)
0
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
-500
Using this estimate of fleet composition as well as a 12% discount rate and a 10 year forecast period plus terminal value, results in an NPV of -$0.09bn
92
The method of calculating of Net Present Value (NPV) is not to accepted industry standards
Non-conservative assumptions and omissions have led to overstating the economic case for the CDP
Assumptions within the economic model are non-conservative
Significant costs that should be in the economic model have been omitted or under-estimated
93
The method of calculating of Net Present Value (NPV) is not to accepted industry standards
Non-conservative assumptions and omissions have led to overstating the economic case for the CDP
Assumptions within the economic model are non-conservative
Significant costs that should be in the economic model have been omitted or under-estimated
94
Significant costs that should be in the economic model have been omitted or under-estimated
• Direct costs – no details of the project direct costs. This is concerning as there has been widespread concern about a cost blow-out. Industry insiders have been quoted as saying “If (the Port of Melbourne) get away with $1 billion they'll do bloody well”1
• Project finance costs – no consideration of how the project will be financed and costs arising from servicing debt
• Ongoing maintenance costs – no discussion of costs relating to maintaining a deeper channel
• Omission of sunk costs – costs already incurred of trial dredging, EES, SEES, have not been included
Source: 1. Lucas, Clay, Digging in Deep, in The Age 22/3 2007
95
• Environmental costs – Meyricks & Associates identify 15 costs that “will not be completely eliminated by mitigation measures” but have no cost assigned to them. They claim that “There are no reliable tools for estimating the economic costs”
• The field of environmental economics is a well established discipline that provides many methods for evaluating such costs.
• Dismissing environmental costs is not a conservative assumption and is inappropriate in a project where there has been so much comment over potential environmental impacts. This is a major shortcoming of the Meyricks & Associates cost-benefit analysis.
• Considering these many omissions, Economists@Large believe a present value of costs figure of $1 billion dollars is a more conservative estimate.
Source: 1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p46-48
Significant costs that should be in the economic model have been omitted or under-estimated
96SourceExtrapolated from data from SEES
Channel Deepening Project Benefits & Costs (SEES)
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
0
Significant costs that should be in the economic model have been omitted or under-estimated
97SourceExtrapolated from data from SEES
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
Channel Deepening Project Benefits & Costs (Conservative Cost Estimate)
0
Significant costs that should be in the economic model have been omitted or under-estimated
98
Economists@Large have used the same economic model with more conservative assumptions: - 12% discount rate - Valuation over 10 years plus a terminal value - Conservative estimate of future fleet composition - Conservative estimate of costs
The SEES’ cost-benefit analysis forecasts net project benefits or net present value (NPV) of $1.35bn
These calculations yield an NPV of -$0.54bn.
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
99SourceExtrapolated from data from SEES
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
Channel Deepening Project Benefits & Costs (SEES)
0
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
100
Channel Deepening Project Benefits & Costs (12% discount rate)
Project Benefits Project Costs Net Project Benefits
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
NPV ($m)
2,000
1,500
1,000
500
0
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
SourceExtrapolated from data from SEES and analysis by Economists@Large
101
Project Benefits Project Costs Net Project Benefits
Channel Deepening Project Benefits & Costs (10 yr benefits + TV, 12% discount rate)
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
SourceExtrapolated from data from SEES and analysis by Economists@Large
NPV ($m)
2,000
1,500
1,000
500
0
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
102
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Channel Deepening Project Benefits & Costs(Conservative Ship Size Composition, 10 yr forecast + TV, 12% discount rate)
0
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
-500
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
SourceExtrapolated from data from SEES and analysis by Economists@Large
103
SourceExtrapolated from data from SEES and analysis by Economists@Large
Project Benefits Project Costs Net Project BenefitsNPV ($m)
2,000
1,500
1,000
500
Container Vessels
Liquid Bulk Vessels
Dry Bulk Vessels
-500
0
Channel Deepening Project Benefits & Costs(Conservative Cost Estimate & Ship Size Distribution, 10 yr forecast + TV, 12% discount rate)
Appropriate assumptions results in the CDP having a negative NPV, a clear sign not to implement the project
104
Can the CDP confidently deliver: a efficient shipping market AND sufficient cost savings per TEU, in the period 2008 to 2035 to repay a commercial return on the estimated $500 to $1000m capital investmentcompared with any other project(s) that could have been made and/or business as usual?
Is this a high probability outcome?
Ecolarge answer: this project is ‘brave’ & whimsical in its willingness to spend capital on revenues that are so far in the future - there is a high risk it cant deliver.
105
Cost Benefit Analysis - checklist
“Key steps in the cost-benefit process”. DOF, 2006, pg 9.
Determine the scope & the objectives
What are the constraints? What are the alternatives? Identify costs & benefits Quantify/value costs and
benefits? Sensitivity test for
uncertainty Consider equity issues &
intangibles
106
SEES analysis has provided an objective - positive NPV
Determine the scope & objective of the project? To create value in the Victorian/Australian economy, and hence to improve the welfare of Victorians & Australians.
SEES CBA says benefits>costs Ecolarge says there are highly plausible low or negative
value scenarios - case not proven.
Cost Benefit Analysis - checklist
“Good economic analysis should leave no doubts about the project’s contribution to the country’s welfare”. WB, 2001, pg 3.
107
SEES analysis - environmental impacts difficult to quantify
What are the constraints? That is what issues affect the ability to deliver a useful CBA?
Ecolarge says - environmental benefits can be quantified see DOF handbook for suggestions - pg 147
Cost Benefit Analysis - checklist
“Valuation methods: applications and conclusions Examples of public goods, the benefi ts they provide, and valuation methods are shown in Table A.1. The goods include educational and health services, safety, transportation services, recreational facilities, and various environmental goods. Table AII.2 Examples of public goods, benefi ts and valuation methods ”. DOF, 2006, pg 147.
108
SEES analysis - with and without alternatives
What are the alternatives?
Ecolarge - disagree with the quantum of value in the with & without scenarios
Delay alternative highly feasible - inadequately considered in SEES
If higher returns are 13 years away, money invested late is will get a stronger return immediately.
In the meantime the capital is invested elsewhere (by capital markets) at higher returns - benefiting Australians
Cost Benefit Analysis - checklist
DOF, 2006, Section 5.
109
SEES analysis - has done a adequate job of identifying costs & benefits
Identify costs & benefits
Next step quantify costs and benefits!
Inadequate quantification of the discount rate - this is the MOST important factor in this analysis
Cost Benefit Analysis - checklist
“However, the Governments borrowing rate does not refl ect the true opportunity cost of the use of capital funds, known as the social opportunity cost of capital. The social opportunity cost of capital (SOC) represents the return on the capital funds that could be achieved by another project or programme.” DOF, 2006, pg 64.
110
Quantify costs & benefits continued
Cost Benefit Analysis - checklist
Most common international practice is that a producer rate of discount is the appropriate rate of discount to employ. This ensures that resources are used efficiently. Consumer rates of discount should be used only in exceptional cases, where for some reason resources have no opportunity cost and a programme involves only a comparison of consumption streams.
However, in many cases a project specific discount rate is appropriate. These cases arise when the risk of a project is borne by specific lenders who require a higher real rate of return for participating in the project or where a project could be undertaken by the private sector. .” DOF, 2006, pg 64.
111
Quantify costs & benefits continued DOF indicates that there should be a figure for the long
term Treasury bond rate (about %6.4%) & another interest rate to capture the risk premia (about 6%) associated with commercial or near commercial enterprises that involve production
CDP is a production project where education for example is a consumption project
Cost Benefit Analysis - checklist
For most evaluations of public projects, programmes or policies, this Handbook recommends the use of a cost of capital or producer rate of discount. The use of a producer rate of discount ensures that the true opportunity cost of capital is reflected in the project evaluation and that resources are used efficiently. DOF, 2006, pg 66.
112
Quantify costs & benefits continued - risk premia!
Cost Benefit Analysis - checklist
A method closely related to the SOC is to use an estimated project-specifi c cost of capital (PSCC) as the discount rate. This method is based on the Capital Asset Pricing Model (CAPM) developed to explain the relationship between the return expected by shareholders in any particular private sector firm and the market risk characteristics of the shares. Market risk can be defi ned as the risk to which all business enterprises are exposed through business cycle and other general business conditions. In the CAPM framework, equity holders seek a risk premium in compensation for the price volatility of their investment. Estimates of the size of the average market risk premium are typically based on the risk premium for equity investments and, for Australia, are generally in the order of 6 per cent2.
Most common international practice is that a producer rate of discount is the appropriate rate of discount to employ. This ensures that resources are used effi ciently. Consumer rates of discount should be used only in exceptional cases, where for some reason resources have no opportunity cost and a programme involves only a comparison of consumption streams. ･ However, in many cases a project specifi c discount rate is appropriate. These cases arise when the risk of a project is borne by specific lenders who require a higher real rate of return for participating in the project or where a project could be undertaken by the private sector. DOF, 2006, pg 66.
113
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Rate of Return
Notes1. Source: Extrapolated from data from SEES
% Rate of Return(SEES)
10
30
50
70
90
2010 2015 2020 2025 2030 2034
Normal commercial projects must make 20% return before bankers will take a look otherwise there is not enough gap between the WACC and the net revenue to pay the
bankers/shareholders & the business itself - this is an argument for delay!
114
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Rate of Return
Notes1. Source: Extrapolated from data from SEES and EcoLarge analysis
% Rate of Return (conservative ship size composition, costs $1bn)
10
30
50
70
90
2010 2015 2020 2025 2030 2034
115
Channel Deepening Supplementary Environmental Effects StatementExpert Witness Presentation
17 July, 2007
Francis Grey – PrincipalSimon O’Connor – Senior ConsultantCraig Robertson – Associate ConsultantRoderick Campbell – Associate Consultant
PO Box 256Noble Park VIC [email protected]: 03 9562 4472Fax: 03 9562 4118www.ecolarge.com
