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COMPARATIVE CASE STUDY ON COST-BENEFIT ANALYSIS FOR TOLL ROAD PROJECTS

Chi, S., Bunker, J., Kajewski, S., Queensland University of Technology, Australia

ABSTRACT

Project evaluation is a process to measure impacts and risks of a project as a public good. Cost-Benefit Analysis is a most commonly used project evaluation methodology for major road projects. Cost-Benefit Analysis conducted for Australian toll road projects have tended to mirror those for non-toll road projects, because they generally treat tolls as a financial transfer. However, a number of project impacts and risk characteristics are unique to toll road projects. It is therefore hypothesised that Cost-Benefit Analysis for toll road projects should treat tolls uniquely, on the basis that risk allocations and concession arrangements are different. This paper reviews Cost-Benefit Analysis methodologies used to evaluate major public road projects. Examining the treatment of project impacts and risks in practice, and the outcomes of the analyses revealed both the advantages and limitations of each extant Cost-Benefit Analysis methodology used in practice. Moreover, the suitability of different methodologies in terms of Cost-Benefit Analysis for toll roads was assessed by studying project characteristics and risk characteristics of each project. Identifying an appropriate treatment of tolls contributes to determining an appropriate Cost-Benefit Analysis methodology for toll road projects. The refined methodology would ensure that all relevant impacts and risks of the toll road project are addressed in decision-making. This will provide a basis for ensuring that the full and true impact to the community is properly assessed.

INTRODUCTION

The goals of a public project are to increase the well-being of residents and to maintain or increase overall prosperity (Keating & Keating, 2013). Government is responsible for ensuring that the benefits of decisions outweigh the costs to the community. In public governance, evaluation of public projects requires that all project impacts to the community to be assessed appropriately. Project evaluation is a process of assessing and measuring impacts and risks of the project for the purpose of evaluation and decision-making. Project evaluation provides the decision-maker with the ability to structure information, remember and consider all or most aspects of the project (Mackie, Worsley, & Eliasson, 2014).

The most commonly used project evaluation methodology to assess major road projects is Cost-Benefit Analysis (CBA) (Wee & Rietveld, 2014). The fundamental theorem of CBA is that the estimation of net impacts to the community (Rogers & Duffy, 2012; Wee & Rietveld, 2014). Benefit-Cost Ratio (BCR) is used as a means of net impacts to users and non-users, operators, safety and environmental benefits, wider economic impacts, and costs of the project in present value (Mackie, Graham, & Laird, 2011). CBA is well studied in academic literature, however studies with regard to CBA for toll road projects and the treatment of tolls in CBA are limited. The guidance on the treatment of tolls in CBA in extant guidelines (Queensland Department of Transport and Main Roads, 2011; Rockliffe, Patrick, & Tsolakis, 2012) is also limited.

This study focuses on toll roads, which may be provided either publically, privately or in some form of a Public-Private Partnership (PPP). Such major road infrastructure projects can impact the community in the same manner as their non-tolled, public road counterparts, so ought to be subject to project evaluation by the government. However, a number of impacts and risks are unique to toll road projects. The toll itself is unique, because it influences traffic demand on a micro-economic basis. This requires considerations in measuring net benefits of the toll road users, as well as in traffic modelling and forecasting. The price of the toll sometimes is uncertain



at the time of the analysis so this uncertainty needs to be assessed in the decision-making. Understanding of the toll price and forecasted traffic volume is vital to estimate toll revenues.

In some toll road settings, when the toll road is owned, operated and/or maintained by the private concessionaire, rather than earning revenue directly through receipt of tolls, it receives payments from the host government using one of various methods depending on the concession agreement. The following explains those payments (Brocklebank, 2014):

Shadow tolls avoid charging the users tolls; instead the host government is responsible for paying the concessionaire according to traffic volume or total travel distance along the road, in which case and specifically for traffic modelling, the road is considered not to be tolled.

Performance-based public sector payments may be paid by the host government to the concessionaire.

The concession can include guarantees of toll revenue. Toll revenue risk can be shared with the host government through minimum revenue guarantees. With minimum revenue guarantees, partial or full revenue risk is transferred to the host government whereby it compensates the concessionaire for shortfalls when the toll revenue received by the concessionaire is less than a guaranteed amount.

These payments are forms of risk sharing strategies. The risk to the public needs to be properly assessed in project evaluation. However, the concession arrangement of a toll road can be complex with these various payment methods and risk sharing arrangements, which may impact which project evaluation methodology is appropriate and the results of analyses using that methodology.

METHOD

As has been highlighted, a knowledge gap exists about how the effects of the toll road impacts can be captured in project evaluation, in particular the treatment of tolls. This needs to be investigated due to the uniqueness of toll road project impacts and risk sharing mechanisms.

This study investigates how major road projects, including toll road projects, have been evaluated in Australian practice using Cost-Benefit Analysis (CBA) and compares the analyses of toll road projects with those of non-tolled road projects. The aim of this study is to examine how CBA is conducted for major road projects and how tolls have been treated in CBA for existing major Australian toll roads. The cases studied include both major non-tolled road projects and toll road projects in Australia. The methodologies of sensitivity analysis, treatment of tolls, and estimation of project capital cost, user benefits and residual value are reviewed.

The methodologies and outcomes of the CBA conducted for the study cases are examined. Reviewing and examining CBA cases can highlight the limitations of the practice of CBA for major road projects, as well as the factors that have large significance in the outcomes of the evaluation. This will allow the complexity of project evaluation of major road projects to be explored.

THE STUDY CASES

Eight Australian major road study cases that include three non-tolled roads and five toll roads were analysed in this study. The following describes background of each case.

Non-Tolled Roads

Horsham Bypass (HSB)

A study was commissioned by VicRoads in order to select preferred route alignment for a future Western Highway bypass of Horsham, Victoria (AECOM Australia, 2014). The bypass was planned to allow for the future traffic growth along the Western Highway that connects Melbourne and Adelaide (AECOM Australia, 2014). Cost-Benefit Analysis (CBA) was conducted



to choose the preferred alignment based on the Net Present Value (NPV) and Benefit-Cost Ratio (BCR) (AECOM Australia, 2014). The lengths of option route alignments were between 22 and 23.8 km (AECOM Australia, 2014).

Singleton Bypass (SNB)

A study was commissioned by NSW Roads and Maritime Services (RMS) in order to select a preferred route alignment for a future New England Highway bypass of Singleton (New South Wales Roads and Maritime Services, 2016). The bypass was planned to allow for future traffic growth along the New England Highway, which connects Newcastle and the Upper Hunter region (New South Wales Roads and Maritime Services, 2016). The preferred alignment was chosen based on the measured economic benefits that were calculated in CBA (AECOM Australia, 2012). The lengths of option route alignments were between 19.1 and 22.5 km (AECOM Australia, 2013).

West Petrie Bypass (WPB)

The section of Youngs Crossing Road is prone to flooding and is frequently inundated (Arup, 2010a). The 1.92 km West Petrie Bypass (WPB) is a proposed new road connecting Youngs Crossing Road and Dayboro Road in the west of Petrie, which is a suburb of Moreton Bay Regional Council to the north of Brisbane (Arup, 2010b; GHD, 2013). A business case was produced for the alignment of the WPB that was selected from the previous study (Arup, 2010a). The business case consists of CBA of the alignment and the environmental and cultural heritage study (GHD, 2013).

Toll Roads

Airport Link (APL)

Airport Link (APL) consists of a 6.78 km section of tunnel and motorway, which is located in Brisbane (BrisConnections, 2016). APL is part of the corridor designated as M7-A7, which connects the south west and north east of Brisbane. APL connects with other M7 elements of Clem Jones Tunnel at its southern end and East West Arterial Road leading to the Brisbane Airport and the Port of Brisbane at its north east end (BrisConnections, 2016). A major interchange at its southern end also connects it with Inner City Bypass expressway and Legacy Way Tunnel, and Bowen Bridge Road. A major interchange mid-tunnel connects it with Gympie Road and Stafford Road, Kedron. CBA conducted for the proposed alignment of APL assesses the viability of the APL project by reviewing BCR calculated in the CBA and also reviews the integration of the Interim Northern Busway Project within the APL project (SKM & Connell Wagner, 2006).

City Link (CYL)

City Link (CYL) is a 22 km motorway located in Melbourne and connects the Monash Freeway, the West Gate Freeway and the Tullamarine Freeway (Transurban, 2016a). CYL consists of Western Link and Southern Link and provides access to Melbourne Airport, Melbourne CBD and Eastlink (Transurban, 2016a). The study was conducted to review economic benefits of the CYL and CBA was conducted as part of the evaluation (The Allen Consulting Group, 1996).

Gateway Upgrade (GUP)

Gateway Upgrade Project (GUP) is a 22.4 km upgrade of the Gateway Motorway (M1) in Brisbane, between Mt Gravatt-Capalaba Road at Wishart and Nudgee Road at Nudgee (Connell Wagner, 2004). The Gateway Motorway provides direct access to the Brisbane Airport and to the Port of Brisbane Motorway (Connell Wagner, 2004). GUP project consists of lane widening of the existing infrastructure, a new bridge crossing, a new section of motorway and a new interchange along the motorway (Connell Wagner, 2004). A business case was developed to review economic impacts of the GUP project by performing CBA (Connell Wagner, 2004).



Legacy Way (LGW)

Legacy Way (LGW), previously referred as Northern Link, is located in Brisbane and is a 4.6 km tunnel designated as part of the M5 corridor passing through the west of Brisbane. It connects the Centenary Motorway (Western Freeway) at Toowong (Brisbane City Council, 2010) with the Inner City Bypass expressway at Herston. The LGW tunnel provides access to the Brisbane Airport, Royal Brisbane Hospital, Chermside, Sandgate Road and Toowoomba (Queensland Motorways Management, 2016). CBA was conducted as part of a business case of the LGW project to assess costs and benefits of the project (Brisbane City Council, 2010).

Toowoomba Bypass (TWB)

Toowoomba is located at the convergence of the Warrego, Gore and New England Highways (Queensland Government, 2008). The road network in Toowoomba provides interstate movements from Queensland to New South Wales (NSW), Victoria and the Northern Territory (Queensland Government, 2008). The Toowoomba Bypass (TWB) project proposes a new, 42 km motorway that bypasses through movements from Toowoomba City (Queensland Government, 2008). A business case was developed to assess the need of the project using CBA (Queensland Government, 2008). Impacts of tolls were reviewed as part of the business case, however CBA was not conducted for those impacts (Queensland Government, 2008).

Project Proponent and Owners

Major transport infrastructure projects are generally initiated by host government bodies. Typically, they commission private consulting firms to undertake project evaluation. Table 1 summarises project proponents, representing their host governments.

Table 1: Project proponent (AECOM Australia, 2012, 2014; Brisbane City Council, 2010; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell

Wagner, 2006, 2008; The Allen Consulting Group, 1996)

Case, State Project proponent

Horsham Bypass (HSB), VIC VicRoads

Singleton Bypass (SNB), NSW NSW Roads and Maritime Services

West Petrie Bypass (WPB), QLD Moreton Bay Regional Council

Airport Link (APL), QLD The State of Queensland and Brisbane City Council

City Link (CYL), VIC VicRoads

Gateway Upgrade (GUP), QLD Queensland Department of Transport and Main Roads

Legacy Way (LGW), QLD The State of Queensland and Brisbane City Council

Toowoomba Bypass (TWB), QLD The Australian Commonwealth Government and the State of Queensland

Table 2 summarises the operators of each tolled study case and its owner following the conclusion of its concession period. Generally, the infrastructure item is owned by the operator and will be transferred back to the host government at the conclusion of the concession period. A number of private firms are usually involved in a single toll road project to design, build, operate, maintain and/or finance. The operators generally are responsible in financing the development of the project, and maintaining and operating the toll road in whole or part, and receiving toll revenues in return. Toll roads are most often part of the state controlled motorway network. All of the study cases aside from LGW will be transferred to a state government at the conclusions of their concession periods.



Table 2 Study toll road operators and owners (Brisbane City Council, 2015; Queensland Department of Transport and Main Roads, 2015; Queensland Treasury, 2016; Transurban,

2015a; VicRoads, 2015)

Case Operator Owner after the concession

APL BrisConnection The State of Queensland

CYL Transurban The State of Victoria

GUP Transurban The State of Queensland

LGW Transurban Brisbane City Council

TWB Nexus Infrastructure The State of Queensland

ECONOMIC PARAMETERS

A fundamental principle underlying economic analysis is that the value of money depreciates over time (Sinha & Labi, 2007). This is due to the time value of money, whereby to the individual, a dollar is worth more if it is available to them today than having to wait to receive it at some point in the future. Discount rate reflects the time value of money as well as the premium that is required by investors to compensate them for the systematic risk inherent in the project (Australian Department of Infrastructure and Regional Development, 2013).

When calculating monetary benefits or costs at the particular point of year, any past and/or future benefits and costs need to be calculated in present value terms. In a monetary project evaluation methodology such as Cost-Benefit Analysis (CBA), all benefits and costs are converted to present values, which represent the values of those benefits and costs at the time of analysis or when construction has been completed. Year zero refers to the year when initial costs including construction costs are fully paid and the facility is opened. Year one refers to the year when toll revenue of the opening year is counted as income. The discount rate can have large impacts on benefits and costs that occur in the long term (Koopmans & Rietveld, 2014; Wee & Rietveld, 2014). The future value depreciates exponentially with discount rate, therefore Benefit-Cost Ratio (BCR) is calculated as:

𝐵𝐶𝑅 =∑ [𝐵𝑦(1 + 𝑖)−𝑦]𝑛

𝑦=0 + 𝑅𝑉(1 + 𝑖)−𝑛

𝐶𝑎𝑝 + 𝑂&𝑀

(1)

Where:

𝑛 = period of planning horizon (years)

𝑦 = corresponding year, 𝑦(0, 1, … , 𝑛)

𝑖 = discount rate (%)

𝑅𝑉 = residual value of the road ($)

𝐶𝑎𝑝 = total capital cost over the whole planning horizon in present value ($)

𝑂&𝑀= total operation and maintenance cost over the whole planning horizon in present value ($)

Contreras (2014) states that using one single discount rate for very different projects is inadequate. Choosing the most appropriate discount rate to be adopted in economic planning, project evaluation and public policy formulation is a significant issue for researchers (Simonelli, 2013). In practice, either the discount rate that the host government through its state treasury indicates at the time of analysis, or the discount rate that is derived from the discount rate methodology that is documented in the applicable government guidelines, is used. Discount rate varies for Public-Private Partnership (PPP) projects. This is because, depending on the risk allocations between public and private sectors, the systematic risk premium is adjusted to reflect



the proportion of risks that the public sector is bearing (Australian Department of Infrastructure and Regional Development, 2013). For instance, a risk free rate is used when all of the systematic risks are borne by private sector (Australian Department of Infrastructure and Regional Development, 2013). Estimating the proportion of the systematic risks that are borne by the public sector can be complex. Hence, it has been recommended that sensitivity and uncertainty of discount rate should be tested.

Table 3 shows the discount rates and planning horizon used for the study cases. The discount rates used for HSB and CYL are significantly different, although they both are based in the same state. A three per cent difference of the discount rates can impact the results of CBA dramatically over the planning horizon of 30 years. This suggests that the risk allocations of HSB and CYL are noticeably different. Significant variation of BCR values with different planning horizons was also highlighted in Contreras’s study (2014). The length of planning horizon can be a key input in CBA.

Table 3: Economic parameters (AECOM Australia, 2012, 2014; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell Wagner, 2006, 2008; The

Allen Consulting Group, 1996)

Case State Discount rate Planning Horizon

HSB Victoria 5 % 30 years

CYL Victoria 8 % 30 years

SNB NSW 7 % 30 years

WPB Queensland 7 % 30 years

APL Queensland 6.8 % 45 years

GUP Queensland 6 % 30 years

LGW Queensland 6 % 40 years

TWB Queensland 7.6 % 40 years

PROJECT COSTS

The project cost of each study case was estimated by each evaluator as a lump sum payment and distributed over the construction period. In some of the study cases, the operation and maintenance (O&M) cost were estimated individually, while for others, simply one per cent of construction cost was entered as the O&M cost for the whole of planning horizon. For projects with relatively higher capital cost such as tunnel, construction costs and O&M cost should be estimated, as the proportion of construction cost and O&M cost can vary between each project. For instance, with LGW, the proportions of the individually estimated construction cost and O&M cost for the whole of planning horizon were 81 per cent and 19 per cent respectively (SKM & Connell Wagner, 2008), which shows considerable variation from assuming that the O&M cost is one per cent of construction cost.

PROJECT BENEFITS

Project benefits that were considered in the study cases include travel time saving (TTS), vehicle operating cost saving (VOCS), crash cost saving (CCS) and other environmental and externality costs saving (EECS). TTS was estimated based on the assumption that by using the proposed infrastructure, travel time can be saved, which then can be converted to a dollar amount. VOCS, CCS and EECS were estimated based on the assumptions that by using the proposed infrastructure, travel distance can be saved. This translates to lower vehicle operating cost, fewer crashes, and fewer impacts upon the environment. The saved travel distance is then used to estimate the VOCS, CCS and EESC in dollar amount. Comparisons of sources of these cost estimates and the methodologies to model travel time and travel distance are beyond the scope of this study.



Not all input data were documented in the Cost-Benefit Analysis (CBA) reports of the study cases. The inputs that were not documented are shown as “unknown” in the following sections, but it does not indicate that they were excluded in the CBA calculation. In fact, all of TTS, VOCS, CCS and EECS were included for all of the study cases aside from the WPB. All costs are shown with conversation to 2015 dollars for equitable comparison using the inflation methodology of the Reserve Bank of Australia (2016) in the following section.

Travel Time Saving (TTS)

TTS was calculated based on the vehicle hours travelled saving and travel time cost unit price. The travel time cost unit price estimation methodology was not documented for the study cases. For all of the study cases, the travel time cost unit price was estimated for light vehicles (LV) and heavy vehicles (HV) separately and costs for private time and working time were also estimated. Table 4 shows the unit price used in the study cases. The unit price used in the study cases are relatively consistent.

Table 4: Travel time cost unit price per hour in 2015 dollars (AECOM Australia, 2012, 2014; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell

Wagner, 2006, 2008; The Allen Consulting Group, 1996)

Case LV (per veh-h) HV (per veh-h)

HSB $15.29 for non-work trips

$48.92 for in-work trips

$34.38 for rigid HV

$72.67for articulated HV

SNB $37.37 $49.13

WPB $29.47

APL $22.29 for non-work trips


$36.98-$41.89 for rigid HV

$57.94-$69.32 for articulated HV

CYL $20.77

GUP Unknown

LGW $21.82 for non-work trips


$40.52

TWB Unknown

Vehicle Operating Cost Saving (VOCS)

Table 5 summarises VOCS unit price used in the study cases. In the study cases, various VOCS unit prices were used for different vehicle types and travel speeds. The unit price shown in Table 5 are for vehicles travelling at 80 km/h. The CBA conducted for WPB shows some technical errors and VOCS was excluded from the CBA calculation (GHD, 2013). The unit price used in the study cases are also relatively consistent.

Table 5: VOCS unit price per km in 2015 dollars (AECOM Australia, 2012, 2014; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell Wagner, 2006,

2008; The Allen Consulting Group, 1996)

Case LV (per veh-km) HV (per veh-km)

HSB $0.25 $1.31

SNB $0.33 $1.13

WPB Excluded

APL $0.18 for cars

$0.36 for light commercial vehicles

$1.38



CYL Unknown

GUP Unknown

LGW Unknown

TWB Unknown

Crash Cost Saving (CCS)

Table 6 summarises CCS unit price used for the study cases. CCS was calculated as the product of crash cost, crash rate and vehicle kilometres travelled saving (AECOM Australia, 2012, 2014; GHD, 2013). Crash rate theoretically should be different between urban and rural setting and also between roads and tunnels. Motorways particularly should have different crash rate to major arterial roads since they are uninterrupted flow facilities. Crash cost can vary due to various methodologies for estimations, but ought to be similar for the same type of infrastructure in the same state. Unfortunately, only the reports for HSB, SNB and WPB showed values used to estimate CCS unit price (AECOM Australia, 2012, 2014; GHD, 2013). The total CCS unit price used for HSB, SNB and WPB showed noticeable variations. The crash cost used for HSB only considered casualties. The crash rate used for SNB was significantly higher than other two cases. HSB and SNB are both rural bypass projects and the crash rate for the two projects should be similar. The CCS unit price used for APL is significantly lower than other cases. This shows either an error with estimation of CCS unit price or the fact that crash rate is assumed to be lower for tunnels.

Table 6: CCS unit price in 2015 dollars (AECOM Australia, 2012, 2014; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell Wagner, 2006, 2008;

The Allen Consulting Group, 1996)

Case Crash cost (per crash)

Crash rate (per veh-million km)

Total CCS unit price (per veh-million km)

HSB $264,646 0.11 $29,110

SNB $2,307,894 3.44 $7,939,156

WPB $3,469,364 0.31 $1,062,048

APL Unknown Unknown $23,618

CYL Unknown

GUP Unknown

LGW Unknown

TWB Unknown

Environmental and External Cost Saving (EECS)

There are considerable variations in the types of costs that were included in EECS in the study cases. The externality costs generally include the costs for nature and landscape, urban separation, and upstream and downstream. The methodology of estimation of EECS unit price was not clearly documented in any of the study cases (AECOM Australia, 2012, 2014; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell Wagner, 2006, 2008; The Allen Consulting Group, 1996). Table 7 summarises the types of costs that were included in the total EECS unit price for each case. Austroads states that all of these cost types should be included (Tan, Lloyd, & Evans, 2012). Although GHD (2013) mentioned that the EECS unit price includes air pollution, greenhouse gas emission (GGE), noise pollution, water pollution, impact on nature and landscape, urban separation, and upstream and downstream costs, only GGE, and air and noise pollutions were considered in their analysis. The whole of EECS was not considered in the CBA for CYL (The Allen Consulting Group, 1996). The types of EECS considered for GUP were not documented (Connell Wagner, 2004). For TWB, only



externality costs were considered, however the types of costs that were included in the externality costs considered were not documented (Queensland Government, 2008).

Table 7: EECS types (AECOM Australia, 2012, 2014; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell Wagner, 2006, 2008; The Allen

Consulting Group, 1996)

Case GGE Air pollution

Noise pollution

Water pollution

Nature and

landscape

Urban separatio

n

Upstream and

downstream

HSB ✓ ✓ ✓ ✓ ✓ ✓ ✓

SNB ✗ ✓ ✓ ✓ ✓ ✓ ✓

WPB ✓ ✓ ✓ ✗ ✗ ✗ ✗

APL ✗ ✓ ✓ ✓ ✗ ✗ ✗

CYL Excluded

GUP Unknown

LGW ✓ ✓ ✓ ✓ ✓ ✓ ✓

TWB Only externalities are included

Table 8 shows the unit price used to estimate EECS. Although the total EECS unit price for HSB included GGE and other environmental and external costs, the report prepared for HSB case (AECOM Australia, 2014) does not specify the values of other environmental and external costs and are unknown. Separate unit price for LV and HV of EECS were estimated in the CBA of APL, however the cost for HV were not documented (SKM & Connell Wagner, 2006). There are noticeable variations in the costs used to estimate EECS between all study cases. The EECS for HV is higher and has more significance than LV in CBA calculations.

Table 8: EECS unit price per km in 2015 dollars (AECOM Australia, 2012, 2014; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell Wagner, 2006,

2008; The Allen Consulting Group, 1996)

Case LV (per veh-km) HV (per veh-km)

HSB $2.85 for GGE

Other EEC Unknown

$6.42 for GGE cost of rigid HV

$3.41 for GGE cost of articulated HV

Other EEC Unknown

SNB $0.07 $0.42

WPB $0.0233 for GGE

$0.0296 for air pollution

$0.0097 for noise pollution

APL $0.0101 for noise pollution

$0.0304 for air pollution

$0.0044 for water pollution

Unknown

CYL Excluded

GUP Unknown

LGW $0.115 $8.24

TWB Unknown



RESIDUAL VALUE

There was considerable variation in the treatment and calculation of residual value (RV). RV represents the value of the asset at the end of the planning horizon and is added in the CBA calculation as a benefit. The expected economic life of a road is 40 to 60 years, a concrete bridge is 120 years and a tunnel is 100 years (Australian Transport Council, 2006). There may be minor variations in these values, however the lifespan should be the design life of the infrastructure. Table 9 summarises assumed length of lifespan for the infrastructure items of the study cases. The infrastructure value was assumed to depreciate linearly over its lifespan for WPB, APL and LGW. The Cost-Benefit Analysis (CBA) for APL assumed that the value of the APL tunnel will be zero at the conclusion of its concession period. The CBA for LGW also assumed that the value of the LGW tunnel will be zero after 40 years. This can be true for the private sector, as generally the infrastructure will be transferred back to the host government at the conclusion of the concession period and in such cases, but this raises the question of whether RV of the infrastructure ought to be zero at the conclusion of the concession period. From the host government’s perspective, the infrastructure will be owned by the public and there should always be some RV at the conclusion of the concession period, unless the life of the infrastructure item has ended and it needs to be fully replaced. Even so, present worth of a RV is generally very small. The RV was not considered in the CBA of HSB, SNB and CYL (AECOM Australia, 2012, 2014; The Allen Consulting Group, 1996). This can indicate that the RV was assumed to be zero at the end of the planning horizon. This argument also suggests that when the planning horizon is shorter than the concession period, the infrastructure item is still owned by the concessionaire and the RV at the end of planning horizon would be zero. When the planning horizon is longer than the concession period, RV still applies at the end of the planning horizon instead of the conclusion of concession period, as the depreciation of the value of the infrastructure continues.

Table 9: Assumed lifespan (AECOM Australia, 2012, 2014; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell Wagner, 2006, 2008; The Allen

Consulting Group, 1996)

Case Lifespan of the infrastructure

HSB Excluded

SNB Excluded

WPB 50 years for road structure and 100 years for bridge structures

APL Concession period of 45 years

CYL Excluded

GUP Unknown

LGW 40 years

TWB Unknown

SENSITIVITY ANALYSIS

Table 10 summarises the sensitivity analyses that were performed for the study cases. Sensitivity analysis was not performed for CYL and GUP, and, therefore was not considered in the decision-making process. The inputs that were tested in the sensitivity analysis varied between cases. Theoretically, inputs that form the basis of calculated impacts, which are traffic growth rate and forecasted traffic volume, should at least be tested. Capital cost of major transport projects tend to be underestimated (Flyvbjerg, 2014) and, therefore should also be tested in sensitivity analysis. Various discount rates are commonly tested as shown in Table 10.



Table 10: Sensitivity analysis (AECOM Australia, 2012, 2014; Connell Wagner, 2004; GHD, 2013; Queensland Government, 2008; SKM & Connell Wagner, 2006, 2008; The

Allen Consulting Group, 1996)

Case Traffic growth rate

Forecasted traffic volume

Discount rates

Capital cost Other

HSB ± 10 % ± 10 % Not tested Not tested

SNB Higher and lower than forecasted

± 20 % 4 % and 10 % ± 20 % Recalculated CCS

WPB Not tested Not tested 4 % and 10 % Not tested

APL Not tested Not tested 5.5 % Recalculated with various risks

1 % higher population growth

CYL Not performed

GUP Not performed

LGW Not tested Not tested 4 % and 8 % Not tested

TWB Not tested Not tested 3.5 % and 6.5 %

± 20 % ± 20 % of TTS and VOCS; and ± 50 % of crash rate

SELECTION OF PREFERRED OPTION

As part of the whole project evaluation for all of the study cases, although other considerations such as wider economic benefits and other intangible factors were considered as part of the whole project evaluation of all of the study cases, the outcome of Cost-Benefit Analysis (CBA) was represented using net present value (NPV) and benefit-cost ratio (BCR). A BCR below 1.0 was determined for HSB (AECOM Australia, 2014) while BCRs below 2.0 were determined for SNB, WPB, APL and LGW (AECOM Australia, 2012; GHD, 2013; SKM & Connell Wagner, 2006, 2008). None of the study cases was discontinued, suggesting that other major factors that were not accounted for in CBA were considered in the justification process of these projects.

TREATMENT OF TOLLS

Of the five toll road project cases, tolls were considered as a financial transfer between the host government and the toll road users and so were excluded in Cost-Benefit Analysis (CBA) calculations of APL, CYL, GUP and LGW. Various toll prices were applied in traffic forecast modelling and traffic volumes, and proportions of HV were estimated for each different toll price in the CBA for TWB (Queensland Government, 2008). In this analysis, tolls were also considered as a financial transfer, however they were included in modelling as a factor that influenced traffic volume forecasts (Queensland Government, 2008). This is consistent with previous study (Decorla-Souza, Lee, Timothy, & Mayer, 2013). It is reasonable to argue that in all of the study cases, tolls were considered as a financial transfer because they replace the capital, operating and maintenance costs of the project that would have otherwise been borne by the public through the host government if the project were a non-tolled, public road. Philosophically, this manner of treating cost is the most significant assumption that was made in the CBA based project evaluations of the tolled study cases.

DISCUSSION

Some technical inconsistencies exist between the Cost-Benefit Analysis (CBA) methodologies followed in the study cases. For instance, CYL was the only case that included off-road benefits in its CBA calculation. The methodology of the estimation of off-road benefits was not documented (The Allen Consulting Group, 1996). There are several causes of inconsistencies.



First, every consulting firm that would be conducting CBA for host government agencies has some level of limitations with their resources including labour, money and time. The quality of the analysis can highly depend on the resources available and time constraints.

Second, the guidelines of project evaluation and CBA range from the complex, to the lacking in depth or consistency. For instance, the discount rate methodology shown in the discount rate guidelines (Australian Department of Infrastructure and Regional Development, 2013; New South Wales Treasury, 2007) suggest the use of various discount rate methodologies for projects with different risk allocations. It sometimes can be difficult for the firm to first select the applicable methodology and then to conduct the required risk analysis while identifying the appropriate discount rate with which to use.

Third, there is a possibility that the host government is not necessary expecting comprehensive CBA, particularly when there are significant intangible factors involved in the project. For instance, for a bypass project in rural area, the Benefit-Cost Ratio (BCR) that was derived from the CBA may not necessarily completely decide the viability of the project. Some items considered to be intangibles in the CBA, such as community sentiment, may drive decision making. This was also evident in the cases. Despite CBA being capable of capturing many project impacts, monetising certain impacts, particularly related to community issues, can be difficult.

Fourth, decision-making for large scale projects such as transport projects can be complex work, which requires consideration of monetary and non-monetary impacts as well as various project risks and other intangible factors. A large part of what makes project evaluation of transport projects difficult is the complexity of transport planning itself. Forecasting and modelling the impact of adding a new transport infrastructure into an existing network increases with the complexity of the network itself. When evaluating a single road, the worthiness of the road depends on how it acts as part of the whole transport network.

Also important is the opening year of the road. As the time value of money diminishes with the size of discount rate used, the benefits gained in the first few years will be more significant than the benefits gained later years with higher discount rate. If a road is built as an initial component of a larger transport planning initiative, for instance a network of toll roads in an urban area, the full benefits of that road in terms of its use may only be realised once other components of the network are opened and operating in unison. Unfortunately, the discounted benefits and therefore CBA of that initial road would be expected to be relatively less than its subsequent partner component roads due to a longer ramp-up period. For a road to perform at its maximum capacity, the surrounding transport network need to be working effectively with the road. This circumstance is referred as the toll-road network founder disadvantage in this study. The improvement in ability to accurately forecast traffic as the network develops compounds this circumstance. A case in point is the Brisbane toll tunnel network. Clem Jones Tunnel opened two years prior to APL and five years prior to LGW (BrisConnections, 2016; Transurban, 2015b, 2016b). LGW has been the most successful link in the network since its opening, while the first two components suffered from limited demands initially.

It has been highlighted that the estimation of residual value (RV) at the end of the planning horizon depends on the scope of the evaluation. When the design life of the infrastructure is larger than the planning horizon, and the infrastructure will be transferred back to the host government at the conclusion of its concession period, RV should be included in CBA as a benefit. The review of the study cases revealed that RV of some of the study cases were treated in this manner. In particular, for tunnel projects, the longer design life and higher construction cost of the tunnel structure leaves a larger RV at the end of planning horizon. Therefore, RV of tunnels can significantly influence the outcome of CBA.

The treatment of tolls in CBA raises questions when impacts to the community are concerned. As illustrated by the tolled study cases, tolls are generally considered as a financial transfer and enter into CBA calculations only to the extent that they cause a change in micro-economic behaviour (Decorla-Souza et al., 2013). As discussed above, it is reasonable to argue that this is because they replace the capital, operating and maintenance costs of the project that would have otherwise been borne by the public through the host government if the project were a non-



tolled, public road. However, this is only completely truly realistic, if the transfer is internal to the public purse, for instance when the host government on behalf of the public pays for the infrastructure item, collects the revenue, and bears all of the project risk during its lifetime. An example of this case was when Queensland Motorways as a Queensland Government owned and operated a tolled motorway, the Gateway Motorway in Brisbane.

If the opposite extreme is considered, whereby the toll road is designed, built, operated and financed by private sector firms, the influences of the impacts that are borne by the private sector need to be carefully considered. If such impacts are recouped in a commercial environment by way of charging the end users, who in the case of a toll road are normally members of the community, it can be argued that those end user charges should be counted as the societal cost impacts in CBA. Meanwhile, while the project’s capital and operating costs are borne by the private sector rather than the host government, these latter costs should be excluded from the CBA because they are financial impositions that are contained within the private sector entity’s enterprise of offering its product, rather than as an end user societal cost. The majority of toll road projects in Australia do not fit into either extreme, which makes the treatment of tolls in CBA a complex consideration. Further investigation is needed to explore how tolls should be treated, and how concession arrangements such as minimum revenue guarantees should be considered.

As has been discussed, discount rate varies depend on risk sharing arrangement between public and private sectors, and significantly influence the outcome of CBA. As illustrated in the discussion of treatment of tolls in CBA, risk allocations is also directly linked to the allocation of impacts. The risk and uncertainty of a project can play a key role in decision making and need to be measured precisely and empirically. There was limited coverage of risk and uncertainty in all of the study cases.

The CBA conducted for the toll road cases considered tolls only to the extent to that they influence the traffic volume forecasts. The study cases also counted construction and O&M costs as costs of the project. Further investigation is needed to explore how project costs should be considered in CBA calculations.

The study also revealed a limitation of the extant CBA methodology, which is to clearly display the range in risk that the project may face. Estimating appropriate discount rate for PPP projects can be difficult due to the complexity of estimating risk sharing between public and private sectors. For instance, the sensitivity analysis that was conducted for each case did not show the project risks in an empirical manner. As an example, representation of the risk of a BCR being below 1.0 that is represented using percentages would be extremely useful in the decision-making process.

CONCLUSION

This study found that for many toll road projects in Australia, tolls were considered as a financial transfer and were excluded in Cost-Benefit Analysis (CBA). However, further consideration showed that tolls should not necessarily simply be excluded as costs, and the treatment of tolls should differ between different toll road projects. Further study is needed to investigate the mechanism of the treatment of tolls in CBA and various risk allocations. The study also identified limitations of the extant CBA methodology to evaluate toll road projects. The CBA methodologies used in study cases did not address project risks and uncertainties precisely. Empirical based representation of project risks and uncertainties would assist effective decision-making. For instance, measuring the risk of Benefit-Cost Ratio (BCR) using statistical measurements such as probability of failure would be significantly useful for decision-making. Future study will analyse hypothetical toll road projects with various risk allocations to further investigate the treatment of tolls and the methodology to address project risks appropriately.



ACKNOWLEDGEMENTS

The authors acknowledge the support of the School of Civil Engineering and Built Environment at Queensland University of Technology.

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AUTHOR BIOGRAPHIES

Sae Chi

Mrs Sae Chi is a PhD candidate in the School of Civil Engineering & Built Environment at the Queensland University of Technology. She holds a Bachelor of Engineering in Civil. Her current work focuses on project evaluation methodologies including Cost-Benefit Analysis of toll road projects.

Jonathan Bunker

Associate Professor Dr Jonathan Bunker leads the Transport Group of the School of Civil Engineering and Built Environment at Queensland University of Technology, Brisbane. He researches and teaches in transit engineering and planning, traffic engineering, highway engineering, and infrastructure asset management. Jonathan has a Bachelor of Engineering



(Civil) with Honours 1 and a Doctor of Philosophy (QUT). Prior to joining QUT he practised as a consulting transport engineer based in Brisbane, Australia and in Portland, Oregon. Jonathan is Past National President of the Australian Institute of Traffic Planning and Management.

Stephen Kajewski

Professor Kajewski is the Head of the School of Civil Engineering & Built Environment at the Queensland University of Technology (QUT). He holds a Bachelor of Engineering, Graduate Diploma in Project Management, Master of Built Environment (Project Management), and a Doctor of Philosophy. His research expertise is centred on the use of innovative Information and communication technologies in the engineering and construction industries.

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