Are infrastructure costs higher on the fringe?

Capital costs per dwelling of infrastructure provision - inner suburbs vs outer suburbs (from Trubka et al)

The exhibit above purports to show that the cost of infrastructure associated with building a new dwelling within 10 km of the CBD of a city like Melbourne is, on average, $50,503. In contrast, it costs $136,401 to provide infrastructure for an outer suburban dwelling i.e. located more than 40 km from the CBD. That’s a huge difference: $85,538 per dwelling.

The figures come from a 2007 report, Assessing the costs of alternative development paths in Australian cities, written by three Curtin University academics, Roman Trubka, Peter Newman and Darren Bilsborough. I’ve mentioned this report before, but that was primarily in the context of The Age and some public sector agencies tending to conflate economic costs with infrastructure outlays (they’re not the same!).

The figures above however are solely infrastructure outlays (not economic costs). Judging by the extent to which Trubka et al’s report is cited by government agencies, there appears to be strong demand for this type of information. It seems, however, that these are the only numbers on this topic around. That’s unfortunate because they have some very serious shortcomings as an indicator of the relative cost of providing infrastructure in inner and outer locations.

The key deficiencies are they’re old; they don’t relate to Melbourne; and they’re not transparent. Trubka et al sourced them from a 2001 report, Future Perth, prepared by the WA Planning Commission to assess infrastructure costs in Perth. Future Perth didn’t calculate its estimates from first principles but rather surveyed 22 earlier studies, some dating from as far back as 1972 and some relating to costs in the USA and Canada.

Future Perth is a working paper and hasn’t been published – hence the rigour of its methodology and those of the 22 studies it drew from hasn’t been tested. Unfortunately, Trubka et al provide scant explanation of their infrastructure estimates, relying instead on a reference to Future Perth.

I can’t say for sure the Trubka et al estimates are wrong, but I can say they’re unlikely to be right. I can also say they’re far too flaky to be relied upon to guide significant policy or investment decisions here in Melbourne. There’s clearly a demand for this sort of information so it would be sensible for the State Government to undertake its own rigorous and up-to-date assessment of the costs of metropolitan infrastructure provision.

Although not as decisive as the shortcomings discussed above, I also have some issues with how Trubka et al have set up their cost comparison. Actually, because the report doesn’t elaborate much on the various infrastructure items, I’ll treat these as questions, or areas that need clarification. Read the rest of this entry »

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Why do the worst infrastructure projects get built?

Inaccuracy of transportation project cost and benefit estimates by type of project, in constant prices (Flyvbjerg)

Under-estimating the cost of major infrastructure projects and over-estimating the demand is so chronic that forecasters deserve some harsh medicine, according to Professor Bent Flyvbjerg from Oxford University’s Said Business School. He says “some forecasts are so grossly misrepresented that we need to consider not only firing the forecasters but suing them too – perhaps even having a few serve time”.

Australians have plenty of experience with underperforming infrastructure projects. For starters, just in transport alone, there’s Brisbane’s Clem 7 road tunnel, Sydney’s Lane Cove and Cross City tunnels, the Brisbane and Sydney airport trains, Melbourne’s Myki ticketing fiasco, and the 2,250 km Freightlink rail line connecting Adelaide and Darwin. And they’re just the ones we know about!

Professor Flyvbjerg says cost overruns in the order of 50% in real terms are common for major infrastructure projects and overruns above 100% are not uncommon. Writing in the Oxford Review of Economic Policy, he argues that demand and benefit forecasts that are wrong by 20–70% compared with the actual outcome are also common.

Transport projects are among the worst performers (see exhibit). Professor Flyvbjerg examined 258 transport projects in 20 nations over a 70 year time frame. He found the average cost overrun for rail projects is 44.7% measured in constant prices from the build decision. For bridges and tunnels, the equivalent figure is 33.8%, and for roads 20.4%. The difference in cost overrun between the three project types is statistically significant and the size of the standard deviations shown in the first exhibit demonstrate the high degree of uncertainty and risk associated with these sorts of projects.

He also found that nine out of 10 projects have cost overruns; they happen in all nations; they’ve been a constant over the last 70 years; and cost estimates have not improved over time.

And it’s not just under-estimation of costs. Errors in forecasts of travel demand for rail and road infrastructure are also endemic. He found that actual passenger traffic for rail projects is on average 51.4% lower than forecast traffic. He says:

This is equivalent to an average overestimate in rail passenger forecasts of no less than 105.6 per cent. The result is large benefit shortfalls for rail. For roads, actual vehicle traffic is on average 9.5 per cent higher than forecasted traffic. We see that rail passenger forecasts are biased, whereas this is less the case for road traffic forecasts.

He also found that nine out of ten rail projects over-estimate traffic; 84% are wrong by over ±20%; it occurs in all countries studied; and has not improved over time.

Thus the risk associated with rail projects in particular is extraordinary. They face both an average cost overrun of 44.7% and an average traffic shortfall of 51.4%. Read the rest of this entry »


Do we still need to conserve water?

The Silk Road - one of 108 Giant Chinese Infrastructure Projects that are reshaping the world (click to see rest)

It seems the water conservation message is starting to recede as the Government and water authorities come to grips with the breaking of the drought and the oceanic task of paying for new infrastructure like the desalination plant and north-south pipeline. Some small evidence of this trend is evident from the latest invoice my household got from our water retailer, Yarra Valley Water.

Our consumption for the three months to 25 May was 626 litres per day. The invoice has the familiar graphic showing how to convert household consumption to per capita consumption, but there’s no longer any target to compare your performance against. We consumed 157 litres per day per person but there’s nothing to help make sense of that number. Unless you can recall the now-abandoned daily target of 150 litres per person, you won’t know if you’re consuming too much water or too little.

The other thing is water consumption charges still account for only a small proportion of the bill – in fact our 626 litres make up slightly less than a third of the total amount. The rest of it is made up of standing costs for “drainage”, “sewage” and “service” charges, which customers have no real control over*. So even if we worked harder at reducing our consumption, the financial pay-off would be pretty small. The pricing of water continues to offer little incentive for conservation, a point I made nine months ago.

Discouraging water use is now a financial liability for the Government and water authorities. They’re in deep water primarily because the former Government had a political problem – it needed to show it wasn’t out of its depth but had a plan to deal with the drought. But rather than navigate the politically troubled waters of low-cost measures like stronger conservation incentives (for example, by raising water prices) it did what governments usually do – spend big licks of money and rely on the costs being diffused over time across large numbers of customers.

This pattern of spending rather than managing is pretty much standard practice for governments. We currently have the possibility of immense sums being spent to address the congestion and capacity problems of Hoddle Street, when the vastly more efficient solution would be to price access to roads. We have the more likely prospect of even bigger sums being spent to construct a rail line to Doncaster when effective public transport can be provided by bus at much lower cost. Read the rest of this entry »


Would we build another Opera House?

The other 'Melbourne Opera House' - Powlett St East Melbourne

An argument I see frequently in relation to massive infrastructure projects like High Speed Rail (HSR) is that we should simply get on and build them because they’re ‘visionary’ and ‘nation building’. For example, a commenter recently likened investment in HSR to the decision to build the Sydney Opera House. If cost-benefit analysis had been done on the Opera House, he argued, it would’ve been still-born. Thus we would’ve been denied the enormous tourism revenue and the boost to national pride provided by this magnificent building.

I expect he’s right. Formal cost-benefit analysis would probably be hard-pressed finding that the benefits of any opera house exceed the costs, either then or now. There’s therefore always a chance if you look too hard at the costs and the risks you could end up missing out on some whopping future benefits. However the problem with this sort of argument is that it’s based on hindsight. We know for a fact from the perspective of 2011 that the Opera House is a grand success. But cost-benefit analysis isn’t retrospective, it’s prospective – it helps us to evaluate projects before we commit to building them.

Here’s a “thought experiment”. Consider a contemporary proposal to spend a fantastic sum of money on (say) The Melbourne Opera House (insert your city of choice). Imagine an architect of Frank Gehry’s stature (but please not Frank himself!) was asked to ignore the cost and come up with a design that would create an “international icon”. The promise is the building would “put Melbourne on the map” and more than repay the preposterous cost over the years in tourism revenue and civic pride. Of course while it would nominally function as an opera house, what we’d really be building is a piece of architecture so powerful, distinctive and attractive, that it would be as iconic as……well, the Sydney Opera House.

The trouble is the probability of achieving this vision is close to zero. No one knows what the recipe for international icons is. We can look back and more or less pick out the vital decisions and factors that made the Sydney Opera House the symbol it is today, but doing it prospectively is close to impossible. We’d almost certainly end up with a Melbourne Opera House that was functionally compromised and cost billions more than it needed to, but which nobody outside Victoria gave a second glance.

Actually even if the Sydney Opera House planners knew with certainty in the late 1950s what we know now, I’m not sure building it would’ve been the “right” decision to take at the time. The Sydney Opera House didn’t instantly become an international symbol so most of the tourism and “icon” benefits, which probably didn’t kick in seriously until at least the 1980s, would’ve been heavily discounted back to the time the decision was taken to proceed. The net present value of the benefits might not have exceeded the cost of construction which, let’s not forget, was very high. Read the rest of this entry »


What can Sydney teach us about airport rail lines?

Mode share (prepared by ACCC)

There is little doubt that Melbourne Airport needs action to improve land-side access for passengers arriving and departing from the airport.

Many observers argue the solution is a rail line from the CBD to the airport. I think there’s a much bigger picture they’re missing. They would be well advised to look at the Airport Monitoring Report 2009-10, just released by the ACCC (see chart).

It shows that only 39% of trips to Sydney Airport are made by private car (on-airport parking, rentals and kerbside drop-off), compared to 69% for Melbourne Airport. Since Sydney has a train and Melbourne doesn’t, it’s tempting to conclude that a train is the answer to Melbourne’s woes.

However the ACCC’s report says that more people travel to Melbourne Airport by public transport (14% – all by bus) than is the case for Sydney Airport (12% – train and bus).

A key difference between the two airports is that taxis (incl ‘mini buses’) are far more popular in Sydney, where they account for 49% of all airport trips. The comparable figure for Melbourne is just 17%.

Part of the reason for this difference is taxis are more competitive in Sydney against cars and against the train – Kingsford Smith is 8 km from the CBD and hence is relatively central.  In contrast, Melbourne is 22 km from the CBD so taxis are not as competitive with either buses or cars (other reasons for the difference include more tourists at Sydney, as well as higher parking charges).

As I discussed last week, Brisbane’s airport – like Melbourne’s – is also located a considerable distance from the city centre. It might be that the location of both airports on the edge of their respective metropolitan areas – well away from the centre of gravity of population in both cities – is a key reason for their high private car use (and low taxi use).

Yet distance can’t be the whole explanation. The Brisbane airport train only captures 5% of trips and all up, public transport carries 8% of airport journeys. That’s considerably less than either Sydney or train-free Melbourne.

Given the experience of Sydney and Brisbane, it cannot simply be assumed that constructing a rail line from the CBD to Melbourne Airport will inevitably lead to a significant increase in public transport use – at the expense of cars – over and above the already substantial mode share enjoyed by buses. Read the rest of this entry »


Is this the way we’ll live next?

Wivenhoe Dam, Qld, at 197% capacity, Jan 2011

The centre of the city of the future will be the airport, according to a book by John D Kasarda of the University of Carolina and journalist Greg Lindsay to be published next month.

They say in Aerotropolis (subtitled, to emphasise its inevitability, The Way We’ll Live Next), that “not so long ago, airports were built near cities, and roads connected the one to the other. This pattern—the city in the center, the airport on the periphery— shaped life in the twentieth century, from the central city to exurban sprawl”. But things, they say, have changed:

Today, the ubiquity of jet travel, round-the-clock workdays, overnight shipping, and global business networks has turned the pattern inside out. Soon the airport will be at the center and the city will be built around it, the better to keep workers, suppliers, executives, and goods in touch with the global market.

Soon the airport will be the centre of the city?!!! I am, to put it mildly, sceptical about this view of the future.

Yes, cities have almost always developed around transport infrastructure – first ports and rivers and more recently railheads and freeway nodes. Yes, local concentrations of economic activity have sprung up in various places to provide logistics services in close proximity to major airports, some of which are very large. And of course, as this preview of the book states, the share of high value freight carried by air is increasing at a much faster rate than trade generally.

Now if some marketer wants to start calling Melbourne airport and the surrounding area ‘Tullamarine Aerotropolis’ or something similar (‘Tullatropolis’?) that’s OK by me. It is after all one of the biggest concentrations of jobs in the suburbs of Melbourne and a fair number of those jobs are doubtless related in some way to aviation.

But arguing that the city of the future will “be built around the airport” is silly. Read the rest of this entry »


Where will the money come from?

Melbourne & Ballarat trams in the 60s (click)

According to Paul Austin in The Age (29/11/10), there’s little doubt that infrastructure inadequacies weighed heavily on voters’ minds in last Saturday’s election. His list of problems includes overcrowded trains, congested roads, the Myki debacle and long hospital waiting lists.

The pressure to “fix” these problems from voters in the eastern suburbs and sandbelt electorates that fell to the Coalition on Saturday will be immense.

The new Premier, Mr Baillieu, might therefore find it worthwhile to look at this report on public sector borrowing by Dr Nicholas Gruen (summary here).

Dr Gruen contends that governments in Australia have focussed on the cost of debt but have ignored the benefits. They’ve reduced the budget deficit to zero but exchanged it for an infrastructure deficit. Their constituents have saved on debt repayments, but:

they are paying inflated tolls on roads and heavy mortgage repayments that reflect the lack of land release and the loading of infrastructure charges onto the land that has been released. And they are paying with their time as they wait at peak hour in traffic that has slowed to a crawl or crowd into late trains and buses.

Thanks to the culture of strict fiscal rectitude that dominates modern government thinking, new debt has been kept off the government’s balance sheet by funding infrastructure in other ways – partly through asset sell-offs but mostly via Public Private Partnerships (PPPs). Read the rest of this entry »