Economic Benefits of Cycling Infrastructure

cycling-brisbane

Very pleased to see that my colleagues at Queensland Department of Transport and Main Roads and Aurecon will be presenting our analysis on the economic benefits of cycling infrastructure at the National Traffic and Transport Conference of AITPM in mid-August.  The abstract is available here:

https://www.aitpm.com.au/economic-benefits-of-cycling-infrastructure/

 

Image: Southbank, Brisbane. Source: Brisbane Tourism.

Cross River Rail Dice Roll?

1489723898874

In this note we consider there is a 25% possibility that Cross River Rail may fail to achieve a positive economic net present value and explain how we arrive at that opinion.

Building Queensland reported in its cost benefit analysis summary that Cross River Rail produces a Net Present Value (NPV) of $966 million with a Benefit Cost Ratio (BCR) of 1.21. However, its summary did not publish the actual present value totals of the benefits or costs from the study. The full report is not available for public scrutiny.  Also, the government’s website for Cross River Rail has still not published the business case.

The BCR was expressed in terms of P50, which implies there is a 50% probability that it could be lower than 1.21. Similarly, if the NPV was expressed as P50 that implies a 50% probability the NPV could be less than $966 million. Interestingly, no formal sensitivity analysis was presented in the summary.

Is it possible to assess the probability that the net present value of the project could be less than zero or the benefit cost ratio less than one?

Using the NPV and BCR information from the summary we calculate the implied present value of benefits (B) and the present value of costs (C). Since NPV = B – C = $966 million, and BCR = B / C = 1.21, we can solve for C. This gives us a present value figure for C of $4,742 million. Therefore, the present value for B is $5,738 million.

Since we do not know the risk profile of these values, let’s assume variability in the estimates are normally distributed around the benefit and cost values implied by the NPV and BCR figures. This is a generous interpretation of the variability of the actual result compared to the estimate because we know that costs are typically skewed towards overruns and realized benefits fall short of estimates more often than exceed them.

We assume a standard deviation that is approximately 20% for each cost and benefit estimate. We assume in the absence of any guidance that the estimate is the mean for the purpose of this analysis. This applies both to costs and benefits. Under a standard normal distribution the estimate statistic is also a P50 estimate.

Benefits and costs in the tails of each distribution are likely to be extreme values. We assume that values in the 5% tails either side of the mean are not sampled. That is, values are drawn from a normal distribution that represents 90% of possible values for benefits and costs.

One final consideration – no correlation is assumed between benefits and costs. What it costs to build and operate Cross River Rail has no influence on the level of demand achieved. The same project is delivered irrespective of cost.

Running @Risk probability software over this, we find that running the NPV calculation through 1,000 iterations there is a 25% chance that the project will generate a negative NPV. No formal consideration is given to optimism bias, which would tend to increase this value.

Is this a risk worth taking? Hard to say because some of the fundamental information is still not in the public domain. Also, components of both benefit and cost may be well identified and estimated. As a consequence, their probability profiles might be within a much smaller range.

Within the project, further work would be required to minimise and mitigate risks that could affect benefit realisation or lead to increased costs. Release of further detail about the project would enable the public to assess this.

Image: Brisbane Times.

Inland Freight

canola

Recently I have been thinking about inland freight and logistics to see how this affects Australia’s seaports. Volumes may be constrained by production factors – you can only grow what you can grow when the environment allows you to grow it – but where these volumes go can be determined by these inland costs.

Policy can have consequences as NSW’s freight and logistics strategy shows. Improvements in freight handling and inland cargo aggregation can reduce costs. Some of these improvements reduce the cost of multi modal handling, as well as reduce the cost of line haul by mode – whether that is by rail or road.

For an economist like me it is a relative comparison game. Relatively lower costs will shift the movement of commodities from one mode to another, as well as shift the direction of commodities. Subject, of course, to existing commercial agreements.

However this is not the only story. The other story is around the development of vertically and horizontally integrated businesses that develop their own end-to-end freight and logistics systems. This means they are able to profit maximize by using less profitable parts of their networks to feed the more profitable parts. These firms are also taking equity stakes in their clients.

This is different to geographically and modally constrained freight and logistics operators – they have to maximize efficiency of throughput at a single point or along the linear operation of a particular mode. They certainly do not own parts of their client’s operations. Also, singular operations cannot transfer price because the other parts of the network or system are owned by other parties, and often singular operations cannot aggregate the volumes of goods required to develop leverage over prices.

This article also provides a gratuitous opportunity to show some of the canola fields near my home town in the South West Slopes region of NSW. I took this picture last week on a visit there. Primary production remains an important part of the freight task, albeit a volatile one that is hostage to world demand, weather and yields.

Let there be lights …

For all my friends and colleagues in the transport sector, this year we celebrate the centenary of the traffic light.  What a boon that has been to orderly traffic in our major cities across the world – as well as a reliable stream of work for town planners, traffic engineers and even economists!

When Was the First Traffic Light Installed? 5 Fast Facts You Need to Know

And, yes, we economists do measure the economic benefits of traffic lights.  Particularly when you consider installing them at 1,000 intersections:

https://www.london.gov.uk/sites/default/files/traffic-signals.pdf

Of course the big issue is whether we should follow the Europeans and switch to flashing amber during off peak periods.

When we eventually move to three dimensional traffic environments, I wonder how this nodal regulator will evolve.

More importantly, will our legions of pedallists and perambulators prevail in the design of future urban transport systems and kill off King Car?

Or, with the rise of the machines will we simply see motoring evolve through driverless cars into pod platforms?

Either way, as we move into real time, big data clipped from traffic movements will we eventually see the demise of the humble traffic light?

A Bridge to Sell

Unknown Recently at the Warren Centre (http://thewarrencentre.org.au/ip30-panel-investigates-the-infrastructure-governance-opportunity/) there was some commentary around the cost of duplicating Brisbane’s Gateway Motorway Bridge.  Namely, between the original and the duplicate, costs increased fivefold.  On the surface that would be a stunning thing.  However, when we consider 24 intervening years (1986-2010) between the costings for the two projects, we are looking at an annualised increase in costs of 6.9%.  This is still significant when inflation only increased 3.4%p.a. over the same period.  I know there are construction price indices around as well.  However, I wonder whether design and materials were significantly different, and the connecting road infrastructure was more challenging. That might explain some of the residual increase.  Also, the duplicate would have been constructed in a much tighter market for engineering and construction services.  Should we have bought the extra lanes way back in 1986 or would the opportunity cost have been too large?

Valuing Toowoomba’s Second Range Crossing

What value can we put on the capital cost per vehicle using the $1.6 billion Toowoomba Second Range Crossing?

Let’s assume: in a 25 year appraisal period traffic volumes grow 3.5% p.a.; some 75% of some 23,000 vehicles per day divert to the crossing; and a 4% real discount rate. How does just under $12 a vehicle sound?

Bump traffic growth to 6% p.a., raise diversion to 85% diversion, and trim the discount rate to 3%, and you get just over $6.

Sets a bar, doesn’t it?

This project will only show a net economic benefit if benefits that are eventually identified are multiples of this.

Climate Change Impacts on Transport

So how important is the impact of climate change on transport infrastructure?  Very important in developing countries it seems.  We have just completed a present cost analysis of this at a river crossing in the Solomon Islands. It looked out over a 25 year period.

In the absence of downscaled climate forecasts and detailed hydrological data a scenario analysis was developed.  Baseline asset performance in the absence of climate change was assessed against a range of climate change scenarios using actual flood event and cost data. This created estimates of days service lost as well as maintenance, repair and replacement costs.  Five different socio-economic impacts driven by service levels were also assessed identifying wider economic costs.

The upshot is that just at this one crossing the economic present cost of climate change is equivalent to around 5% of the current national transport budget. Any climate change adapation measure that fully mitigates that for less cost will increase economic welfare.  The analysis provides a rational basis for an adaptation budget when considering possible engineering design changes.