neil douglas, douglas economics - changes in project evaluation

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Neil Douglas, Managing Director, Douglas Economics delivered the presentation at the 2014 Major Road Projects Conference. The Major Road Projects Conference brings together government officials with those responsible for the planning, financing and construction of Australia’s critical road infrastructure to discuss future plans. It offers a practical assessment of the strategy necessary to ensure Australia’s current and future major roads projects are successful. For more information about the event, please visit: http://www.informa.com.au/roadprojectsconference

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  • 1. Neil Douglas Douglas Economics Trends in Transport Project Appraisal Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 1

2. Also NZ report Julieta Legaspi TfNSW Peter Bannister & George Karpouzis helped Not an official view of course! Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 2 3. 3 Also in 2013 this NZ report which reviews alternative evaluation approaches And parameter values (mainly public transport but includes some road values) Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 4. 4 Cost Effectiveness Analysis Multiple Criteria Analysis Economic Impact Analysis Social Cost Benefit Analysis Financial Appraisal The same answer Special Case Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 Focus of this talk Gut feel! The starting position and finishing position? Toll Roads 5. 1. A Brief history of transport appraisal in NSW/Australia Bradfield meets Lang for tea and scones early 1920s Personal briefings to discuss alternative plans, costs toll charges and forecast revenue I remember John Lang The Harbour Bridge Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 5 Gut feel? 6. 1960s Agriculture applications (after USA) 1966 Investment Analysis Commonwealth Government 1970s Vernon Commission a high point after 60s credit squeeze 1972 Whitlam Govt States Grants: 2/3rds grants to States having done CBA Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 6 7. Roads Engineering Economy 1970s = Design, speed, discounting NASRA/ARRB advocate approach at conferences But Treasury involvement minor Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 7 8. Manuals/Guidelines 1st = Water/Electricity 1970s NSW 1988 NSW Capital Works Committee >$5m CBA Only Stipulation 7% discount rate NSW Treasury: Guidelines on Economic Appraisal of Assets workshops , accredited list of evaluators 1990s Total Asset Management Process (TAM) >$1m Process included Value Management Early 1990s Roads and Traffic Authority 1993 State Rail Authority Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 8 9. 9 NZ History Project Evaluation 1970 Ministry of Works 1982 Cost Benefit Appraisal the standard approach for road eval 1986 National Roads Board set up developed TR9 a CBA Manual 1988CBA required for all roads 1991 Project Evaluation Manual developed BCR>4 1991 Resource Management Act land use effects of roads 1995 Transfund set up (efficient alternatives) 1996 Review of alternatives CBA selected 1997 Alternative to Roading Eval. Methodology Efficiency Ratio 2002 Value of Time Study WTP values for road and PT 2003 Package evaluations 2004 Land Transport NZ set up 2006 Economic Evaluation Manual developed 2008 Green Party instigates move away for CBA 2008 Roads of National Significance Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 10. 2. Transport funding $4.3b Petrol /Diesel Tax $1.3 billion investment Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 10 Who collects the money WHO determines how its spent? 800,000 sq kms 1/10th 7.3 million people 1/3rd State Federal 11. 0 10 20 30 40 50 60 70 80 90 100 1900 1920 1940 1960 1980 2000 TotalTaxTake% States Federal Wider vertical fiscal imbalance Henry tax review > land tax suggested Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 11 12. Applications for Commonwealth funding Commonwealth Department of Infrastructure Transport (DoIT) National Building Program roads/rail (& cycleways) $37 billion 4 years 2009- $10b per year NSW $3billion per year 33% Infrastructure Australia projects >$100 million advice to Minister Northern Sydney Freight Corridor No NSW public urban transport project so far But Parramatta Epping $2.1b approved ?! Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 12 13. Infrastructure Australia assessment framework Priority List 1. Early Stage 2. Real Potential 3. Threshold 4. Ready to Proceed Framework Strategic Alignment Problem definition Solution development CBA required at 3 and 4 stages 7% discount rate Best practice/standard parameters Non monetized impacts appended 7 point scale Wider economic benefits not in core evaluation Non monetized impacts appended 7 point scale Seven National Priorities + Align with State Plans Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 13 14. Economic appraisal manuals guidelines Australian Economic Appraisal Guidelines NSW Road Evaluation Manual NSW RailCorp Capital Project Evaluation Manual ATC National Guidelines TfNSW Principles Guidelines for Economic Appraisal Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 14 No shortage of manuals! 15. Recent developments in economic appraisal techniques Gateway reviews 2004 Assurance to Govt process as well as project George Karpouzis: Engineering / recurrent cost focus Much less on scope /benefits Misunderstanding of financial versus economic A UK Treasury import Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 15 16. a number of major projects that have been selected have either been delayed or cancelled notably the Sydney metro, a $400 million bill for taxpayers for nothing at all. The underlying failures leading to these outcomes have been poor planning and project selection rather than an inability to deliver. Infrastructure NSW Still can blow $400 million on Metro project - INSW Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 16 17. Bloated business cases escalating cost Retrospective Advocacy One way progression Secrecy Business Case Problems Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 17 18. Centralisation of transport planning in NSW Integration - road rail buses ferries.. BUT Separation from grass roots & history shows evaluation most useful at middle level? (Top level all politics?) For economists: One value of time a return to the 1970s Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 18 19. 19 Mackie v Nash Continuing Transport Economics Boxing Match Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 Value of Time 20. 20 There is no reason for the value that the individual is willing to pay to reduce travel time to be equal to the value that society as a whole attaches to the reassignment of time of that individual to other activities. Mackie concluded that using individuals or groups willingness to pay as their value of time savings is inappropriate for social evaluation and therefore Mackie supports the UK practice of adopting an equity approach to the valuation of non-working time, Mackie et al (2003). Peter Mackie Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 21. 21 the British approach, again like many others, attempts to allow for equity considerations by using common values of time, risk of accidents and environmental amenity regardless of income. Nash: This might have been reasonable at a time when appraisal was mainly applied to road schemes which were paid for by the government but gave time savings to users, but now that appraisal is often applied to schemes which trade-off time savings against money cost (e.g. whether to replace buses with higher priced light rail services, whether to reduce road congestion by means of road pricing), it may be highly misleading. It would be quite possible for the appraisal to conclude that the scheme was desirable on the basis of a standard value of time, when according to the actual values of the users it was not (or vice versa). (Nash, 2010, p. 9) Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 22. 22 In March 2013, TfNSW released Principles and Guidelines for Economic Appraisal of Transport Investment and Initiatives (PGEATII), TfNSW Harmonised (same) value of time for equity reasons of $13.76/hr for private road & PT. Dates to a 1997 AusRoads working group (40% wage) I recommend: Income standardisation considers income differences Allows for differences in mode (hence quality), mode, travel time component, journey purpose See Douglas & Jones ATRF 2013 Trends in Transport Project Appraisal by Neil Douglas - by Neil Douglas - Roads Conference Informa, Sydney - March 2014 NZTA announced move to a common value of time in July 2013 23. 23 Declining Discount Rates (except in NSW) Makes discounting (and economists) less important! Longer evaluation period (bigger spreadsheets) Greater importance in forecasting the future mugs game The ECONOMIST Country Discount Rate Evaluation Period England 3.5% for first 30 then 3% 60 years Germany 3% nk Netherlands 2.5% plus 3% risk premium varies 100 years/infinite Sweden 3.5% changed from 4% recent