“We are surprised the Commonwealth Government has apparently supported a project that breaches almost all its guidelines on efficacy and procurement.” JON STANHOPE & KHALID AHMED continue to shred the business case for light rail stage 2b.

The economic analyses in the stage 2b light rail business case documents that the ACT government was recently forced to release are based on fundamentally problematic assumptions. 

There are staggering inconsistencies some of which relate to future government policy under a business-as-usual scenario, for example, where:

• there will apparently be no housing supply in Canberra other than along the light rail corridor, ie  the drastic shortage of housing in Canberra will be “solved” by light rail from Civic to Woden; and

• bus travel times between Civic and Woden will allegedly more than double despite a dedicated busway along a large part of the route, and only minimal investment required to extend it to Civic.

In addition, problems arise by presenting assumptions as outputs of modelling, and premises as conclusions – pitfalls that practitioners are advised and expected to avoid.

In our opinion, neither the case prepared by Transport Canberra nor Major Projects should have proceeded to cabinet due to their poor quality and shallow analysis.

To be fair, the Transport Canberra offering appears a tad more realistic, albeit, suffering from the sense that it is to some extent a response to a pre-determined expectation that the project needs to be justified and delivered.

For example, Transport Canberra acknowledges that transit times for commuters from Civic to Woden will increase with light rail, resulting in a negative benefit (an economic cost) from lost productive and leisure time. It also advises that infrastructure cost savings from densification will, on its assessment be $1.8 million over 30 years, ie virtually zero.

The Benefit to Cost Ratio (BCR), excluding wider-economic benefits (as indeed they should be under the relevant guidelines) is estimated at 0.22 to 0.27 by Transport Canberra, and 0.54-0.55 by Major Projects (through the miraculous doubling of benefits we previously noted). In our opinion, the true BCR under a rigorous assessment would be closer to zero than to either of these estimates.

Advice would have been to not proceed 

With the estimated benefits of light rail being a fraction of the costs, we would have expected that the appropriate and professional advice to ministers from central agency officials would have been to not proceed with the project. 

Why waste taxpayers’ money if the same or greater benefits can be achieved through lesser expenditure in this or other areas of service provision?

Instead, however, the business case states: “The ACT government has noted its plan to develop a citywide rail network over time. A light rail network cannot be delivered (particularly that section to Tuggeranong) without developing this key section of the network. Furthermore, light rail can assist in enhancing the reputation of Canberra as a desirable city in which to live, visit and invest.

“Noting this, a BCR greater than 1 is not a guarantee of project success. Similarly, a BCR less than 1 does not necessarily mean the project should not go ahead. Consideration should be paid to these potential costs and benefits that have not been captured, as well as the project’s strategic fit with broader territory strategies and policies.”

Classic circular reasoning

The first paragraph is classic circular reasoning, ie the project is justified because the government has decided to proceed with it. The second paragraph, apart from its obvious non-sequitur, is an example of “crooked thinking”. We use these terms in reference to their meanings in logic rather than pejoratively.

The success of a project is usually measured in several but at least in two domains – economic and technical. A rigorously assessed BCR greater than 1 is indeed a guarantee of success if the benefits are properly realised under a plan. 

Without a benefit realisation plan, there is no guarantee of economic success. A project’s technical success is not necessarily guaranteed if the BCR is greater than 1. In fact, it is possible that technical success is achieved at the cost of economic failure, for example where uneconomic or gold-plated technical solutions are utilised in pursuit of engineering excellence.

We note that Stage 1 of light rail was a technical success but is an economic failure – the trams are running, albeit, at a higher cost and minimal benefit in terms of an increase in patronage. Stage 2a is also certain to be an economic failure, because of high costs, low benefits and the government’s decision to not bother with a benefit realisation plan.

Even after assuming what should not have been assumed, and having counted what should not have been counted, claims that some benefits have not and cannot be quantified is strange.

There are well established methods and techniques, developed over a century, to quantify potential benefits attributable to a particular project. We would be happy to put the government in touch with the many professionals who we are certain would be willing to assist with a proper assessment of the costs and benefits of light rail in Canberra.

Major Projects, in its business case, advises on the project delivery model, that is, the proposed procurement. Broadly, the various options discussed relate to the procurement of Design and Construct (D&C) and Operations and Maintenance (O&M) parts through either open-market tendering or a direct contract with the existing consortium. 

The competitive advantage of Canberra Metro

Industry consultation was undertaken to assess the market interest in the project and any concerns. The business case advises that market participants showed interest in bidding for both D&C and O&M, but highlighted the considerable competitive advantage which Canberra Metro (the existing consortium for stage 1) enjoys.

Notably a major concern of the broader industry with a particular interest in D&C was expressed in the business case as: “On the basis that the process was communicated to the market in a transparent manner and there were adequate controls in place should John Holland and CPB [two of the existing consortium partners] be participating as part of the procurement team”.

That potential bidders for stage 2 are, it seems, concerned by the involvement of the incumbent operators of stage 1 (their business competitors) in the procurement process for stage 2 is deeply worrying. Such concerns would surely not have arisen if the industry was confident that the procurement would be open, transparent and without the involvement of the incumbent on the procurement team.

The business case recommends that the procurement be through a sole-source negotiation with Canberra Metro. We understand this recommendation was indeed adopted for stage 2a of the project, where a direct contract was apparently awarded to the incumbent without an open-market competitive process.

If that is indeed the case, we are more than a tad surprised that the Commonwealth Government has apparently supported a project that breaches almost all of its guidelines on efficacy and procurement.

One cannot help but wonder what the auditor-general or the integrity commissioner might have to say about this.

Jon Stanhope is a former chief minister of the ACT and Dr Khalid Ahmed a former senior ACT Treasury official.