Melbourne’s great big tunnel of pork

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Macro Business: Melbourne’s great big tunnel of pork. Leith van Onselen, August 4, 2014

Fairfax’s Michael West has thrown a great big hand grenade at Melbourne’s East-West Link – Melbourne’s controversial road tunnel project – which according to West could cost an incredible $1 billion per kilometre, making it one of the more expensive road projects in the world:

“Guess which road in Australia is shaping up to cost $1 billion per kilometre to build?..

As the state election nears, the Napthine government is declaring all sorts of unfunded public works, some $27 billion in infrastructure projects crowned by the controversial East West Link. Conceptually, this road is not a bad thing, even though the city’s trains are clogged, but the price is stupefying.

Actuary Ian Bell has kindly put some figures around this for us, deploying what scant information is in the public domain. Bell puts the capital cost of this road at up to $18 billion for 18 kilometres, a grand $1 billion per kilometre. One could be forgiven for thinking that the business case for the East West should be made public so the people who are paying for it could discuss it. Alas, not so…”

Whether the $18 billion figure cited by West is accurate remains to be seen. Previous estimates have claimed the road would cost some $8 billion, or around $440 million per kilometre.

Irrespective, it is an expensive tunnel by global standards. As noted in The AFR today, a 10-kilometre road tunnel in France, known as “Duplex A86”, cost €1.56 billion ($2.25 billion), which works out at around $226 million a kilometre. France, of course, is renowned for its 35-hour working week and being a relatively high cost nation for infrastructure investment.

What is more concerning is that the East-West Link appears to have been approved without passing a rigorous cost-benefit analysis, with The Age earlier this year revealing that the project could deliver a net loss to Victoria:

“Infrastructure Australia head Michael Deegan told a Senate committee that the government’s unpublished business case also provided an alternative estimate, showing a benefit-cost ratio of 0.8 when ”wider economic benefits are not included”.

Under this scenario the project would return just 80¢ for every $1 spent, suggesting an economic loss if the ”stock-standard” analysis preferred by Infrastructure Australia is used…

In a submission to a federal infrastructure inquiry, Infrastructure Australia targeted Victoria for failing to submit a ”robust” business case for the east-west link, singling the project out as an example of why the public are cynical about ”big ticket” infrastructure announcements.”

With the mining capex boom set to unwind, Australia needs to find ways to fill the void to both growth and jobs.

One obvious option is to boost investment in productivity enhancing infrastructure – i.e. projects whose expected benefits far outweight their costs and whose cost of financing can be funded by the increased productivity (and therefore tax revenue) that they create, making the project’s debt “self liquidating”.

Unfortunately, the East-West Link appears to fail this most basic test, with the project instead looking more like a politically motivated exercise in pork that risks undermining Australia’s productive capacity and living standards.

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