Archive for July, 2017

A Peter Martin article entitled ¨Benefits from a Wollongong-to-Sydney rail upgrade would exceed costs, Cabinet told¨ appeared recently in the Sydney Morning Herald on 13 July 2017. The article suggests that a $5bn upgrade to the rail line from Sydney to Wollongong would potentially provide benefits more than double their cost. It suggests that this is a favourable option to an $18bn extension of the F6 Motorway between Sydney and Wollongong.

The biggest obstacle to upgrading the rail line to Wollongong is that there is actually no business case currently available for the full project. The SMH article claims ¨the total cost of upgrading the Sydney to Wollongong commuter line would be around $5 billion¨, of which a rail tunnel from Thirroul to Waterfall is the largest expense at $2.9bn.

A Benefit Cost Ratio (BCR) of 1.5 to 2.4 is provided only for the Maldon to Dombarton freight line, which at $700m-$800m represents no more than 16% of the full project on a cost basis. This line would allow freight trains to travel to Sydney from Wollongong via Campbelltown rather than the current path via Sutherland.

The Maldon to Dombarton Railway would allow freight trains to travel between Sydney and Port Kembla without using the T4 Line through Hurstville and Sutherland. Click to enlarge. (Source: Infrastructure NSW, State Infrastructure Strategy Update 2014, p. 65.)

However, the BCR drops to 0.9 when a discount rate of 7% is used rather than 4.4%. A discount rate of 7% is the standard one used in order to compare all infrastructure projects. Using a lower discount rate inflates the benefits when compared to other projects. The reduction in BCR below 1.0 suggests that the costs of this project outweight the benefits.

Infrastructure Australia also pointed out that the benefits are probably to be overstated for 2 reasons: (1) coal freight tonnage is likely to decline in coming decades and (2) there are no current plans to convert part of the T4 Illawarra Line to metro standard which would subsequently require a new entry path for rail freight from the Illawarra into Sydney.

The full text of Infrastructure Australia´s conclusion is included below.

¨There is significant uncertainty around forecast future freight demand, particularly from 2031 onwards. Freight throughputs were estimated for 2014, 2021 and 2031. Beyond 2031, demand was assumed to remain constant at 2031 levels. The business case assumed coal would represent 58% of projected freight tonnage using the line in 2031. However, a number of coal mines which were projected to use the Maldon-Dombarton Rail Link over the entire 50-year evaluation period are expected to be exhausted within the next 20 years. For example, the Tahmoor coal mine – which was expected to account for around 22% of rail paths on the Maldon-Dombarton Rail Link from 2031 – is expected to close by early 2019. This lost freight demand is unlikely to be replaced, and lower freight demand would lower project benefits.

The base case is not a ‘do-minimum’ base case because it assumes uncommitted future network changes to the Sydney rail system, including the potential introduction of rapid transit services to Hurstville by 2031. This would affect freight rail capacity on the Illawarra line. However, these changes have not been committed or funded, so it is not certain that the related project benefits would be realised.Also important to consider is that the $700m-$800m cost was calculated at P50. In other words, there is a 50% chance that the cost will be higher than that estimate, and a 50% chance that it will be lower. Additionally, the analysis excludes wider economic benefits. These include things like agglomeration economies, improving market competitiveness, or increased tax revenues from labour markets. They are excluded in part because they are indirect and thus hard to measure. But it does mean that a BCR of close to 1.0 could still make a project such as this viable as WEBs would ultimately make the benefits outweigh the costs. However, as previously stated, if the benefits are overstated then it is unlikely that the BCR would be close to 1.0 anyway.¨

So does this mean that an upgrade of the South Coast Line from Wollongong to Sydney does not stack up? The answer is: we actually don´t know.

A section of the partly completed Maldon to Dombarton freight railway. Click to enlarge. (Source: Marcus Wong.)

Remember: this is a $5bn project and the Maldon to Dombarton freight line is just one small part of it. In order to determine if the full project is economically viable, a business case needs to be developed for the full project. Not one part of the project. Not all of the parts separately. The full project. This is because when taken as a whole, individual parts of the full project could provide benefits for another part and vice versa.

What certainly doesn´t help is a government decision to look into a road improvement to connect Sydney to Wollongong, excluding all other options. Instead, the government could have committed itself to evaluating the transport corridor first, then determining which mode provides the best possible outcome.

It remains possible that improved road connections could provide a greater benefit than improved rail connections. However, the higher estimated cost of road ($18bn) compared to rail ($5bn) makes this seem less likely when taken at face value.

But without a study into the business case of both, we won´t know for sure.

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