27th ARRB Conference – Linking people, places and opportunities, Melbourne, Victoria 2016 COMPARATIVE CASE STUDY ON COST-BENEFIT ANALYSIS FOR TOLL ROAD PROJECTS Chi, S., Bunker, J., Kajewski, S., Queensland University of Technology, Australia ABSTRACT Project evaluation is a process to measure impacts and risks of a project as a public good. Cost-Benefit Analysis is a most commonly used project evaluation methodology for major road projects. Cost-Benefit Analysis conducted for Australian toll road projects have tended to mirror those for non-toll road projects, because they generally treat tolls as a financial transfer. However, a number of project impacts and risk characteristics are unique to toll road projects. It is therefore hypothesised that Cost-Benefit Analysis for toll road projects should treat tolls uniquely, on the basis that risk allocations and concession arrangements are different. This paper reviews Cost-Benefit Analysis methodologies used to evaluate major public road projects. Examining the treatment of project impacts and risks in practice, and the outcomes of the analyses revealed both the advantages and limitations of each extant Cost-Benefit Analysis methodology used in practice. Moreover, the suitability of different methodologies in terms of Cost-Benefit Analysis for toll roads was assessed by studying project characteristics and risk characteristics of each project. Identifying an appropriate treatment of tolls contributes to determining an appropriate Cost-Benefit Analysis methodology for toll road projects. The refined methodology would ensure that all relevant impacts and risks of the toll road project are addressed in decision-making. This will provide a basis for ensuring that the full and true impact to the community is properly assessed. INTRODUCTION The goals of a public project are to increase the well-being of residents and to maintain or increase overall prosperity (Keating & Keating, 2013). Government is responsible for ensuring that the benefits of decisions outweigh the costs to the community. In public governance, evaluation of public projects requires that all project impacts to the community to be assessed appropriately. Project evaluation is a process of assessing and measuring impacts and risks of the project for the purpose of evaluation and decision-making. Project evaluation provides the decision-maker with the ability to structure information, remember and consider all or most aspects of the project (Mackie, Worsley, & Eliasson, 2014). The most commonly used project evaluation methodology to assess major road projects is Cost-Benefit Analysis (CBA) (Wee & Rietveld, 2014). The fundamental theorem of CBA is that the estimation of net impacts to the community (Rogers & Duffy, 2012; Wee & Rietveld, 2014). Benefit-Cost Ratio (BCR) is used as a means of net impacts to users and non-users, operators, safety and environmental benefits, wider economic impacts, and costs of the project in present value (Mackie, Graham, & Laird, 2011). CBA is well studied in academic literature, however studies with regard to CBA for toll road projects and the treatment of tolls in CBA are limited. The guidance on the treatment of tolls in CBA in extant guidelines (Queensland Department of Transport and Main Roads, 2011; Rockliffe, Patrick, & Tsolakis, 2012) is also limited. This study focuses on toll roads, which may be provided either publically, privately or in some form of a Public-Private Partnership (PPP). Such major road infrastructure projects can impact the community in the same manner as their non-tolled, public road counterparts, so ought to be subject to project evaluation by the government. However, a number of impacts and risks are unique to toll road projects. The toll itself is unique, because it influences traffic demand on a micro-economic basis. This requires considerations in measuring net benefits of the toll road users, as well as in traffic modelling and forecasting. The price of the toll sometimes is uncertain © ARRB Group Ltd and Authors 2016 1 27th ARRB Conference – Linking people, places and opportunities, Melbourne, Victoria 2016 at the time of the analysis so this uncertainty needs to be assessed in the decision-making. Understanding of the toll price and forecasted traffic volume is vital to estimate toll revenues. In some toll road settings, when the toll road is owned, operated and/or maintained by the private concessionaire, rather than earning revenue directly through receipt of tolls, it receives payments from the host government using one of various methods depending on the concession agreement. The following explains those payments (Brocklebank, 2014): Shadow tolls avoid charging the users tolls; instead the host government is responsible for paying the concessionaire according to traffic volume or total travel distance along the road, in which case and specifically for traffic modelling, the road is considered not to be tolled. Performance-based public sector payments may be paid by the host government to the concessionaire. The concession can include guarantees of toll revenue. Toll revenue risk can be shared with the host government through minimum revenue guarantees. With minimum revenue guarantees, partial or full revenue risk is transferred to the host government whereby it compensates the concessionaire for shortfalls when the toll revenue received by the concessionaire is less than a guaranteed amount. These payments are forms of risk sharing strategies. The risk to the public needs to be properly assessed in project evaluation. However, the concession arrangement of a toll road can be complex with these various payment methods and risk sharing arrangements, which may impact which project evaluation methodology is appropriate and the results of analyses using that methodology. METHOD As has been highlighted, a knowledge gap exists about how the effects of the toll road impacts can be captured in project evaluation, in particular the treatment of tolls. This needs to be investigated due to the uniqueness of toll road project impacts and risk sharing mechanisms. This study investigates how major road projects, including toll road projects, have been evaluated in Australian practice using Cost-Benefit Analysis (CBA) and compares the analyses of toll road projects with those of non-tolled road projects. The aim of this study is to examine how CBA is conducted for major road projects and how tolls have been treated in CBA for existing major Australian toll roads. The cases studied include both major non-tolled road projects and toll road projects in Australia. The methodologies of sensitivity analysis, treatment of tolls, and estimation of project capital cost, user benefits and residual value are reviewed. The methodologies and outcomes of the CBA conducted for the study cases are examined. Reviewing and examining CBA cases can highlight the limitations of the practice of CBA for major road projects, as well as the factors that have large significance in the outcomes of the evaluation. This will allow the complexity of project evaluation of major road projects to be explored. THE STUDY CASES Eight Australian major road study cases that include three non-tolled roads and five toll roads were analysed in this study. The following describes background of each case. Non-Tolled Roads Horsham Bypass (HSB) A study was commissioned by VicRoads in order to select preferred route alignment for a future Western Highway bypass of Horsham, Victoria (AECOM Australia, 2014). The bypass was planned to allow for the future traffic growth along the Western Highway that connects Melbourne and Adelaide (AECOM Australia, 2014). Cost-Benefit Analysis (CBA) was conducted © ARRB Group Ltd and Authors 2016 2 27th ARRB Conference – Linking people, places and opportunities, Melbourne, Victoria 2016 to choose the preferred alignment based on the Net Present Value (NPV) and Benefit-Cost Ratio (BCR) (AECOM Australia, 2014). The lengths of option route alignments were between 22 and 23.8 km (AECOM Australia, 2014). Singleton Bypass (SNB) A study was commissioned by NSW Roads and Maritime Services (RMS) in order to select a preferred route alignment for a future New England Highway bypass of Singleton (New South Wales Roads and Maritime Services, 2016). The bypass was planned to allow for future traffic growth along the New England Highway, which connects Newcastle and the Upper Hunter region (New South Wales Roads and Maritime Services, 2016). The preferred alignment was chosen based on the measured economic benefits that were calculated in CBA (AECOM Australia, 2012). The lengths of option route alignments were between 19.1 and 22.5 km (AECOM Australia, 2013). West Petrie Bypass (WPB) The section of Youngs Crossing Road is prone to flooding and is frequently inundated (Arup, 2010a). The 1.92 km West Petrie Bypass (WPB) is a proposed new road connecting Youngs Crossing Road and Dayboro Road in the west of Petrie, which is a suburb of Moreton Bay Regional Council to the north of Brisbane (Arup, 2010b; GHD, 2013). A business case was produced for the alignment of the WPB that was selected from the previous study (Arup, 2010a). The business case consists of CBA of the alignment and the environmental and cultural heritage study (GHD, 2013). Toll Roads Airport Link (APL) Airport Link (APL) consists of a 6.78 km section of tunnel and motorway, which is located in Brisbane (BrisConnections, 2016). APL is part of the corridor designated as M7-A7, which connects the south west and north east of Brisbane. APL connects with other M7 elements of Clem Jones Tunnel at its southern end and East West Arterial Road leading to the Brisbane Airport and the Port of Brisbane at its north east end (BrisConnections, 2016). A major interchange at its southern end also connects it with Inner City Bypass expressway and Legacy Way Tunnel, and Bowen Bridge Road. A major interchange mid-tunnel connects it with Gympie Road and Stafford Road, Kedron. CBA conducted for the proposed alignment of APL assesses the viability of the APL project by reviewing BCR calculated in the CBA and also reviews the integration of the Interim Northern Busway Project within the APL project (SKM & Connell Wagner, 2006).