Application Exercise 1l: Cost-benefit analysis
1. Identify the costs associated with building and operating the SRL.
The costs associated with the SRL include the construction and operating costs of building the 90-kilometre rail line and maintaining services over time. According to the Parliamentary Budget Office (PBO), the nominal cost to build and operate SRL East and North between 2019 and 2084 is estimated at $216.7 billion, with SRL East costing $84.1 billion and SRL North costing $132.5 billion.
These costs include: Infrastructure construction (tunnels, underground stations and transport hubs), Land acquisition and development, and ongoing operating and maintenance expenses. [There is also an opportunity cost, as government funds allocated to the SRL cannot be used for alternative projects such as hospitals, schools or other transport improvements.]
2. Identify the benefits associated with the completion of the SRL.
The completion of the SRL is expected to generate significant economic, social and environmental benefits. The economic benefits include:
· Support for 24,000 jobs across Victoria
· Connection to approximately 550,000 jobs in station precincts
· Stimulation of $58.7 billion in economic, social and environmental benefits
Social benefits include:
· Improved access to health, education and employment
· Reduced travel times (an average saving of 40 minutes one way)
· Better connectivity for regional Victorians without travelling through the CBD
Environmental benefits include:
· An estimated 600,000 fewer car trips per day, reducing congestion and emissions
· These benefits aim to improve living standards by increasing efficiency and accessibility.
3. Identify the benefit-cost ratio (BCR) from the initial business case and describe the implications for Victorians.
The initial business case estimated a benefit-cost ratio (BCR) between 1.1 and 1.7.
A BCR greater than one indicates that the present value of benefits exceeds the present value of costs, meaning the project is expected to deliver a net benefit to society. For Victorians, this implies that:
· The SRL would increase overall living standards
· The economic and social benefits would outweigh the financial costs
· The project would represent an efficient allocation of scarce resources
Therefore, under this analysis, proceeding with the SRL would be considered economically justified.
4. Determine the BCR calculated by the PBO and describe the implications for Victorians.
The Parliamentary Budget Office calculated a BCR between 0.6 and 0.7. A BCR less than one indicates that the present value of costs exceeds the present value of benefits, meaning the project would result in a net cost to society.
The PBO also estimated a negative net present value (NPV) between –$10.6 billion and –$7.4 billion. This implies:
· The SRL may reduce overall economic efficiency
· Resources may be better allocated to alternative projects
· The opportunity cost of proceeding with the project could be high
· Under this analysis, the project would not be economically justified.
5. Outline one possible reason for the different BCRs.
One possible reason for the different BCRs is the use of different assumptions and methodologies in the cost-benefit analysis. For example: The PBO may have used higher cost estimates, different discount rates may have been applied, the valuation of wider economic or urban consolidation benefits may differ and the forecast demand for rail services may vary
Small changes in assumptions regarding future costs, benefits or discount rates can significantly alter the present value calculations, leading to different BCR outcomes.