Market-led proposals

Tabled: 27 November 2019

2 West Gate Tunnel project: uniqueness, options and benefits

Image is a map of the west gate tunnel project

Source: http://westgatetunnelproject.vic.gov.au.

After discussions with the government in late 2014 and early 2015, Transurban submitted its proposal for what became known as the WGT project in March 2015. DTF and lead agencies assessed the proposal through all five stages of the MLP process between March 2015 and December 2017 using the February 2015 version of the MLP guideline.

DTF and the relevant agencies assessed Transurban's WGT proposal as meeting the key MLP assessment criteria. DTF advised the government in December 2017 that Transurban's final offer was unique and represented good VFM, meaning it satisfied the Stage 4 MLP guideline criteria to proceed to Stage 5—awarding a contract.

The government signed a public-private partnership (PPP) contract with Transurban on 11 December 2017. The WGT will give road users an alternative to the West Gate Bridge. The WGT component of the project involves:

  • the construction of a road tunnel
  • widening of the West Gate Freeway
  • an elevated motorway that will link the West Gate Freeway to the CityLink tollway and the Port of Melbourne.

Under the contract, Transurban must design, partially finance and construct the WGT, then operate, toll and maintain it until January 2045, when it will transfer responsibility back to the state. The contract also requires Transurban to manage Stage 1 of the Monash Freeway upgrade and deliver improvement works at Webb Dock, a port facility at Fishermans Bend.

In this Part, we examine whether DTF and the former DEDJTR (now DoT) assessed the MLP for the WGT in accordance with relevant MLP guideline requirements concerning uniqueness. We also examine the quality of the business case in justifying project scope, assessing options and estimating benefits compared to costs.

2.1 Conclusion

DTF and lead agencies advised the government that Transurban's proposal met the requirements for uniqueness primarily based on Transurban's capacity to access, escalate and extend toll revenues on its existing CityLink concession.

DTF assessed the CityLink escalation and extension funding source as unique because no party other than Transurban could access revenue from increasing tolls on CityLink prior to 2035, and no other party could access revenue from an extended concession until after 2035. Identifying the CityLink escalation funding source as unique was consistent with the MLP guideline. The uniqueness of the extension funding is less clear, as the possibility for the state or another provider to take up this funding source existed.

The MLP guideline is silent on the level of materiality unique characteristics should represent. Together, these funding sources made up almost 50 per cent of the total funding sources identified and estimated by the state for the project.

The uniqueness assessment and project business case lacked a comprehensive analysis of the costs and benefits of adopting alternate funding options for delivering the project. DTF's advice to the government would have been more comprehensive if it had included such analysis.

Since the community will pay for the WGT project whichever funding source is adopted, we question whether funding should have been considered the defining unique characteristic to exclude a competitive procurement process.

In addition, the business case did not adequately justify the inclusion of the Monash Freeway upgrade in the project scope. The inclusion of this scope element improved the project BCR. There was also a lack of transparency in the CBA that limited assurance that the risks of overstating benefits had been addressed.

2.2 Uniqueness

Assessment

The February 2015 MLP Interim Guideline defined unique characteristics as including proponents being in a unique position or owning strategic assets to deliver desired outcomes, including having:

  • rights under an existing contract
  • ownership of land, technology or software, or
  • exclusive access to, or control over, strategic assets integral to delivering the proposal or improved outcomes for the government.

In December 2015, DTF advised the government that Transurban's proposal satisfied the MLP guideline uniqueness test and provided material benefits to the state that could not be achieved through a standard competitive process.

DTF assessed the proposal as unique based on Transurban's capacity to access toll revenue from:

  • its existing concession on the Melbourne CityLink
  • escalated and extended CityLink tolls.

That is, the assessment of uniqueness was based primarily on Transurban's funding model for the project. The Transurban proposal relied on revenue from four sources—an upfront payment from the government, tolling revenue on the new WGT road, additional increases to tolls from its existing CityLink concession and an extension of that concession for another 10 years. These funding sources were contingent on government actions and parliamentary support.

Adequacy of the assessment

Our examination of the uniqueness assessment process identified three key issues:

  • The assessment was not balanced by examination of other possible providers and funding sources.
  • The MLP guideline does not specify a threshold or approach to assessing the materiality of the uniqueness.
  • The MLP guideline does not specifically deal with primary and secondary unique characteristics.

In addition, not all funding sources cited were uniquely deliverable by Transurban and there was uncertainty around these funding sources when awarding the WGT proposal contract. Transurban could not have secured or delivered the funding sources identified by DTF as unique without direct government policy decisions and parliamentary support.

Funding sources and balance of uniqueness assessment

Transurban's position as the operator of CityLink is certainly unique as it is the only entity that can access CityLink tolling and escalation revenue.

Transurban …

However …

Was the only party with the right to operate and toll the existing CityLink to 2035

Transurban did not have any existing rights or capacity under the Concession Deed to:

  • access revenue from escalating CityLink tolls by more than the consumer price index
  • extend the CityLink concession.

Included access to the CityLink toll revenue stream beyond the 2035 expiry of its existing concession in its proposal

The DTF advice to government at Stage 4 recommending that it sign the contract with Transurban made it clear that access to this funding source was not certain, as it relied on parliamentary support.

Source: VAGO.

DTF's advice to government on the Stage 4 assessment correctly noted that:

  • if the government could not secure the relevant legislative changes and parliamentary support to deliver the funding sources, the primary unique characteristic in the Transurban proposal would be eliminated
  • other parties could not access the CityLink toll revenue streams without government support
  • Transurban also required government support to secure revenue from its CityLink toll escalation and extension
  • these funding sources were not certain because they relied on the actions of a future parliament.

DTF's assessment and subsequent advice to the government focused on funding sources and advised that the CityLink escalation and extension funding source was uniquely accessible by Transurban.

The uniqueness assessment would have been more comprehensive if DTF had also:

  • demonstrated why the proposed funding sources provided more beneficial outcomes than other options available, by valuing the relative benefits of Transurban's ability to access this funding compared to other market participants
  • examined whether other entities could offer the same project outcomes and benefits in a similar time frame. To do so would have been more consistent with the MLP guideline.

While Transurban's access to CityLink escalation revenue was unique, it is less clear that extension revenue is unique. The right to operate the CityLink concession after Transurban's concession deed expired in 2035 could have been granted to a state-owned tolling company or a different private sector operator.

DTF rightly identified that because this revenue cannot begin flowing until 2035, parties other than Transurban may face challenges in raising project finance tied to this funding source on a VFM basis. However, DTF's assessments of the uniqueness of the Transurban proposal did not include any substantive analysis of the option to grant another private operator access to the CityLink extension as a source of revenue.

Materiality of uniqueness characteristics

The MLP February 2015 guideline specifies that:

'It is not sufficient to only demonstrate the presence of unique characteristics in a proposal. It must also be demonstrated that these characteristics provide value for money and other benefits for government that could not be achieved through a standard competitive process outside of the guideline within acceptable time frames'.

It is appropriate to estimate the size of any claimed unique benefits of a proposal. However, the guideline does not specify an approach or threshold for assessing how material uniqueness benefits need to be to support exclusive negotiations and is unclear about whether benefits should be measured against a state benchmark or other private providers.

The CityLink escalation funding source made up between 14 and 18 per cent of the total funding sources identified and estimated by the state and Transurban for the project. DTF advised us that this was sufficiently material to justify proceeding as an MLP.

It is less clear whether the 10-year extension CityLink concession the government gave to Transurban was unique. This made up around 31 per cent of the total funding sources the state identified and estimated for the Transurban project.

Primary and secondary uniqueness factors

As shown in Figure 2A, DTF's Stage 4 assessment of the Transurban proposal introduced a distinction between two levels of uniqueness.

Figure 2A
Levels of uniqueness in the Stage 4 assessment

Level of uniqueness

Type of factor

Primary

Funding sources

Secondary

Related to potential for Transurban to realise operational synergies and economies of scale from:

  • operating the WGT together with the existing CityLink toll road
  • taking on the interface risks in relation to accessing and disrupting CityLink to deliver the connection between the two roads.

Source: VAGO.

The MLP guideline does not refer to primary and secondary uniqueness factors. It is unclear how DTF weighed the significance of the primary and secondary factors and how each factor impacted the assessment.

DTF updated the MLP guideline in November 2017 to refer to a holistic assessment of uniqueness, including consideration of other factors that may be considered material to demonstrate a unique proposal. DTF can further enhance the guideline by providing additional information and guidance about assessing the materiality of unique characteristics including primary and secondary uniqueness factors.

2.3 Service need and benefits

Business case

The government approved the outcome of the Stage 2 assessment of Transurban's proposal in April 2015. Parallel to the Stage 3 assessment, it asked DEDJTR to develop a business case, with support from DTF, to examine the project's merits, irrespective of the delivery method and potential involvement of Transurban.

A business case should clearly establish service need and project scope, examine solution options and demonstrate project benefits.

The DEDJTR business case for the project was provided to the government in October 2015 and:

  • did not reasonably explain the inclusion of the Monash Freeway widening works in the WGT project scope, which improved the BCR
  • showed a marginal value proposition for the WGT project on its own but had limited transparency regarding the sensitivity of the BCR for the WGT project scope element
  • did not examine a range of alternative project options in sufficient depth
  • did not have a fully transparent CBA, meaning the user of the advice could not be assured that benefits had not been overstated.

Inclusion of Monash Freeway upgrade in project scope

The justification for including the Monash Freeway widening works in the WGT project scope lacked a convincing rationale and was inconsistent with DTF's guidelines on separate business cases for multiple related projects and the findings of independent reviews.

Business case scope

The government's commitment in late 2014 to construct a West Gate Distributor project did not include any works on the Monash Freeway east of Toorak Road. Similarly, the project scope in Transurban's initial proposal in March 2015 did not include these works.

DTF's Stage 1 and Stage 2 assessments of Transurban's proposal and related advice to the government in April 2015 did not refer to Monash Freeway upgrade works as part of the project scope for the state's reference project or in any other context.

Given this, it is reasonable that the project scope for the business case would be largely consistent with the scope of Transurban's proposal.

However, DTF's advice to the government in August 2015 indicated that the state's base scope for the project included Monash Freeway upgrade works. DTF indicated that these works could deliver additional user benefits along the M1 corridor, but did not provide a clear rationale for combining this scope item with the Transurban proposal.

Figure 2B shows the geographic and preferred investment scopes outlined in the October 2015 Western Distributor business case. This proposed investment scope covered a wide geographic area and comprised several distinct key project scope elements.

Figure 2B
October 2015 Western Distributor business case scope

Geographic Scope

Preferred Investment Scope

  • M1 Corridor
  • Its adjoining economic precincts stretching from Geelong through to the Latrobe Valley
  • Widening of West Gate Freeway
  • New Western Distributor connecting the West Gate Freeway to the Port of Melbourne and CityLink
  • Port of Melbourne (Swanson Dock) access
  • Port of Melbourne (Webb Dock) access
  • Monash Freeway Capacity Improvement Project

Source: VAGO from Western Distributor Business Case, October 2015.

The works proposed as part of the Monash Freeway upgrade were:

  • around 15 kilometres away from the core WGT project scope at their closest point (Toorak Road)
  • over 60 kms away at the farthest point.

These works and related benefits were unrelated to the WGT works.

The inclusion of the Monash Freeway upgrade in the Western Distributor business case was not consistent with DTF's Investment Lifecycle and HVHR guidelines. These guidelines allow for a single master plan, or program business case covering outcome-focused investments that bring together multiple projects under a single coordinating structure. While not mandatory, the guidelines state that agencies should prepare separate business cases for the major projects that are part of the master plan or program.

Both the peer reviewer appointed by DEDJTR and the Independent Review Panel (IRP), appointed by DPC to review the business case, pointed out the need to better justify the inclusion of the Monash Freeway upgrade works in the business case.

Independent Review Panel findings

The IRP review:

  • identified that the Monash Freeway scope element contributed a significant proportion of overall project benefits
  • did not agree that the two projects should be combined into a single business case
  • recommended separate business cases for the WGT and Monash Freeway upgrade because it saw very limited overlap between the problems and the benefits.

DTF did not accept this IRP recommendation, and was transparent about this in the relevant advice to the government. However, DTF's advice that this recommendation could be addressed by simply strengthening the justification for presenting two separate works packages in a single business case did not fully address the issues raised by the IRP. DTF provided the government with an option to separate the business cases, noting that this option would delay the finalisation of the business case. The government approved the retention of a single business case approach in October 2015.

The IRP also recommended that the business case present the results of the CBA for both the WGT and the Monash Freeway upgrade separately. DTF asked the government to determine the response to this recommendation. The government agreed that the final business case show separate BCR results for the WGT and Monash Freeway upgrade and a BCR for the combined project scope.

Transparency of BCR analysis

In August 2015, the government determined that the WGT project would not proceed unless the business case demonstrated that it had a positive BCR, meaning 1.0 or above.

The CBA in the business case provided to the government in October 2015 used a discount rate of 7 per cent and showed a marginal value proposition for the WGT project and a strong value proposition for the Monash Freeway upgrades. Figure 2C shows these BCRs.

Figure 2C
Final business case BCRs

Project

BCR

Monash Freeway upgrade and the WGT (combined project)

1.3

Monash Freeway upgrade (solo project)

4.2

WGT (solo project)

1.1

Source: VAGO, from Western Distributor Business Case, October 2015.

A sensitivity analysis shows how the viability of a project changes if some variables deviate from expected values.

The analysis is useful when projects involve uncertainty as it can demonstrate whether the preferred solution option would be still worthwhile pursuing if key assumptions were incorrect.

The business case only included sensitivity analysis results for the combined project scope.

The sensitivity analysis showed the impacts of applying a higher and lower discount rate and different assumptions about project costs. Applying a discount rate of 10 per cent to reflect greater uncertainty or project risk reduced the BCR for the combined project scope to 0.8. This meant that the present value for project costs exceeded the present value of project benefits. Applying a discount rate of 4 per cent increased the BCR for the combined project scope to 2.3.

The sensitivity results were included in the business case provided to the government. However, DTF's advice to the government summarising the key results of the business case did not highlight the lack of sensitivity analysis in relation to the WGT project scope element.

Options assessment

A business case should:

  • define a set of problems
  • explore a range of options for addressing the problems
  • include an options assessment to identify a preferred way forward which is VFM, affordable, feasible and deliverable.

The October 2015 business case did not meet the requirements in DTF's Investment Lifecycle and HVHR 'Prove' guidelines to examine a range of alternative project solutions to reach a preferred investment option. As shown in Figure 2D, these guidelines require two distinct stages of options assessment.

Figure 2D
Options assessment requirements

Options assessment stage

Required steps/outcomes

First stage

Explore high-level potential options (strategic options), including both asset and non-asset options.

Select a preferred 'strategic response' based on a qualitative assessment of strategic options that also considers the potential to package strategic options (for example, an asset upgrade combined with a policy targeted at consumer behaviour).

Second stage

Develop detailed options (solution options) that are all a subset of the preferred strategic response.

Assess and rank the solution options, either through an economic evaluation or a broader integrated assessment if there are significant, difficult to monetise, socio-economic costs or benefits that need to be evaluated, to determine the preferred solution.

Source: VAGO, from Investment Lifecycle and HVHR guidelines.

The approach taken in the business case departed from these DTF requirements at both stages because it did not:

  • package strategic options to determine a preferred strategic response, creating the possibility that potential elements of a solution were prematurely overlooked
  • follow the process of defining solution options for the project as a whole and conduct an economic evaluation, or integrated analysis, of different solution options to reach a preferred investment option.

These issues mean the business case was not sufficiently comprehensive and so undermined one of its key purposes—to provide confidence to decision makers that they are selecting the right investment option. Instead, the approach focused on justifying a series of investments rather than using an economic evaluation to compare options and identify a preferred investment option.

DTF advised that the business case exceeded the requirement for options analysis. We acknowledge that the business case identified a range of project options, but do not agree that the analysis of these options fully addressed the requirements in the Investment Lifecycle and HVHR guidelines.

Neither the Gateway Gate 2 review nor DTF's HVHR review of the business case identified the shortcoming. However, the IRP identified the need for:

  • better articulation of how possible public transport options were explored
  • more information on how the investment pathways were selected from a broader range of pathway options
  • further work to establish that certain elements of the project scope, such as multiple port and CBD access points, freeway braiding and additional off‑ramps to Hyde Street, are positively adding to the net economic benefits of the project.

DTF's response to the IRP findings was inadequate because it did not broaden or revisit the options assessment.

In addition, DTF's summary advice to the government did not highlight that the sensitivity analysis undertaken for the CBA for the business case found that a surface road for the Western Distributor was a better value investment than a tunnel.

It is not standard practice to include alternative investment options in a CBA sensitivity analysis. Despite this, this analysis showed results for a surface road option at a BCR of 1.8 and an NPV of $2 034 million, higher than the equivalent analysis for the WGT on its own, with a BCR of 1.1 and an NPV of $217 million. The analysis did not include a transparent explanation of the surface road option's underlying costing and transport modelling.

Wider economic benefits relate to economic benefits that are not typically captured in traditional CBAs and include estimates of project impacts on productivity due to improved proximity to suppliers and labour markets, the impact of transport on increasing competition and competition-related user benefits.

We expected commentary on these results in advice to the government. However, the business case, economic analysis report and the various Gateway and HVHR review reports did not comment on this, and we have seen no evidence of further analysis to rule the option out.

Cost-benefit analysis

Consultants commissioned by DTF conducted two CBAs for the project. The first formed part of the business case in October 2015. The second was an updated CBA in March 2018 after the state signed the project agreement with Transurban. The consultants produced an economic assessment report and a financial model to support the CBA results reported in the business case.

Figure 2E shows the high-level approach taken by the consultants to estimating key benefit streams included in the CBA. It outlines the standard and non‑standard benefits it included, where non-standard means that these benefit types are not typically included in a CBA developed under DTF's Investment Lifecycle HVHR guidance. We have excluded wider economic benefits, as these were not relevant for the BCR ratios presented to the government.

Figure 2E
Approach to estimating WGT benefits

Benefit category

Standard or non‑standard benefit

Description

Base travel time savings from improved flow—cars

Standard

Based on transport model outputs and the National Guidelines for Transport System Management (NGTSM) monetisation factors

Travel time savings from reduced traffic congestion—cars

Non-standard

Based on transport model outputs and a methodology from the New Zealand Transport Authority

Travel time savings from improved reliability—cars

Non-standard

Based on transport model outputs and the United Kingdom Department of Transport's methodology

Vehicle operating cost savings—cars

Standard

Based on transport model outputs and NGTSM monetisation factors

Base travel time savings from improved flow—Light Commercial Vehicle and Heavy Commercial Vehicle

Standard

Based on transport model outputs and NGTSM monetisation factors

Vehicle operating cost savings—Light Commercial Vehicle and Heavy Commercial Vehicle

Standard

Based on transport model outputs and NGTSM monetisation factors

Travel time savings from improved reliability—Light Commercial Vehicle and Heavy Commercial Vehicle

Non-standard

Based on transport model outputs and the United Kingdom Department of Transport's methodology

HPFV user benefits

Non-standard

Bottom up calculation made by consultants separately to the transport model

Resilience to lane closures on the West Gate Bridge

Non-standard

Bottom up calculation made by consultants separately to the transport model

Base travel time savings from improved traffic flow—public transport users

Standard

Based on transport model outputs and NGTSM monetisation factors

Crash benefits

Standard

Based on transport model outputs and NGTSM monetisation factors

Reduced air emissions and improved amenity

Standard

Based on transport model outputs and NGTSM monetisation factors

Source: VAGO based on Western Distributor business case and supporting economic assessment, October 2015.

Risk of overstating benefits

For road infrastructure projects, travel time savings typically make up most estimated project benefits. As expected, core travel time savings made up around 76 per cent of the total estimated economic benefits of the WGT claimed in Transurban's initial proposal.

However, the CBA in DEDJTR's business case for the project valued 'other related benefits'—including congested vehicle travel time savings, estimated travel time savings from metered on-ramps to the Monash Freeway, HPFV benefits, reliability and resilience benefits—at $1.76 billion in present value terms, higher than core travel time savings from the transport model calculated at $1.63 billion.

That these other related benefits exceeded the core travel time saving benefits indicates the:

  • potential for these related benefits to include some of the same travel time benefits
  • need for the CBA to transparently justify both the inclusion and the additive nature of each individual benefit stream.

Overstatement may occur where benefit streams overlap and potentially capture benefits that have already been counted as part of the core travel time savings. The extent to which this is a problem depends on how the transport model treated traffic within the network, including the extent to which exceptional conditions, such as lane closures, were already incorporated into the modelled traffic conditions and therefore did not require adjustments outside the model.

The economic assessment report and CBA financial model that supported the business case did not transparently explain the basis for the material 'other related benefits' streams or demonstrate that they were distinct from and additive to the core travel time saving benefits.

An example of insufficient documentation is the inclusion in the estimated benefits of $408 million (present value) in the CBA for an item titled 'switcher Vehicle Operating Costs correction'. The business case does not specifically note or explain this item but included it within a total $880.1 million (present value) for vehicle operating costs savings. Given that the impact of this correction represented nearly half of the total vehicle operating costs savings benefits, it should have been transparently explained and justified in the business case.

In general, DEDJTR did not adequately justify in the business case their inclusion of additional non-standard benefit categories. An alternative approach would have been to incorporate these considerations into a sensitivity analysis to better inform the government's decision on the project.

This view was also supported by a peer review of the CBA in October 2015 that suggested that a number of these benefit streams should have been included in a sensitivity analysis rather than in the core analysis. DTF and DEDJTR did not address this peer review suggestion in the business case.

On-ramp meters, usually a basic traffic or two‑section signal light together with a signal controller, manage the rate of vehicles entering a freeway in response to traffic conditions.

In some cases, the estimated benefits may be overstated. We outline examples here.

Monash managed motorway benefits

Additional time savings were assumed on the Monash Freeway by implementing 'managed motorway techniques'—primarily on-ramp metering. These travel time benefits, shown in Figure 2F, were aggregated into the travel time savings category in the CBA reporting, but were a standalone calculation in the CBA model.

Figure 2F
Monash managed motorway benefits

Benefit (saving)

Individual benefit

Monash managed motorway travel time

Additional 7.5 per cent travel time saving in the morning and afternoon peaks.

Additional 3.5 per cent travel time saving in the period between the morning and afternoon peaks.

Source: VAGO based on information from DTF and DEDJTR.

These benefits were applied to travel times along the Monash Freeway based on the transport modelling. There are several issues with this approach:

  • It applied additional travel time savings whether or not the link was performing at, or near, free flow (meaning traffic travelling continuously at or near the speed limit). In circumstances where the traffic is flowing freely, the benefits of metered on-ramps would be redundant.
  • The calculation did not account for the main downside of the ramp metering relating to vehicles having to wait longer to join the freeway.
  • The time saving assumed to result from ramp metering was based on a single source from the United States that referred to unspecified toll roads.
  • Another source dealing with the benefits of ramp metering presented to the Australasian Transport Research Forum in 2015 suggested lower and potentially negative time savings from ramp metering.

Given that the present value of the Monash Managed Motorway benefit was significant, at $209.7 million, DEDJTR should have tested and more clearly justified the assigned benefit value. Applying the results of the Australian study would have resulted in a far more modest benefit.

Benefits from HPFVs

The CBA included $283 million in benefits from HPFVs, particularly their improved access to the Port of Melbourne. Calculating these benefits required a number of assumptions to approximate journey times, vehicle operating costs, crashes, emissions, externalities and amenity benefits. However, as noted in the economic assessment report, the Victorian road network requires multiple upgrades to enable HPFVs to operate. As a result, this benefit cannot be wholly attributed to the project, as realising it relies on other investments that are not included within the costs in the CBA.

Blended approach to transport modelling outputs

The CBA took a 'blended' approach to using the transport modelling outputs. This considers how road users will change their travel routes and patterns in response to the changed roads, using 'fixed' and 'variable' matrices.

A matrix that is …

Assumes …

So …

Fixed

Demand for the road is fixed and independent of cost

No behavioural change occurs in response to the costs of travel.

Variable

Travellers can change their travel mode or route in response to costs and network conditions

Allows for induced demand associated with new or upgraded roads.

Source: VAGO.

The CBA outputs were 'blended' using a linear profile, with outputs applied differently over time.

Year of operation

Based on Fixed Matrix

Based on Variable Matrix

First full year of operation

90%

10%

Ninth year of operation

10%

90%

Beyond the tenth year of operation

0%

100%

Source: VAGO based on Western Distributor Economic Assessment Report, 15 October 2015.

Adopting this blended approach, which initially relies on a fixed trip matrix, results in higher benefits than an approach that relies solely on a variable matrix. As such, DEDJTR should have transparently justified the reason for this approach. However, the business case and underlying economic assessment report presented no evidence to support it.

The peer review of the economic appraisal in October 2015 identified the lack of evidence as to why it was assumed that travellers will take 10 years to change their habits and stated a need for further justification of the approach. DEDJTR did not address this comment in the updated peer review.

Given the limited justification for use of the blended approach, the CBA results in the economic appraisal report should have also shown results from fully applying the variable matrix from the first year, at least as a sensitivity test. This is consistent with our previous recommendations on the need to adequately assess the significance of induced traffic for all major road projects and take account of this when forecasting traffic and estimating the economic benefits.

External review of the CBA approach and results

We expected the CBA methodology, model and results to be thoroughly reviewed and refined as part of the business case development process. However:

  • the report on the combined Gateway 1 and 2 review made no comment on the CBA
  • the peer review, conducted by consultants commissioned by DEDJTR, of the economic analysis underpinning the CBA (initial report on 8 October 2015 and an updated report on 21 December 2015) raised substantive issues, but there is little evidence that DEDJTR and DTF refined the CBA approach and results to address these matters
  • DTF's HVHR review of the business case focused on deliverability and did not reference the CBA
  • the IRP review noted that the panel did not receive the economic assessment report to inform their review, but nonetheless found that 'the economic analysis undertaken in the Business Case appears to be both robust and based on accepted methodologies'.

Of these reviews, only the peer review made substantive comments on the CBA. The updated peer review indicated that a number of issues raised in the initial peer review were either not addressed at all, or only partially addressed. These issues had a material impact on the results of the CBA. Specifically, the initial peer review:

  • made it clear that the CBA scenarios within the economic appraisal referred to as 'current Victorian practice' included benefit categories not included in Victorian guidance material, such as the perceived cost of congested travel time
  • suggested that, subject to sufficient justification, the perceived cost of congested travel time could be included in the core analysis but might be better referred to as part of sensitivity tests to be consistent with Victorian and Australian guidelines. The updated peer review report noted that some additional justification was provided for the inclusion of this benefit category
  • suggested that it would be useful to identify which other benefit categories were included in a standard Australian or Victorian guideline, and which were 'add-ons'
  • identified the need to clarify how HPFV benefits were calculated and how they related to additional investment in bridges across the state
  • raised an issue with benefits relating to network resilience and redundancy, saying 'The calculation methodology and assumptions would benefit from greater supporting justification to ensure that they are robust and that there is no overlap with other benefits'. The updated peer review indicated that greater clarification was provided, but did not state whether the potential for double counting had been addressed.

The peer review did not provide an overall conclusion on whether the economic appraisal as a whole was appropriate and fair based on relevant guidance and practice.

Review of transport modelling

DEDJTR appointed a peer reviewer in mid-2015 to assess the transport modelling undertaken for the business case. This peer reviewer raised substantive issues with the modelling approach, but they were not retained long enough to assess the adequacy of responses to these issues.

There was no formal peer review process for transport modelling undertaken after the business case. This is despite this modelling representing a key input for the Environment Effects Statement process, the VFM assessment process and the state's tolling parameters and approach.

The final VFM assessment report in December 2017 gave the impression that the outputs of the transport model had been reviewed by another adviser. However, DTF has confirmed that this was not a formal peer review and there is no documentary evidence on the outcome of this review process.

We reviewed available evidence on the transport modelling undertaken for the business case and the subsequent Environment Effects Statement with a focus on whether issues raised by the peer review were adequately acquitted.

DEDJTR used a strategic transport model to evaluate the impacts of this road project. The model largely met VicRoads validation standards for strategic models but not international standards for road project models.

The peer review raised concerns about whether technical aspects of the modelling approach used for the business case were consistent with accepted guidance and practice and the potential implications of this for the reliability of the modelling. We conducted our own review which confirmed these issues, but also found, subject to some qualifications relating to the comprehensiveness of validation and forecasting data, that:

  • forecast rates of traffic growth were reasonable
  • there was no indication of serious faults in the network modelling methodologies applied for the project
  • the model generally reproduced the pattern of total traffic in the project area well for the business case, with a few exceptions
  • model performance improved for the subsequent Environment Effects Statement process although some key roads were less well matched and the model 'fit' to peak traffic levels (in the peak direction) deteriorated compared with the business case
  • the modelling of afternoon peak traffic was less accurate and there was limited evidence to support the estimates for commercial vehicle traffic flows.

Our review also found that the blended approach to using the transport modelling outputs for the calculating benefits in the business case was not well justified and the impacts of induced travel on project benefits were unclear.

Updated cost benefit analysis

When DTF recommended to the government in December 2017 that it proceed to award a contract to Transurban for the WGT project, the project's total cost had increased by $1.2 billion (nominal) and the state contribution had increased by more than $600 million (nominal), as shown in Figure 2G.

Figure 2G
Updated WGT project costs: 2017

 

Original Business Case Cost

Total cost in 2017 (nominal)

Excluding

Total project cost

$5.5 billion

$6.7 billion

 

State contribution

$2.1 billion

$2.7 billion

 

Unfunded contingency

   

$220 million

Source: VAGO based on information from DTF.

DTF advised the government that it:

  • had not updated the CBA for the project to determine a revised BCR
  • expected that the BCR for the combined project comprising the WGT and Monash Freeway upgrade would be above 1.0 despite the revised scope and cost
  • had instructed the state's commercial adviser to update the CBA and BCR.
Updated economic assessment report

The commercial adviser provided a draft updated economic assessment report in March 2018. DTF advised us that this report was not finalised. This report and the underlying CBA model further demonstrated the marginal value proposition for the WGT on its own.

This report updated the project cost and benefit estimates to reflect the final project scope. While it is clear that the project costs had increased, the basis for the assumed benefit increases is less apparent.

The report included new benefit categories that were not included in the original business case.

Total additional benefits

% of total NPV*

% of total increase in project benefits**

$432 million

46% ($931 million)

~40% ($1 084 million)

Note: * Total project benefits, excluding wider economic benefits, less total costs.
Note: ** Excluding wider economic benefits.
Source: VAGO from West Gate Tunnel Project, Updated Economic Appraisal draft report, March 2018.

This included benefits from:

  • reduced truck incidents at the Napier Street bridge
  • improved incident response time resulting from increased live monitoring of traffic
  • new and upgraded walking and cycling paths
  • improved access to community open space
  • better noise walls along the West Gate Freeway
  • opening of the Monash Freeway upgrade in 2019–20 rather than 2022–23.

Further, the updated economic assessment report applied the discount rate used in the business case of 7 per cent, but included no sensitivity analysis applying higher and lower discount rates.

The revised BCR figures reported were:

  • 1.2 for the combined WGT and Monash Freeway upgrade project
  • 1.0 for the WGT project on its own.

The updated economic appraisal report did not provide details on the methods used to estimate the additional benefits or a breakdown of the values of individual components within the new benefit categories.

The updated CBA has similar issues to those identified with the business case CBA, including that it did not provide detail to dispel any concerns of potential double counting of benefits. In addition, neither the updated model nor the updated report included convincing evidence to demonstrate the appropriateness of the new additional benefits included in this analysis.

As a result, the updated CBA can only reasonably be considered as a sensitivity analysis undertaken to examine whether it was possible for the project to still provide positive net benefits, despite the significant cost increases.

Figure 2H provides specific comments on three of the new additional benefits and other issues.

Figure 2H
Issues with new additional benefits in updated CBA

Additional benefit category

Audit comments

Better noise walls

  • The calculation of the better noise walls benefits is highly assumption driven. It uses a 'noise externality monetary benchmark' which is commonly used in CBA, but also relies on an assumption that noise walls reduce vehicle sound impacts by 75 per cent. This assumption on the marginal impact of noise walls is not based on CBA guidance and no evidence is cited to support it.
  • The broader 'externality impact' benefit category in the original CBA—an output of the transport modelling included the noise externality monetary benchmark. The updated economic appraisal report does not explain why the new benefit of 'better noise walls' does not double count this reduced noise benefit.

Walking and cycling benefits

  • This was a logical benefit to include within the updated CBA as the scope of active transport improvements had been clarified by this time in the project.
  • However, the key input used to calculate the walking and cycling benefit is a survey of the number of walkers and cyclists, along the route to be upgraded, over a two‑hour morning peak period. An expansion factor of 7.21 was applied to the two-hour morning peak data to determine daily use data. This expansion factor is a figure used by Transport for New South Wales for application to Sydney roads. It implies that morning peak rates of walking and cycling along this route are sustained for over 14 hours a day. The report does not explain why this factor is applied to walking and cycling, when the equivalent Transport for New South Wales expansion factors are 3.58 for trains and 4.34 for buses.
  • Given this additional benefit stream totals $102 million in present value, justification of the expansion factor was warranted in the report.

Monash Freeway early opening benefits

  • This benefit is not calculated within the CBA financial model. It is input as a single value, providing a benefit of $192 million NPV, with no details included in the model on how it was calculated.
  • DTF provided further information on this benefit during our audit that should have been highlighted in the updated economic appraisal report.

24-hour truck bans in Maribyrnong and Hobsons Bay

  • Our review of the updated CBA financial model indicates that this benefit stream may have been overstated because it counts a 60-year benefit stream. The report does not explain the inconsistency with other benefit streams (with the exception of the Monash Freeway early upgrades) where benefits were profiled for 50 years.

Auxiliary traffic control room

  • This has been used to calculate an additional resilience benefit relating to the Monash Freeway upgrade. However, no justification is provided to demonstrate why this benefit is wholly additive to the managed motorways benefit stream already included in the CBA.

Source: VAGO.

2.4 Public Interest Test and equity

A key feature of the preferred solution in the business case was a PPP procurement approach for the Western Distributor/WGT works, though not for the Monash Freeway and Webb Dock upgrades.

The business case stated that the purpose of the Public Interest Test was to ensure that procuring the project as a PPP was in the public interest and that, after a decision was made to procure the project as a PPP, the process be structured so that the project continued to be in the public interest.

The business case concluded that 'the Public Interest Test has determined that the public interest can be adequately protected through a PPP delivery of the Western Distributor works'. Tolling the newly constructed Western Distributor/ WGT was implicit in the preferred solution.

The Public Interest Test applied as part of the business case assessed the preferred project against eight elements set out in the Partnerships Victoria Guidelines and largely addressed the criteria of:

  • effectiveness
  • accountability and transparency
  • affected individuals and communities
  • equity
  • public access
  • consumer rights
  • security
  • privacy.

The Public Interest Test assessment for the equity criteria asks, 'are there adequate arrangements to ensure that disadvantaged groups can effectively use the infrastructure or access related services?'.

The assessment referred to impacts on urban amenities in the inner west and improving walking and cycling connections. However, the assessment made no reference to the potential impacts of the toll road element of the PPP on disadvantaged groups.

A comprehensive assessment of equity impacts would have also noted that it introduced a new toll road into the inner west—the WGT—while upgrading an untolled road in the south-east—the Monash Freeway. This issue was not explicitly considered in the Public Interest Test assessment.

The Public Interest Test also did not consider the implications of tolling on different user groups. Specifically, it does not consider the impacts:

  • on the freight and logistics sector of tolling heavy commercial vehicles using both the new Western Distributor/WGT and the existing West Gate Bridge
  • of the city access charge, which would only apply during the inbound morning weekday peak period. This tolling element may disproportionately impact commuters who live in Melbourne's west and have poor access to public transport.

The Public Interest Test assessment did not examine the distribution of costs and benefits among different categories of road users. While not specifically required by the Partnerships Victoria Guidelines, including analysis of this issue in the assessment would have improved its comprehensiveness by considering the equity implications of introducing a new toll road.

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