Why the Inland Rail project will never add up

by Marion Terrill

Published by Australian Financial Review, Wednesday 21 February

As with sausage-making, so too with public infrastructure appraisals – you’re happier not knowing what went into them. And nowhere is this more true than with Inland Rail; whether you think it’s nation-building or yet another boondoggle depends on how willing you are to trust that the project selection and appraisal process gives us the right answer.

But there are red flags on this railway line. Beyond the image of a 1.8-kilometre-long train, double-stacked, chugging up and down between Melbourne and Brisbane, don’t forget this railway line has a massive price tag of $9.9 billion, and it’s your money.

Just because the government is funding it mainly as an investment, and not a grant, doesn’t mean that the usual problems of project selection and management don’t apply.

Inland Rail, when completed in 2025, will be a 1700-kilometre freight rail line between Melbourne and Brisbane.

Around 40 per cent of the line will be new, with the rest using existing track, upgraded where necessary.

The Australian government committed $8.4 billion to this project in last May’s budget, in the form of an equity investment, on top of a similar investment of $600 million the previous year.

Equity investments are not the usual form of transport infrastructure funding; they don’t affect the budget deficit, unlike the more common direct project payments.

Governments make equity investments when they believe that the asset will generate investment returns to taxpayers.

Officials at a parliamentary committee last week assured politicians that the risks and costs had been rigorously assessed in the business case.

The only problem is that Infrastructure Australia evaluated that same business case in 2016 and highlighted that the options assessment undertaken by the Rail Track Corporation did not robustly consider the value for money and deliverability of the full range of options.

Cost and other risks are particularly important for this project, because it has the skinniest of benefit-cost ratios, at just 1.1:1.

In other words, every dollar of public money spent will yield just $1.10 of benefits – if all goes according to plan. Will all go according to plan?

Reasons for doubt

There are at least three reasons for doubt.

For one, cost overruns are more likely and larger on average for large and complex projects; every 10 per cent increase in a project’s size is associated with a 6 per cent higher chance of an overrun. Not only that, but there appears to be insufficient provision for ‘worst case’ cost outcomes. The experience of the past 15 years has shown that the difference between the median, or ‘P50’ cost, and the ‘worst case’ or ‘P90’ cost is 26 per cent, but Inland Rail has provision for only 8 per cent above the median for ‘worst case’ costs.

Last year’s budget papers themselves have a section on the risks of Inland Rail, pointing out that “this project is sensitive to increases in project cost and lower revenues from users, which could decrease the returns on the government’s investment in the project”.

It’s lucky that the Rail Track Corporation is so experienced and skilled at procurement – except that the Auditor General has just criticised them for shortcomings in providing value for money in procurement activities.

Supporters of Inland Rail may argue that Infrastructure Australia has endorsed the project, notwithstanding its concerns about costs going up, benefits going down and political risks.

And the Rail Track Corporation argued in its business case that the project has a better benefit-cost ratio, which would have been evident if only Infrastructure Australia had allowed discounting of project costs and benefits at 4 per cent, rather than the standard 7 per cent.

A new Grattan Institute report to be published next week finds that 7 per cent is too high for most transport infrastructure projects, but in fact Inland Rail is a rare exception where the current 7 per cent is about right.

That’s because demand for freight rail is likely to ebb and flow with the state of the economy much more than the demand for urban freeways and public transport, where the great majority of people will keep on travelling to work and school and buying transported goods even in a recession.

Nobody knows for sure how any individual project will turn out, and whether it will prove a worthwhile investment.

But we do know how projects perform on average and we can learn from experience where extra care is warranted. Inland Rail has many warning signs already, and we’re still in the pre-construction phase.

Just because the government is funding it through an equity investment doesn’t mean that it makes commercial sense and doesn’t mean that taxpayers shouldn’t still wonder if Inland Rail isn’t more a wish and a hope than a sound investment of our money.