inland rail wp5 final 050509 - executive summary stage 1 financial... · economic benefits of...

ARTCMelbourne-Brisbane

Inland Rail Alignment Study

Stage 1 Working Paper No. 5Financial and Economic

Assessment and Identification ofthe Route for Further Analysis

Executive Summary

ARTC

Melbourne– Brisbane Inland Rail Alignment Study – Working Paper No. 5: Stage 1 Financial and EconomicAssessment and Identification of the Route for Further Analysis

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Disclaimer

This report has been prepared by PricewaterhouseCoopers (PwC) at the request of the Australian Rail Track Corporation (ARTC),provide economic and financial analysis of the inland rail project.

The information, statements, statistics and commentary (together the ‘Information’) contained in this report have been prepared byPwC from material provided by the ARTC, and from other industry data from sources external to ARTC. PwC may at its absolutediscretion, but without being under any obligation to do so, update, amend or supplement this document.

PwC does not express an opinion as to the accuracy or completeness of the information provided, the assumptions made by theparties that provided the information or any conclusions reached by those parties. PwC disclaims any and all liability arising fromactions taken in response to this report. PwC disclaims any and all liability for any investment or strategic decisions made as aconsequence of information contained in this report. PwC, its employees and any persons associated with the preparation of theenclosed documents are in no way responsible for any errors or omissions in the enclosed document resulting from any inaccuracy,mis-description or incompleteness of the information provided or from assumptions made or opinions reached by the parties thatprovided Information.

PwC has based this report on information received or obtained, on the basis that such information is accurate and, where it isrepresented by ARTC as such, complete. The Information contained in this report has not been subject to an Audit. The informationmust not be copied, reproduced, distributed, or used, in whole or in part, for any purpose other than detailed in our ConsultantAgreement without the written permission of the ARTC and PwC.

Comments and queries can be directed to:

Scott LennonPartner – PricewaterhouseCoopersPh: 02 8266 2765Email: [email protected]

ARTC

Melbourne–Brisbane Inland Rail Alignment Study – Working Paper No. 5: Stage 1 Financial and EconomicAssessment and Identification of the Route for Further Analysis

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AcronymsABS Australian Bureau of Statistics

ADO Automotive Diesel Oil

AFT Australian Freight Terminals

ARTC Australian Rail Track Corporation

ATC Australian Transport Council

ATEC Australian Transport and Energy Corridor Pty Ltd

ATSB Australian Transport Safety Bureau

BAH Booz Allen Hamilton

BCR Benefit cost ratio

BITRE Bureau of Infrastructure, Transport and Regional Economics

BOOT Build, Own, Operate, Transfer

BTE Bureau of Transport Economics

BTRE Bureau of Transport and Regional Economics

BCA Cost Benefit Appraisal

CCM Capital Cost Model

CPI Consumer Price Index

DBFM Design Build Finance Maintain

DoT Department of Transport, Victoria

DITRDLG Department of Infrastructure, Transport, Regional Development and LocalGovernment

EIS Environmental Impact Statement

ESA Equivalent Standard Axle

EIRR Economic internal rate of return

FBIRA Food Bowl Inland Rail Alliance

FEC Financial and Economic Consultant

GATR Great Australian Trunk Rail

GDP Gross domestic product

GFC Global Financial Crisis

GST Goods and Services Tax

gtk Gross tonne kilometre

hr hour

IA Infrastructure Australia

IRR Internal Rate of Return

kg kilogram

km kilometres

km/h kilometres per hour

L Litre

LTC Lead technical consultant

MJ MegaJoule

mm millimetres

mt million tonnes

NPV Net present value

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NPVI Net present value: investment ratio

NSW New South Wales

ntk Net tonne kilometre

p.a. per annum

PB Parsons Brinckerhoff

PwC PricewaterhouseCoopers

PV Present value

Qld Queensland

QR Queensland Rail

RBA Reserve Bank of Australia

RoA Return on Assets

RTA Roads and Traffic Authority of NSW

SBR Surat Basin Railway

SKM Sinclair Knight Mertz

SNP Short North Project

SPV Special Purpose Vehicle

SSFL Southern Sydney Freight Line

TEU Twenty-foot equivalent unit

t hrs Tonne hours

t pa Tonnes per annum

VOC Vehicle operating cost

WP Working paper

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Executive summaryThe Australian Government has asked the Australian Rail Track Corporation (ARTC) to conduct a

Melbourne-Brisbane inland rail alignment study. The proposed railway is referred to in this paper as

‘inland rail’. Nineteen working papers are being prepared covering route options, costs, standards,

environmental impacts, land requirements, finance and economics. This paper, Working Paper No. 5

(WP5), provides preliminary economic and financial analysis and determination of the route for further

analysis. This paper draws on the demand forecasts in WP1, and WP2-4 focused on route options,

capital costs and operating costs respectively. As with most working papers, WP5 is a preliminary

analysis, presented as work in progress, and it will be superseded by WP12 and then by the Draft and

Final Reports which will provide updated capital costing and demand analysis work. Hence readers are

advised to check they are reviewing the latest working paper or report output throughout the various

iterative changes of this study as the financial and economic results will change over the course of the

study as capital costs are further optimised and demand is further analysed to identity extra tonnages.

Introduction

The methodology behind this paper comprises:

performance specification – involves drawing from WP1 and preliminary outputs from WP2-4 to

develop an outcome-focused above and below rail performance specification for inland rail. This is

required as the specification drives demand as well as financial and economic assumptions;

optimal alignment – parts of the proposed inland railway would take advantage of existing rail lines

between Melbourne, Parkes and Moree, and it would require a new route from a point north of Moree

to near Brisbane; a number of route and alignment options including upgrades or deviations to existing

route sections have been generated by various parties in the past;

financial assessment – undertaking financial assessment on a below rail basis assuming it will be

owned and operated by a private, commercial entity, to enable the financial viability of inland rail to be

assessed under a range of operation start dates; and

economic assessment – undertaking a rail freight user economic appraisal to capture benefits for rail

and road users, as well as third parties (e.g. due to external environmental costs) to assess the net

economic benefits of inland rail under a range of operation start dates.

Performance specification

From consultation with the Study Steering Committee and ARTC, a range of performance specifications

was developed for inland rail that drive demand and a number of cost and revenue items for operation of

the proposed rail alignment. The baseline adopted was that, to be viable, an inland railway must provide

a superior service to Melbourne–Brisbane freight than that offered by the coastal route. Some of the key

specifications include:

a freight train transit time driven by customer preferences which to date are mainly seeking a terminal-

to-terminal transit time within a range of 23 to 28 hours;

equivalent or better reliability of journey time than that provided by the coastal route;

equivalent or lower operational costs (fuel and crew) than the coastal route;

allow for a maximum train length of 1,800 m;

a desirable maximum freight operating speed of 115 km/h;

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a maximum allowable gradient of 1 in 67; and

a standard gauge of 1,435 mm between rails.

Technical specifications for the alignment and maximum grade, curvature, and so on will be refined as the

study progresses.

Optimal alignment

In this preliminary assessment of the optimal alignment, this paper undertook the following approach:

Step 1 – key route decision in the south – assessing route either via Albury or Shepparton through

northern Victoria and southern NSW;

Step 2 – key route decision in the north – assessing routes either via Warwick or Toowoomba on

approach to Brisbane;

Step 3 – upgrade options in the mid-section of the corridor – developing low cost, high cost and

mid/central cost upgrade scenarios for sections within northern NSW. These three scenarios were

developed by the Lead Technical Consultant (LTC) from a review of over 50 route options using a

capital cost versus transit time analysis; and

Step 4 – test and analyse the three capital cost scenarios which are referred to as the Low Capital

Cost, Central Capital Cost and High Capital Cost scenarios throughout this report.

Given the above approach the preliminary optimal alignment was identified as the Low Capital Cost

scenario which has a capital cost (Melbourne to Brisbane) of $2.8 billion, transit time of 27 hours and

40 minutes and total route length of 1,881 km. This scenario has a route as follows:

From Melbourne via Albury to Cootamundra, Parkes and then on to Narromine, Dubbo, towards

Binnaway, Werris Creek (both with by-passes) and Moree then on to Inglewood, Millmerran,

Gowrie, Grandchester, Rosewood and Kagaru to Brisbane.

The map below depicts the three alternative routes analysed. Figure 7 later in WP5 presents the

preliminary optimal alignment identified for further analysis in Stage 2.

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Figure 1 Inland route options

Source: LTC

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In the map above the purple line depicts the core route that is constant to all three cases. The variations

from this route are highlighted in brown, green and yellow, which represent the Low Capital Cost, Central

Capital Cost and High Capital Cost, scenarios, respectively. It can be observed that the preliminary rail

alignment for the inland railway identified for further analysis, is via Albury in the south and via

Toowoomba in the north for all scenarios.

The financial and economic results of the three capital cost scenarios are provided in Sections 5 and 6 of

WP5, a summary is outlined below.

Preliminary financial assessment

The financial assessment was undertaken on a below rail basis assuming the inland railway would be

owned and operated by a private, commercial entity on an open access (multi-train operator) basis with

ACCC regulation of maximum access prices. The analysis had three different capital cost scenarios

against a Base Case of no inland railway but with currently planned upgrades to the existing coastal route

(see Table 12 for details of these upgrades). The analysis also tested three different times for

commencing operations (2020, 2030 and 2040) for each scenario. The three capital cost scenarios are:

Low Capital Cost scenario – with development of inland rail based on a target of 27⅔ hours transit

requiring low-level capital costs, and upgrades to the coastal route in line with the Base Case;

Central Case scenario – with development of inland rail based on a target of 25¾ hours transit

requiring mid-level capital costs, and upgrades to the coastal route in line with the Base Case; and

High Capital Cost scenario – with development of inland rail based on a target of 23¾ hours transit

requiring high-level capital costs, and upgrades to the coastal route in line with the Base Case.

The summary results of the financial appraisal in Net Present Value (NPV) terms are presented below

with the detailed breakdown provided in Section 6 of WP5.

Table 1 Summary of financial appraisal results ($ million, figures in brackets are negative)

Low Capital Cost($2.81b capex and 27⅔ hrs)

Central Case($3.09b capex and 25 ¾ hrs)

High Capital Cost($3.61b capex and 23 ¾ hrs)

Inland rail scenarios

2020 2030 2040 2020 2030 2040 2020 2030 2040

Financial NPV of Project(NPV @ 8% Real WACC)

(1,045) (423) (174) (1,275) (530) (224) (1,691) (722) (312)

Financial NPV for EquityInvestor(NPV @ 11% Real Return onEquity)

(1,250) (413) (138) (1,447) (479) (162) (1,803) (602) (205)

The preliminary financial assessment results indicate that a Melbourne-Brisbane inland railway, as at

Stage 1, does not appear financially viable as a standalone commercial entity. As part of upcoming

analysis within Stage 3 of this Study, we will consider alternative funding structures including the likely

funding implications for governments so as to package an inland railway into a more viable project. The

Low Capital Cost scenario has better financial performance indicating that the additional tonnage

attracted from faster transit times does not appear to justify the extra capital cost. In addition, while

delaying the opening by 10 or 20 years sees some improvement in the financial NPV, this is mainly due to

the NPV discounting process which reduces the significance of the initial capital cost and to a lesser

extent the tonnage growth over the period. Hence the viability of the project is only modestly better in

2030 and 2040 compared to 2020. Overall, for the inland railway to reach financial viability it is likely to

require a combination of additional tonnages, reductions to the capital cost and/or a range of funding

contributions from different sources.

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Preliminary economic assessment

The initial economic assessment has been completed from a national perspective that includes costs and

benefits accruing to likely users and non-users of inland rail. Benefits include freight time savings to end

customers, train operator and road freight cost savings, producer surplus from induced freight, road

maintenance savings and environmental externality cost savings resulting from development of the inland

railway. Overall, the size of a range of economic benefits is relatively low. These can be explained by a

number of factors including:

mode shift from road to rail is modest compared to that of the shift from the coastal route (rail to rail),

as a result externality savings are minimal;

as the inland railway traverses mostly rural areas unit rates for benefits are lower compared to urban

rates;

induced freight generates more externality costs; and

the extent of travel time savings is low due to ARTC’s planned improvements on the coastal line. The

improvements are forecasted to allow for a transit time of 28 hours; further shifting from road transport

to rail will actually lead to an increase in transit time which will decrease the size of the net transit time

saving benefits.

The preliminary economic assessment covered the same three scenarios (listed above) with three

different opening years incrementally to a ‘without inland rail’ Base Case to represent the net economic

benefits to the community that are expected from the proposed rail line. The three inland rail scenarios

assumed that the coastal route upgrades would take place regardless of whether the inland railway

proceeds.

The summary of the results of the economic appraisal are presented below with the detailed breakdown

provided in Section 6.

Table 2 Summary of economic appraisal results (incremental to the Base Case) ($ million, figuresin brackets are negative)

Low Capital Cost($2.81b capex and 27⅔ hrs)

Central Case($3.09b capex and 25¾ hrs)

High Capital Cost($3.61b capex and 23¾ hrs)Inland rail scenario

2020 2030 2040 2020 2030 2040 2020 2030 2040

Economic NPV@ 7% real discount rate

(860) (379) (160) (846) (350) (133) (976) (399) (147)

As indicated in Table 2, the inland railway does not appear economically viable. The economic viability of

all three capital cost scenarios, and in particular the Low and Central Capital Cases in 2020, is broadly

equivalent. As with the financial results, the scenarios appear to have a better performance by delaying

the opening 10 or 20 years but viability remains marginal as the improvement in results is due mainly to

the NPV discounting process which reduces the significance of the initial capital cost.

Preliminary assessment – alternative demand scenario

The financial and economic results above are based on ACIL Tasman demand forecasts, derived from

assessment of the current freight market in the corridor, consultation with key freight/logistics companies

and customers, and development of a logit model to estimate future mode shares with and without the

inland rail line. Presented for comparison with these results, Table 3 shows the financial appraisal results

based on ARTC demand assumptions. The ARTC demand forecast has a more responsive elasticity

than estimated by ACIL, interpolating from rail market shares on eight intercapital routes (including

Adelaide and Perth). This results in a higher rail market share:

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Low Case preliminary WP1 findings – forecast Melbourne-Brisbane rail market share to increase from

a 2008 share of 20%, becoming 34% once the inland route is assumed to be open in 2020, then rising

slowly to 45% by 2050; and

Low Case ARTC assumptions – indicates the Low Case rail market share will increase from a 2008

share of 33%, increasing to 69% once the inland route is assumed to be open in 2020, then rising

slowly to 82% by 2050.

Table 3 Appraisal results with ARTC demand forecasts ($ million, figures in brackets are negative)

Low Capital Cost ($2.81b capex and 27⅔ hrs) Inland rail scenario

2020 2030 2040

Financial NPV of Project (NPV @ 8% Real WACC) (921) (344) (130)

Financial NPV for Equity Investor (NPV @ 11% Real Return on Equity) (1,191) (382) (125)

Economic NPV @ 7% real discount rate (558) (178) (37)

As indicated in Table 3, incorporating the ARTC demand assumptions results in the Low Capital Case

improving its financial NPV by between 10-20% at a real WACC of 8%. However, inland rail still does not

appear financially or economically viable. While the higher demand results in higher financial revenue,

the increase in revenue is not significant enough to fund the capital and operating costs of the proposed

route.

Overall, the results of this preliminary financial and economic assessment are that the inland railway does

not appear financially viable as a standalone commercial project. The economic results indicate that the

Low and Central Capital Cases have broadly similar outcomes. The financial results show that the Low

Capital Case has clear stronger performance, identifying this as the route for further analysis in Stage 2.

The scenarios delaying opening of the railway to 2030 or 2040 appear stronger as the NPV discounting

process reduces the significance of the initial capital cost, but viability at these dates remains marginal

The Stage 1 results presented in this working paper are based on preliminary estimates and forecasts of

costs, revenue and demand. Stages 2 and 3 of this study will focus on improving viability by trying to

identify further tonnage, reducing capital costs, and developing potential more viable funding structures

including likely implications for governments. Some of the key areas of focus for further analysis within

Stage 2 of this study are listed in Section 6.3 of this working paper.

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