Australian governments want to pay $810m subsidy for unviable road tunnel in Sydney while Benefit Cost Ratio is low (part 2)

The 1st part of this series of articles analysed that the oil supply situation will be tight by 2019 when the proposed road tunnel is supposed to open. This 2nd part continues by checking documents which have been prepared for this project since 2004. We find that many documents are outdated and that even in the most recent documents oil/energy supplies have not been taken into account as a limiting factor for future traffic and revenue.

Cost benefit ratios in previous documents have been calculated to be low and will be lower still with higher construction costs. It will be interesting to see what genuinely updated planning documents will be produced which would satisfy prudent investors.

Prepare for some dry reading stuff which documents how this road tunnel drama is evolving in its early stages. After all, the author of this website went through this already twice, for the Clem7 and Airportlink tunnels in Brisbane, both of which went into receivership.

(3) Toll-way subsidy against government’s own policy

The Federal government refused to help the car and airline industry, yet intends to pay $405 million to tollway operators. Together with a similar State contribution this amounts to 27% of the project cost. If private investors need that much government assistance then apparently the road tunnel is not viable without this hidden subsidy. So what’s the difference between car manufacturers and toll-way operators trying to make money with cars?

Remember this:

Qantas, Holden: get your house in order, says Tony Abbott. …companies must operate profitably if they want to survive.

Prime Minister Tony Abbott has ruled out giving Toyota extra government assistance to remain in Australia.

Tony Abbott against debt guarantee for Qantas after 500 jobs axed

Treasurer Joe Hockey has warned that the age of entitlement is over and it was time for all Australians to do their fair share of heavy lifting.


What better example for the heavy lifting than the M2:

16/1/2014   Unsustainable Sydney: cost of using M2 toll-way grows 4 times faster than traffic

(4) Government’s oil, energy and transport planning house NOT in order

(4.1) The December 2013 issues paper for the Energy White paper consultation process

does not suggest that any serious oil supply analysis will be done in 2014, so any oil-dependent infrastructure hangs in the air without proper energy planning. More details are here:

(4.2) The Productivity Commission’s draft report on Public Infrastructure released on 13/3/2014

did not analyse why the above mentioned road tunnels went into receivership. On the Clem7 tunnel failure the report writes:

“This project is an example of demand risk being transferred to private investors and not being borne by the government.”

So what is the logical conclusion from this? Taxpayers to the rescue! They can take the demand risk.

No one had the idea that the job at hand is to increase the productivity in the use of oil in the economy and that can really only be done by electric rail and rail freight, not toll-ways with gas-guzzling cars and trucks.

More details are here:

Submission sub19_Mushalik.pdf

(4.3) The Commission of Audit’s terms of reference:

“The Commission should also be guided in its work by the principles that:

– government should have respect for taxpayers in the care with which it spends every dollar of revenue; “

So where is the risk analysis for hundreds of millions of tax payer’s dollars to co-finance road tunnels?

The Federal budget is in deficit for the foreseeable future:

“the heavy lifting to achieve a surplus must come through expenditure restraint” (p 25)

Thus, a federal $405 million subsidy to a project where oil supplies have not been analysed to be sufficient for the lifetime of the tunnel, i.e. from 2020 to 2050, makes no sense.

(5) Documents show low Cost Benefit Ratio

The Northconnex website refers to 3 planning documents:

(5.1) F3 to Sydney Orbital Link Study by SKM (February 2004)

Table 7: Summary Results of Economic Analysis of Type A Options
(1) Costs are based on the BOOT model of project delivery and are rounded to nearest $10 million.
(2) For the Base Case - based on Urban Development Program Scenario A, implementation of major rail
upgrades on Main North Rail Line and calculated at 7% real discount rate.
(3) BCRs are calculated using D&C capital cost estimates.
(4) Note that the BCRs for tolled options are based on certain assumptions about the tolling regime that
would apply on the M2 for travel east & west of the interchange with the new link and that results could
vary if toll assumptions were altered.

The purple option has been selected. For a toll of $3.50 the benefit cost ratio was below 1. Applying the ATO CPI index

to the $3.50 toll that would be $ 3.50 * 104.8/79.5 = $4.60 in 2013 dollars. Assuming the CPI continues as in the last 5 years that would be $ 4.60 * 1.13 = $ 5.20 in 2019. However, a toll of $6 was already announced:


What will the tolls be, Premier?


Well the tolls, you know, to compare them to today, they’ll be roughly in line with the M2. So currently cars on the M2 pay just over $6, trucks pay about three times that. They’ll be in line with that by the time they open. The tolls will be equivalent between NorthConnex and the M2.

For dual 3 lanes we’ll have construction costs of $ 3bn, 50% higher than in table 7 and tolls 15% higher (less traffic) so the benefit cost ratio will be lower than in table 7.

The classification of Infrastructure Australia for benefit cost ratios:

That is why the title of this post says this tunnel is not viable.

It may have dawned on some planners that cars alone will not make sufficient money:

Roads Minister Duncan Gay says he will fine heavy vehicles that continue to drive along Pennant Hills Road once a new motorway tunnel is built linking the M2 with the M1 in northern Sydney by 2019. The tunnel is expected to take 5000 trucks a day off the road

(5.2) Mahla Pearlman Report, commissioned by the Federal Government (in Feb 2007)

On page 82 we read:

Aug 2007

“SKM’s conclusion was as follows:
The analysis showed that it would be difficult to achieve the transport objectives set for the F3 to Sydney Orbital link by upgrading public transport alone. However, potential public transport enhancements would lead to an increase in the volume of the public transport travel and overall mode share and therefore serve wider community transport objectives
(SKM Main Report, page 6-4).
This conclusion may not be a direct answer to the claims raised in the submissions, but these claims are actually beyond my terms of reference. The same comment may be made about global warming and peak oil issues. This Review has been directed to focus on the assumptions and data in the SKM Study, changes to land use and transport flows and the outcomes of the SKM Study. However, I note these claims for completeness, and so that they will not be lost sight of in any further progress of the Link.”

(5.3) State Significant Infrastructure Application Report by NSW Roads and Maritime Services (Sep 2013)

This report (the O’Farrell government came to power in Mar 2011) mentions the Pearlman report in chapter 2.2.3 (p 14) but has of course dropped the issues of peak oil, not to mention global warming:

The review concluded that:

  • The assumptions and data used in the 2004 report were valid and reasonable at the time of the study.
  • There have been changes affecting land use and traffic flows since the 2004 report, but that these changes reinforce the selection of the purple option.
  • The purple option should be the preferred route and should progress to the next
  • stage of design and development.
  • Any future concept should consider east facing ramps at the Hills M2 Motorway to
  • make the option more attractive to motorists.
  • A long term option, being strategic corridor C, should be planned for.

Benefit Cost Ratios have not been calculated in this report.

What has fundamentally changed since February 2004, of course, is the oil supply situation. The process of crude oil peaking started in 2005, 1 year after the SKM study was done.

 A kink in the crude oil production curve shows up in 2005. Earlier projections of the IEA of perpetual oil production  and demand growth did not materialise 

The 2013 Application Report just ignored 10 years of oil production data. No wonder that the following 2 documents of the previous governments  – which mention peak oil and are critical of the tunnel project – have been omitted on the Northconnex library website.

(6) Documents omitted on Northconnex website

Documents under previous governments were critical about the road tunnel

(6.1) NSW updated Transport Submission to Infrastructure Australia (August 2010)

The original link to that report with the file name ia_submission_full_web.pdf  returns error 404.

This is an excerpt from chapter 2.8 and 2.9:

Despite the abiding principles (lip-service) the “template for summaries of further priority projects” includes the F3-M2 link on p 522:

The estimated project cost in 2008 dollars is $4.14B for two lane (each direction) tolled option and $4.75B for three lane (each direction) untolled option, according to the RTA review in 2008. The project is not capable of being staged as intermediate ramps are not proposed. Staging would also result in increased costs and significantly lower travel benefits until completion of the total project.

Financial modelling indicates that the forecast revenues from tolling are approximately equal to the operating and maintenance costs of the tunnel. Therefore, it may not be appropriate to procure the concession as a standard economic PPP and other funding models should be considered.

Possibly 3 but more likely 4 tunnel ventilation stacks. (p 525)

Extract from: ia_submission_full_web.pdf

On page 61 we find a Benefit Cost Ratio of 0.74

One may ask why construction costs have dropped from $4.75 bn to $3 bn in 3 years. This is of course vital for the cost-benefit analysis. Interesting also the need for 4 ventilation shafts while the Northconnex promotion video shows only 2, one each at the tunnel exits.

Most importantly, the new federal government doesn’t like an energy constrained world:

Prime Minister Abbott in a speech in Adelaide:

Do you really want, as Premier of South Australia, someone who is looking forward to what he calls a carbon constrained future?

Well, I want no restraints on the future of South Australia. I want the future of South Australia to be unconstrained, ….

(6.2) National Infrastructure Coordinator Report by Infrastructure Australia (March 2012)

The following is an excerpt from:

Private Financing Options for Upgrades in the M5 and F3 – M2 Corridors in Sydney

on page 19:

F3 – M2 Corridor

The previous (2010) submission from the NSW Government included material indicating that an F3 – M2 motorway proposal would destroy economic value (the six lane tunnel option was judged as having a benefit cost ratio of around 0.6:1). This is likely to be a consequence of the high cost of the project – it was then estimated to cost $4.8 billion ($2008) – and traffic volumes (although high) and speeds that are insufficient to generate a positive benefit cost ratio.

Re-scoping the project to focus on freight and improvements in bus-based public transport from the Central Coast is likely to provide a more cost-effective solution to the transport needs of Sydney and the Central Coast. Such an option could involve:

  • a two lane high value vehicle tunnel using the preferred route;
  • high occupancy vehicle lanes on the existing F3 between the Central Coast and northern Sydney, on Pennant Hills Road, and into key commercial centres30;
  • car parking stations on the Central Coast, e.g. at various points along the F3; and
  • (potentially) acquisition of a new, air-conditioned „commuter‟ bus fleet, providing services from the Central Coast directly into major employment centres in Sydney (particularly northern Sydney).

The cost of such a project is probably of the order of $2 – 3 billion, based on the per kilometre costs for other tunnel projects, costs of introducing bus priority measures, multi-deck car spaces and procurement of a fleet of buses. Limiting use of the link to freight vehicles, light commercial vehicles, buses and high occupancy vehicles is likely to generate the highest value solution because it would help capture time and fuel savings for those consumers who value these most.

There have been previous suggestions from some parties that alignments for an F3 – M2 link east of Pennant Hills Road (the route identified in previous studies) might be preferable. The Office of the Infrastructure Coordinator does not agree. The current alignment provides the most effective route for freight movements (given it provides the most direct access to the M7 and industrial areas of south west and south industrial areas of Sydney). Alignments to the east would direct more traffic towards the lower north shore and Sydney CBD, areas that are already congested.

Recommendation on page 32:

c. contributing to any broader community debate on road charging as a means of funding new transport improvements and managing transport demand in Sydney.

That recommendation was taken up by the Productivity Commission (see 4.2 above) in its March 2014 draft report on p 11:

“For cars and other light vehicles, governments should undertake pilot technical studies of (revenue-neutral) direct road user charging using vehicle telematics and extend tolling across existing road networks as it becomes practical and cost-effective to do so”



Prime Minister Tony Abbott has rejected a controversial recommendation in a key Productivity Commission report that suggests drivers be charged for every kilometre of road use.


Road tunnel proposals are being pushed through at all cost, abandoning due diligence and prudent governance. This is because election promises were made for which no number crunching was done. The Federal government has manoeuvred itself into a dead end street.  Part 3 of this series will be about impacts from and on global warming. We’ll also have a look at the rail freight tracks being currently built, running basically parallel to the proposed tunnel, with the objective of taking trucks off the road