Acquisition & Logistics Services (ALS), Canberra

MEDIA RELEASE - CRITIQUE OF CAPITAL METRO BUSINESS CASE

Purpose
This is a summary of a critique by Max Flint, Principal Consultant, Acquisition and Logistics Services, of the
Capital Metro Stage 1 Business Case, released by the ACT Government on 31 October 2014.
The critique was done to independently evaluate the content of the Case and to apply findings to a revision of
the independent assessment of the project costings, distributed to interested parties on 23 October 2014.
Key findings
The most important deficiency of the Business Case is that it is NOT a full Business Case as claimed by the
Government:
It does not provide anywhere for the very substantial cost of capital investment, which is independently
estimated to be an absolute minimum of $398 million and which could be as high as $600 million or more,
in todays prices.
It does not state what the annual repayments would be on the $783 million borrowed capital, over the
planned 20 years repayment period, or give details of the annual subsidies over the 30 year period.
It fails to give total costs in actual 2014 prices, opting instead to present estimates in heavily discounted
prices, which completely distort the financial liability facing taxpayers.
The Case claims a discounted Benefit Cost Ratio (BCR) of 1.2 but, in ignoring the cost of capital, this
figure is grossly in error. At best, a ratio of 0.81is most likely, after inclusion of the cost of capital in the
equation. Thus, the Government claim that the project is cost-effective cannot be sustained.
Estimates given in the Business case are not complete, there being several components acknowledged
therein but not costed and so not included in project estimates.
The Government needs to clearly explain why such a large proportion of the expected total cost of construction
has been excluded from the Business Case, especially seeing that all Canberra taxpayers are expected to foot the
bill. Several tables of data in the Case make it quite clear that the $873 million construction cost is the starting
point and nowhere is the cost of capital estimated or included in that figure.
Given detailed study of the Case, the revised, independent assessment of Project costs are summarised in the
following table.
Taxpayer Liability (2014 prices)
30 year
20 year liability
Liability
Total pa
O&M Part [1]
per household
$m
$m
$m pa
Number
$ pa
Min
1,890
85
19
145,000
586
+20% risk
2,280
102
24
145,000
705
1. O&M part is the net annual subsidy, after deduction of estimated revenues.

Conclusion
The Government has failed to provide a coherent or compelling Business Case for Capital Metro Stage 1.
While riddled with inconsistencies, its most important failing is to ignore the substantial cost of capital which,
when included, drops the claimed benefit-cost ratio to well below unity to 0.81 at the most optimistic. The
Government claim that the project is cost-effective cannot be sustained.
All Canberra taxpayers should be made aware of the gross failings of the Business Case and of how the
Government has apparently ignored them in deciding in October to proceed with the project.
M.R. Flint
Principal Consultant, Acquisition and Logistics Services
25 November 2014
The Author: Max Flint has specialised for many years in providing logistics services for defence-related major
capital project acquisitions, including life-cycle costing. He is well qualified in this field, having extensive
experience as a logistician in the RAAF, the Department of Defence and as a consultant, as well as possessing a
diploma in electrical engineering from RMIT and a Master of Science (Logistics Management) with Distinction
from USAF Institute of Technology.
In the preparation of this critique, the author has not received funds from any external source nor prepared
it on behalf of any other entity.

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CRITIQUE OF CAPITAL METRO BUSINESS CASE
In the preparation of this critique of the Capital Metro Business Case, the author has not received funds
from any external source nor prepared it on behalf of any other entity. It has been prepared only as a public
service to properly inform the voters and taxpayers of Canberra of the most probable financial liability they
face if this project proceeds, as their Government intends.
SUMMARY
This document is a detailed critique of the Business Case for Capital Metro Stage 1 that the ACT Government
released on 31 October 2014, concurrently with the request for Expression of Interest to potential suppliers of
the tramway system.
In general, the Business Case is a highly confusing document, riddled with inconsistencies and errors and poorly
organised in content. It is extremely difficult for a professional analyst to comprehend, let alone for other
readers. Even the authors of the Business Case could be challenged to clearly explain what they have written.
The Case is far from persuasive but, evidently, the ACT Government has ignored its serious deficiencies.
The most important deficiency of the full Business Case is that it is NOT a full Business Case as claimed by
the Government. It does not provide anywhere for the very substantial cost of capital investment, which the
revised, independent assessment estimates at a minimum of $398 million and which could be as high as $600
million, in 2014 prices. Nor does it state what the annual repayments would be on the $783 million borrowed
capital, over the planned 20 years repayment period, or give details of the annual subsidies over the 30 year
period. Tables 1, 15 and 17 of the Case make it quite clear that $610 million (risk-free, before adding a
contingency allowance of $173 million) is the starting point and nowhere is the cost of capital estimated or
included in that figure.
The Case claims a discounted Benefit Cost Ratio (BCR) of 1.2 but, in ignoring the cost of capital, this figure is
grossly in error. At best, a ratio of 0.81is most likely, after inclusion of the cost of capital in the equation. Thus,
Government claims that the project is cost-effective cannot be sustained.
Estimates in the Business case are not complete, there being several cost components acknowledged therein but
not costed and so not included in project estimates, eg for survey work, changes to utilities, some park & ride
facilities and bus/tram interchanges.
The whole document has a major problem with how escalation, inflation and discounting are applied. While it
is acceptable practice to use validly produced Present Values (PV) of quantified benefits and costs to establish a
benefit-cost ratio for comparison of options (using a cost of capital or an Internal Rate of Return figure), it is an
erroneous practice to use these discounted costs as the actual costs of a project at a given Base Date. A net
result is that the Business Case fails to give total costs in actual 2014 prices, opting instead to present estimates
in heavily discounted prices, which completely distort the financial liability facing taxpayers.
The Government needs to clearly explain why such a large proportion of the expected total cost of construction
and other project costs have been excluded from the Business Case, especially seeing that all Canberra
taxpayers are expected to foot the bill.
Given detailed study of the Business Case, findings were used to revise the independent assessment of Capital
metro Stage1 costs, as shown in the following table. While the overall 30-year estimates have reduced (a lower
interest rate on capital was used), the annual subsidy has risen moderately and is quite substantial at $19 million
to $24 million.
Taxpayer Liability (2014 prices)
30 year
20 year liability
O&M Part [1]
per household
Liability
Total pa
$m
$m
$m pa
Number
$ pa
Min
1,890
85
19
145,000
586
+20% risk
2,280
102
24
145,000
705
1. O&M part is the net annual subsidy, after deduction of estimated revenues.

The Government has failed to provide a coherent or compelling Business Case for Capital Metro Stage 1. Its
most important deficiency is to ignore the substantial cost of capital which, when included, drops the claimed
benefit-cost ratio to well below unity to 0.81 at the most optimistic. The Government claim that the project is
cost-effective cannot be sustained.
All Canberra taxpayers should be made aware of the gross failings of the Business Case and of how the
Government has apparently ignored them in deciding in October to proceed with the project.

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CRITIQUE
This document is a detailed critique of the Business Case for Capital Metro Stage 1 that the ACT Government
released on 31 October 2014, concurrently with the request for Expression of Interest to potential suppliers of
the tramway system.
In addition, the basic results are included an independent assessment by Acquisition and Logistics Services
(ALS), as revised after study of the Business Case. The original independent assessment A case against
Capital Metro Stage 1- what every Canberra voter and taxpayer should know was released to interested parties
on 22 October 2014 and made accessible on www.canthetram.org.
Qualification: This critique looks principally at the integrity of the Business Case, in particular the cost
estimates except that it does not challenge the construction cost of $783 million. Also, it makes no attempt to
validate or critique the estimated values of benefits claimed therein; except for the way they may have been
discounted in the several tables, the nominal values have been accepted as they are. However, experts in the
field could well disagree with some or all of the estimates for claimed benefits. It is also highly probable that
quantification of benefits have been on the optimistic side and cost estimates minimised, so as to give an
acceptable Benefit Cost Ratio (BCR). The opinion piece Proposal built on fantasy by David Hughes (The
Canberra Times, 17Nov14), clearly lays out a case against the claimed benefits for the project.
General deficiencies
In general, the Business Case is a highly confusing document, riddled with inconsistencies and errors and poorly
organised in content. It is extremely difficult for a professional analyst to comprehend, let alone for other
readers. Even the authors of the Business Case could be challenged to clearly explain what they have written.
The Case is far from persuasive but, evidently, the ACT Government has ignored its serious deficiencies.
A detailed critique of the Business Case is provided at Appendix 1, along with a list of definitions that may
assist readers of this document. General deficiencies are as follows:
It provides no assistance in how estimates for either costs or benefits are arrived at. It is as if readers are
expected to believe what is said and the figures given - trust us!
It is not consistent and is highly confusing in its use of discount-related terminology, eg the use of
nominal, real, raw, NPC, total, constant and present value dollar estimates, without providing
definitions. It is virtually impossible to determine which discount rates are being used for which
estimates, there being no indication of values used or their related timeframes.
It is not even clear whether the Business Case is estimating the cost of the planned Public, Private
Partnership (PPP) contract or the total project cost, which includes important components excluded from
the contract.
It does not contain a list of acronyms or definitions to assist the reader. This is sometimes done
deliberately to confuse readers.
Most important deficiencies
The most important deficiencies of the full Business Case are considered to be as follows:
It is not a full Business Case as claimed by the Government. It does not provide anywhere for the very
substantial cost of capital investment, which the revised, independent assessment estimated at a minimum
of $398 million (could be as high as $602million) in 2014 prices. The Government needs to explain why
such a large proportion of the expected total cost of construction is not included in the Business Case. In
particular, Tables 1, 15 and 17 make it quite clear that $610 million (risk-free, before adding a
contingency allowance of $173 million) is the starting point and nowhere is the cost of capital estimated
or included in that figure.
Given the current case of a capital investment of $783 million ($610 plus P75 risk allowance of $173m),
at 7% reducible over 20 years, an annual repayment, in arrears, would be $72.85 Million (comprised of
variable values each year of principal and interest). While the sum of payments is $1,457 million, the
Base Date Value (BDV) of total repayments, discounted at assumed average escalation rate of 3.16% per
annum is $1,070 million, giving a net BVD of interest paid of $287 million (1,070 783). However, the
accrued cost of capital during the three-year construction period (independently estimated at $111
million, at 7%), has to be added giving a minimum BDV for interest (cost of capital) paid of $398 million
(total interest could be $602 million at 9% and even higher allowing for risk). See Table 1below.

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Table 1 Twenty year interest estimates
Capital Metro Stage 1
Twenty Year Interest estimates
BDV Interest Burden

[1]

2014 prices
Loan ($M)
Assumed Interest Rates
6%
7%
8%
$M
$M
$M
447
533
623
206
287
372
95
111
127
398
499
301
599
361
478

783
9%
$M

715
Actual BDV 20 Year Interest
[2]
Net BDV 20 Year Interest
[3]
459
3 year BDV capital carrying cost
143
602
Total Capital Cost (risk free)
722
Total Capital Cost (+ 20% risk )
[4]
Notes:
1. BDV (Base Date Value)= values discounted at the assumed escalation rate of 3.16%
2. Actual BDV of interest component.
3. Net BDV interest is $783 less BDV of principal component of annual repayments.
4. Risk is +20% (reduced from 50% because $783 includes $173m contingency).

The whole document has a major problem with how escalation, inflation and discounting are applied. While it
is acceptable practice to use validly produced Present Values (PV) of quantified benefits and costs to establish a
benefit-cost ratio for comparison of options (using a cost of capital or an Internal Rate of Return figure), it is an
erroneous practice to use these discounted costs as the true costs of a project in Base Date Values (BDV). This
point is illustrated in Table 2 below. A net result is that the Business Case seriously underestimates the project
costs.
Table 2- Bank Loan Example Base Date Values
Bank Loan example
Data
In
Principal
Interest Rate
Inflation rate
Years
Outputs

Abbrev

Value

$P
%Ipa
%Infpa
Y

50,000
7.00%
2.75%
5

Total
at Base Year
5
Date
1
2
3
4
4.10
PV of a $ pa
PV$pa
(1-(1+%Ipa)^(-y))/%Ipa
12,195
Repayment pa
$Rpa
$P/PV$pa
60,973 12,195 12,195 12,195 12,195
8,695
PV Repayments @ 7%
PV$P@%Ipa
Same as $Principal
50,000 11,397 10,651
9,954
9,303
PV Repayments @ 2.75
PV$P@%Infpa $Rpa/(1+%Infpa)^y
56,248 11,868 11,551 11,241 10,941
10,648
Base Date Value interest paid PV$Int
Actual cost of loan
6,248
Notes:
1. PVs discounted at full interest (discount) rate are not what has to be paid. They are used only for comparison of investments.
2. Once investment decision is made, the Base Date Value (BDV) is what has to be paid.
3. The BDV of the loan is the sum of repayments discounted at the assumed inflation rate.
4. Repayments are made in arrears, at end of each year.
Abbrev

Formula

For a reason not understood, several of the tables in the Business Case discount the basic estimate of $610
million, over 3 years, to a lower figure, at various discount rates. Why, when it itself is an estimate
escalated up from some earlier estimate? What Base Dates are used in the Business Case and what are the
dates of various estimates?
Throughout the Business Case, estimates are given predominantly for 23 years (3 years construction plus
20 year operating period, while ignoring the costs of years 21-30 of operations.
The capital cost estimate (Tables 1, 15, 17, 38, 41, 43 and 44) all give a basic estimate of capital
investment of $610 million (2014 prices), to which is added the $173 million, P75 risk allowance
(contingency). It is clear from these tables that the cost of capital is not included in the $783 million. It
is noted, however, that the figure includes a profit component of $59 million, being 8% on cost. This is a
very small profit margin given that it must account for the cost of capital to the firm/consortium, an
allowance for risk in addition to the transferred risk included in the contingency, plus a normal profit
margin. The basic capital cost of the project has not changed significantly from the 2011 estimate of
$614 m, in spite of three years of project definition. This result tests credibility of the Business Case
estimate.
The Business Case claims a Benefit Cost Ratio (BCR) (discounted) of 1.2 (Table page 17, Tables 18 and
29). However, the equation ignores the cost of capital investment, the minimum estimated at $398
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million (could be as high as $602 million) in 2014 prices. The figure of 1.2 is grossly in error and the
ratio will be more like 0.81 at best. Therefore, Government claims that the project is costeffective
cannot be sustained. A detailed comparison of BCRs derived using figures from different tables in the
Case and including the cost of capital is given in Table 3 below.
Table 3-Claimed Benefit Cost Ratio (BCR
Cost Benefit Analysis (PV, $m)
Copy of Tables 18 & 29 Business Case
Cost Scenario
1
Project Benefits
Transport Benefits (of which:)
Time Savings
Public transport operating savings
Other transport benefits
Land Use Benefits
Wider Economic Impacts
Total Project Benefits
Project Costs
Capex
$Cost-Net Capital
Opex
Total project Costs

406
222
54
129
381
198
985

Including
$Cost Capital
Value
[8]
Notes $m PV
4
3
[1] [2]
406
222
54
129
381
198
985

619
0
204
823

[3] [4] 619

[5]
398
204
[6]
1221

[0]
Value
$m PV
2

Project Economic Indicators

[7]
1
BCR (transport and land use)
161
Net Present Value (transport, land use & WEIs)
[11]
BCR (transport, land use & WEIs)
1.2
Notes:
0. Figures fro Table page 17 and Tables 18 an29 [all the same]
1. No derivation of quantified benefits offered in the Business Case.
2. No discount rates shown.
3. PV figures copied from Table 23
4. Different to Table 43. Why?
5. $Cost-Net Capital not included in Business Case calculation
6. Different to Table 43. Why?
7. BCR at Column 2 is actually 0.96 , not 1.
8. Column 2 figures plus net Base Date Value of cost of capital.
9. Table 43 figuresincluding net Base Date Value of cost of capital.
10. Different figures probable due to use of different discount rates
11. Inclusion of net cost of capital reduces BCR to 0.81

Tab 43 figures
& $Cost Capital
Value
[9]
$m PV
5
406
222
54
129
381
198
985
[10]
507
398
269
1174

0.64

0.67

0.81

0.84

Estimates in the Business Case for operating and maintenance costs (Tables 16, 22 and 42) bear no
resemblance to those in the revised, independent assessment of the 30 year Operations and Maintenance
costs yet the Present Values of the two assessments almost agree at about $23m-$24m per annum. Nor
are the bases of estimates explained in the Business Case. Both assessments agree on a 20 % contingency
as being appropriate.
The graph for Capex distribution Profile (Figure 23) is recognised as an @Risk output, but the Business
Case does not give any detail of the risk profiles of each component of the capital cost modelled. The
components are presumed to be those comprising the Public Sector Comparator (PSC) point estimate of
$610m plus Transferable Risk ($81m) and Retained Risk ($68m) for a Mean (P50 of $759m). The graph
gives a P75 figure of $783m, which is only 3% higher than the Mean. This is an extremely small
increment. The Case offers no idea of what inputs and respective risk profiles were input to the model
but the assumed risk profile of each component cost must have been very small. Even taking the
transferred and retained risks into account, the P75 figure using the base estimate of $610m is only 28%
above the Mean. This is far too conservative for the capital investment, especially given that the risk on
O&M costs is assumed at a reasonable 20%. The revised independent study assumes a risk of plus 20 per
cent on the point estimates (down from the +50% on the $610 million in the initial, independent
assessment).
The Business Case gives the cost of the Capital Metro Agency during the three-year construction period
at $45m. However, it neglects to include the cost of the Agency during the three years prior to the
construction phase. The independent assessment estimated the cost of the Agency at $60m for the six
years.
The Business Case identifies several costs excluded from a PPP contract that will need to be met by the
ACT Government but does not attempt to quantify them. These have been included in the revised,
independent cost estimates at a nominal (not justified) $60 million for six years of CMA project office
costs, plus an additional $60 million for project costs outside the scope of the PPP contract, eg
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consultancies, survey work, changes to utilities, new trees, some park & ride facilities and bus/tram
interchanges. Land acquisition costs have not been included.
The assumption of $1.01 for the average tram fare is very low and seems to go against the Government
case. The current Single trip, adult fare for ACTION is $4.50. The Gold Coast tram has a flag-fall fare of
$3.50. The revised, independent estimate has reduced its assumed average fare from $4 to $3.
Residual values of benefits are estimated within the transport benefits (Table 24) and are presented as
net residual benefits, being (presumed) residual benefits for years after the 30 year contract period less
residual costs for the same post-30 year period. This is an erroneous calculation that serves to inflate the
overall benefits and benefit-cost ratio. It is not a valid inclusion, given that the cost side of the equation
stops at 30 years.

The Business Case cites (8.3.5.3, page 122) participants recommended the ACT Government provide
an affordability signal to the market during the RFP stage.. This content of the Business Case
contradicts the ACT Governments oft-stated position that release of such information would prejudice
tendering. The independent assessments refute the Governments position as a self-servicing fallacy.

In respect of costs in excess of affordability (9.9.2), two optional strategies are offered, neither of which
would provide a suitable compromise for most Canberran taxpayers and voters. Other more acceptable
options would be to either to cancel the project, or to defer the project until after the next ACT election
when the current Government can test its claimed mandate for the project.
Revised, independent assessment
After release of the Business Case, its detailed study has led to revision of the following assumptions that have
been incorporated in a revision of the initial independent assessment:
The assumed cost of capital has been revised down from 9% to 7% per annum.
The Base Date Value (BDV) has been calculated for the total capital investment cost (including cost of
capital) over 20 years at an assumed average escalation rate of 3.16% pa; ie the BDV of the sum of the
annual repayments over 20 years, has been discounted to the Base Date year of 2014 at the assumed
escalation rate. The 3.16% is an equally weighted average of the assumed wage and material indexes
(0.5*3.75% + 0.5*2.27%) 1. Although the assumed inflation rate of 2.75% is included in nominal
discount rates used in the Case, it is not appropriate as an escalation factor for costs.
Given that the basic P75 estimate of $783 million, includes $173 million of contingency (28%), the
maximum risk of capital investment has been reduced from 50 % to 20 %.
Consequently, the revised independent assessment is summarised at Table 4 below. The expected annual
repayment of loan and interest (availability payment) will be between $85 million and $102 million over 20
years and the overall cost over 30 years is now estimated at from $1,890 million to $2,280 million including a
residual, annual operating subsidy of from $18.9 million to $23.7 million (all values in 2014 prices). Revised,
estimated taxpayer liabilities per Canberra household are given in Table 5 below. Note that these revised
estimates are considered rock-bottom estimates. Given the history of cost blow-outs on other major projects in
the ACT (the dam, the gaol, Gungahlin extension and probably the Majura parkway), final costs could well be
much higher.

Taken from Table 62 of the Case.

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Table 4 Summary of revised, independent assessment
Capital Metro Stage 1
Estimated Life Cycle Cost - Summary
Cost Component
All costs in 2014 dollars

[1]

Probable Up-front payment

Total Cost
30 Years
$m
[2]

BVD-Probable Up-front payment

BVD-Probable Up-front payment + 20%

Average Annual Cost

BDV Annual Cost

[3]

BDV Annual Cost + 20%

Total Project Cost (2014 $) 30 Year Life

BDV Project Cost
BDV Project Cost + 20%

CMA Project Management

System Cost

30

1,890
2,280

Total Cost Total Cost

Years 1-20 Years 21-30
$m
$m
Assumes 20 Y loan
184
242
Assumes 20 Y loan
85
19
102
24
20

10

1,701
2,043

189
237

[4]

120

[5]

1,269
1,549

33
50

BDV of Nominal Estimates

[6]

BDV of Nominal Estimates + 20%

[7]

312
374

156
187

BDV System Cost

BDV System Cost + 20%

na

Net Operating &Logistics Costs

Notes:
1.
2.
3.
4.
5.
6.
7.

All figures in Base Date Values (BDV). Base Date is 2014.

Assumes Government will not avoid an up-front payment at System Acceptance.
Assumes repayment of capital cost over 20 years under PPP funding arrangements.
CMA costs prior to System Acceptance.
BVD of System capital cost ($783m) + BVD of Loan Interest.
Allows for deduction of fare and other revenue.
Risk on through-life costs is assumed +20 % based on personal experience.

Table 5 Revised, estimated taxpayer liabilities per household (costs only)

Taxpayer Liability (2014 prices)
20 year liability
30 year
Total pa
Liability
per household
O&M Part [1]
$ pa
$m pa
Number
$m
$m
586
145,000
19
85
1,890
Min
145,000
705
24
102
+20% risk
2,280
1. O&M part is the net annual subsidy, after deduction of estimated revenues.

Conclusion
While the total cost estimate has been revised down from a range of $2,138 million to $3,064 million to a
probable range of $1,890 million to $2,280 million, the net, annual O&M subsidy has risen moderately to a
range of $19 million to $24 million, excluding the assumed value of benefits that may not be realised for many
years if ever.
The Business Case gives the 30 year value of benefits at $984 million against an estimate of $823 million in
costs (2014 prices), claiming a BCR of 1.2. However, when the ignored cost of capital of a minimum of $398
million is added (could be as high as $602 million), the best BCR drops to about 0.81 and possibly as low as
0.61.

M.R. Flint
Principal Consultant, Acquisition and Logistics Services
Canberra, ACT
25 November 2014
Max Flint has specialised for many years in providing logistics services for defence-related major capital
project acquisitions, including life-cycle costing. He is well qualified in this field, having extensive
experience as a logistician in the RAAF, the Department of Defence and as a consultant, as well as
possessing a diploma in electrical engineering from RMIT and a Master of Science (Logistics Management)
with Distinction from USAF Institute of Technology.
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Appendix 1 to
CMetro_BCase_Ctritique_1.2
SPECIFIC COMMENTS ON BUSINESS CASE

Reference

Pri

Subject

Query/Comment

1.2, 1.3

Full Business
Case

It is not a Full Business Case. It does not provide:

for the cost of capital investment [independently assessed at no less than
$398m in 2014 prices]; or
any idea of the annual availability fee that will need to be paid.
It is a patent error to give Present Values (discounted) estimates as actual
costs, as done in this (and other tables).

Table 1

Capital cost
estimate(P75),$m
nominal

It is clear that the $610 estimate does not include the cost of capital.
Includes Contractors overhead and profit of 8% on cost (most probably too
low).
It Includes escalation by $65m from an initial estimate of $545m to $610m. But
why? Was this not a new estimate made in 2014?
This is stated to be a new estimate, not one updated from 2011, or is it? If an
updated estimate, the escalation rate is 3.8%pa over 3 years.
Contingency (P75) of 28% [most likely too low].
The estimate has not changed much from 2011, in spite of three years of
additional project definition. Amazing!

Table 2
and notes

Comparison Total
cost ($m NPC) of
PSC and PPP
Proxy

1.6.3 and
table p17
3.1.1
Table 4

Benefit cost ratio

3.1.2.3

3.1.2.6

3.1.2.8

3.1.3.2

4.2.2.2
Figure 12
Table 11
Problem 3

Park & Ride

Interchanges
Enabling works
Establishment
works
Park & Ride
Interchanges
Tram capacity =
200
Travel Time
claimed is 25
minutes.
Canberras low
density
Light rail creates
jobs

Neither estimate is total; both exclude the cost of capital.

It is a patent error to present Present Values (discounted) estimates as actual
costs, as done in this (and other tables).
Notes: PPP Proxy discount rates used are not given anywhere in the Case
(unless the figure of 5.52% given under Table 21).
Capex rate independently evaluated at 8.69%. Opex rate independently
evaluated at 12.27%.
BCR (discounted) of 1.2 claimed but is grossly in error, given that the cost of
capital is excluded from the equation.
These imply additional costs outside contract scope but which should be
included in the project cost.

4.3.2

4.3.2.1

5 Key
messages
& 5.1.2

current capital
delivery cost
estimate is in
order of earlier
$614m

Yes, but so would comparable infrastructure development. This is not a

legitimate benefit for Capital Metro (except in respect of permanent operations
and maintenance jobs created).
Accepted, but where is the forward planning for transit corridors in Canberra?
None for the huge development of Molonglo is a good example.
Independent modelling shows that the 2021 estimate is feasible but that the
2031 estimate is not feasible with 12 operational trams (or even 17, the
maximum that could be physically managed on the corridor).
Capital Metro claims that these are new estimates, unrelated to the 2011
estimates.
Absolutely remarkable, given three years of project definition since that
estimate in 2011!
Few if any project costing experts could accept such a result.

Table 15
[also Table
1]

Capital delivery
cost estimates
($m, nominal,
P75)

See comments for Table 1

The whole document has a major problem with mixing discount-related
terms, eg nominal, real, rae, NPCtotal, constant and present
value prices.

housing in
Australia
Patronage

Some imply additional costs outside contract scope but which should be
included in the project cost.
These imply additional costs outside contract scope but which should be
included in the project cost.
Yes but seating for only 85. A lot of commuting standing up, hanging onto a
strap to be done.
Independent modelling shows travel time more likely to be from 30-35 minutes.

At least acknowledged. Currently about 450/m2

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5.1.5.2

Opex
benchmarking

Figure 21,
p83

Figure 22

Table 16

Discount rate of
5.52%; escalation
rate of 2.75%
Comparison of
cost estimates
Operating,
maintenance and
life-cycle costs
($m nominal)

It is quite feasible for experienced operational and maintenance professionals

to make a good estimate of operations and logistics costs and the Case claims
to have engaged costing experts. The independent assessment of Opex costs
was not that difficult.
These discount rates do not seem to be used anywhere.

There does not seem to be a need for Figure 22, which serves only to confuse.
There has been no basis offered for the estimates or why operations costs are
so much higher than maintenance costs.
Costs are for 30 years but later tables use only the 20 year totals.
These estimates for each of operating costs and maintenance costs bear no
resemblance to those in the independent assessment of the 30 year O&L costs
yet the PVs of the two assessments almost agree at about $23m-$24m per
annum.
Both assessments agree on a 20 % contingency.
The figures in this table do not agree with those in Table 22, although
estimates in the latter are in real $m they agree with those in Table 38 which
are nominal estimates.
Error: The yearly totals do not even add up correctly.
The following table give Table 16 totals (not actually in Table 16) and the
different, apparent discount rates used in other tables, as an example of
inconsistent use of discount rates.
O&M
Component
Op Cost
Mnt Cost
LCC
Total O&M
Risk
Total $Nominal

5.1.8

Capital Metro
Agency costs

Figure 23

Capex distribution
Profile ($m
nominal)

1.66

BDVs
Discounted @
BDV esc Rate
BDV Total (Y)
BDV $pa (Y)

Less Risk

Tables 22&23
Discounted @
PV nominal Rate
PV Total (Y)
PV $pa (Y)

Less Risk
665
Table 43
204

Table 43
Discounted @
PV nominal Rate
PV Total (Y)
PV $pa (Y)

Less Risk

Table 44
Discounted @
PV nominal Rate
PV Total (Y)
PV $pa (Y)

Less Risk

445

Table 43
269

Table 44
205

Total (Y) $Nominal

20
30
484
848
96
161
48
83
628
1,092
116
197
744
1,289
625
1.03
445
22

3.16%
657
22

665
1.12
204
10

12.34%
230
8

625
1.09
269
13

8.67%
327
11

625
1.12
205
10

12.27%
231
8

This paragraph gives the cost of the CMA during the three-year construction
period at $45m. However, it neglects to include the cost of the Agency during
the three years prior to the construction phase.
The independent assessment estimated the cost of the Agency at $60m for the
six years.
This has to be considered an error in the Business Case.
While a project cost, it should not be included in the contract cost estimate.
The graph for the PSC Capex distribution Profile is recognised as an @Risk
output.
The components are presumed to be those comprising the PSC point estimate
of $610m plus Transferable Risk ($81m) and Retained Risk ($68m) for a Mean
(P50 of $759m).
The graph gives a P75 figure of $783m, which is only 3% higher than the
Mean. This is a very small increment. The Case offers no idea of what
inputs and respective risk profiles were input to the model but the assumed risk
profile of each component cost must have been very small.
Even taking the transferred and retained risks into account, the P75 figure
using the base estimate of $610m is only 28% above the Mean. This is far too
conservative for the capital investment, especially given that the risk on O&M
costs is assumed at a reasonable 20%.
Note: The author of this critique is an experienced cost risk analyst, including
use of @Risk and having developed cost-risk models validated by @Risk.

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$3.587b in nominal terms is a very interesting figure but not explained in any
way. Given a claimed BCR of 1.2, the corresponding 30 year nominal cost
would be $3.000b over 30 years.
The independent assessment put the 30 year cost at between $1.900b and
$2,300b (in 2014 prices). These would escalate up to a total of $3.270b over
30 years @ 3.16% pa.
The two estimates are quite close.
This figure does not include the cost of capital investment.
Therefore, a figure of 1.2 is grossly in error; the ratio would be more like 0.81 at
best (using Business Case estimates).
There are no bases offered for the dollar estimates of so-called benefits.
Presumed to be over 30 years.
Cost figures (3+30 years) taken from Table 23,
The whole document has a major problem with how escalation, inflation and
discounting are applied. While it is acceptable practice to use validly produced
PV for quantified benefits and costs to establish a Benefit-cost ratio and for
comparison of options, it is erroneous practice to use the discounted cost as
the true cost of a project in Base Date prices (see text for detailed explanation).

6
Key
Messages

benefits to the
community of
around $3,587b
(nominal) over 30
years

6
Key
Messages
Table 18

.. an anticipated
BCR of 1.2

Cost Benefit
Analysis ($m PV)

top Page
90

There seems to be an inconsistency here.

Also, later in the Case, the PSC is discounted at 7% but the PPP Proxy at a
different figure.

Table 19

Economic benefits
are discounted at
7%, (in contrast
to PSC and PPP
Proxy discount
rates)
Economic
assumptions discount rate

Table 19

There is no definition offered for this term (or for any other for that matter), nor
how it is applied.

Table 19

Value of time real

escalation.
1% per year
Annualisation and
extrapolation

Table 21

Summary of
operating,
maintenance and
life cycle costs
(real $m)

6.2.5.2,
para 3

O&M costs

Error: Table is incorrectly headed Summary of operating, maintenance and

lifecycle costs (real $m, year ended 30 June). The index of Tables is also in
error.
The title should be perhaps Anticipated real capital costs associated with
delivering the project.
The purpose of this Table is unclear; but it serves to further confuse.
Why does it include CMA costs of $45m (really higher) yet ignores additional
costs of the project outside the PPP capital investment estimate?
While these are part of the project cost, they are not part of the capital cost of
the potential contract.
The Business Case is not in fact clear on whether it is estimating the
project cost of the contract cost, although the latter is presumed.
This table is a classic case of getting real $m and nominal $m mixed up. The
same problem occurs throughout other tables. Quite confusing!
In reference to Table 22, O&M costs over 30 years, in real $m, is estimated at
an average of $22.2m per year.
The independent estimate is $24m per year (2014 prices).
The term real $m is not defined.
The figure of $22.2m per year does not appear directly n Table 22 but
indirectly as the total $665m divided by 30.

Table 22

O&M costs

Error: The discount rate is given as a real rate of 7%, whereas the nominal
rate is 7%.
The nominal rate comprises the real rate and the assumed inflation rate
(2.75% ?).
This is one example of confusion caused by inconsistent and unexplained use
of different discount rates.

There is no definition offered for this term or how it is applied.

There is no basis offered for O&M estimates.

These estimates for each of operating costs and maintenance costs bear no
resemblance to those in the independent assessment of the 30 year O&L costs
yet the PVs of the two assessments almost agree at about $23m-$24m per
annum.
Both assessments agree on a 20 % contingency.
Error: Operating costs should read Operating and maintenance costs.
The figures in this table do not agree with those in Table 16, although latter are
in real $m.

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Table 23

Summary of
Project costs (real
$m)

Table 23
note under
6.2.8.2

financing
costs
Residual Values

Table 24

Summary
transport benefits
(total and PV $m)

Page 100

6.2.12.3

Table 29

Urban
densification
benefits
Additional tax
revenue
Cost Benefit
Analysis

7.0
Table 31

8.1.1

Ticketing and fare

setting.

Not free money

Table 36

PPP (Availability)

8.3.5.2, dot
point 3

8.3.5.3,
page 122,
dot points
3-5
9.1

Key risks, costs

and commercial
principles
the ACT
Government
provide an
affordability signal
Methodology

Table 38

Raw cost
estimates
(nominal $m)

9.1.4
last para

PSC and PPP

Proxy

Table 39

9.2.5

Timing
assumptions
Base date

Error: The table claims real $m but the totals are the same as nominal $m
figures. Another example of confusing terminology.
Why are capital expenditures being discounted over 3 years, given that the
basic $610m is an escalated figure?
What is the Base Date used in the Business Case?
While it is acceptable practice to use validly produced PV for quantified
benefits and costs to establish a Benefit-cost ratio and for comparison of
options, it is erroneous practice to use the discounted cost as the true cost of a
project once the option is selected (see text for detailed explanation).
What is the Base Date?
Cost of capital finally acknowledged, but is not estimated or included anywhere
in the Business Case.
Residual values are estimated within the transport benefits and are presented
as net residual benefits, being (presumed) residual benefits for years after the
30 year contract period less residual costs for the post-period.
This is an erroneous calculation that serves to inflate the overall benefits and
benefit-cost ratio.
total cost is presumed to mean nominal cost.
This table is quite strange. The ratio of Total to PV values should be much
the same but vary considerably.
Also, the table takes into account residual value of benefits [forever after the
30 year period]. This is not a valid inclusion, given that the cost side of
the equation stops at 30 years.
The Case covers claimed benefits of densification but not any of the
disadvantages, as if there were none. Yet, there are people who prefer not to
have such densification.
This claim is rather doubtful and open to challenge.
This table excludes the cost of capital investment. Therefore, a figure of 1.2 is
grossly in error and the ratio will be more like 0.81 at best.
Yet another example of presenting fully discounted PVs of costs as the true
cost of a project, which is patently in error (see text for detailed explanation).
Later in the Case, it assumes an average fare of only about $1. The current
Single trip, adult fare for ACTION is $4.50.
The Gold Coast tram has a flag-fall fare of $3.50.
The assumption of a $1.01 fare is for the tram is somewhat difficult to
understand.
Cost of capital acknowledged but is not estimated and is totally ignored in the
Business Case.
Who owns the infrastructure created by the project? The Case implies that the
Contractor does.
This paragraph, talking about preferences of operators and equity providers,
seem to be at odds with Federal Government guideline documents.
This content of the Business Case contradicts the ACT Governments claim
that release of such information would prejudice tendering.
The independent assessment refuted the Governments position as a selfservicing fallacy.
The independent assessment is essentially a PPP Proxy and done for the
same reason.
This table needs review for accuracy and consistency with previous data.
Estimates are for the 20 year operational period only (see Tables 39 and
62). NPC of $507m from $610m is 6.4% over 3 years. 7% would give $503m.
But why is the $610m discounted when it was escalated over three years from
$507m?
The $610m does not include the cost of capital.
O&M costs $625m discounted over 20 Years to $269m, being a discount rate
of 8.7%. Where did this apparent rate come from?
Fully discounted costs are again being presented as Base Date project costs
when they are not.
Yet another example of mixing apples and oranges and cause of confusion.
CMA has made PSC and PPP discount rate assumptions, implying different
rates for the two methods. However, while paragraph 9.1.4 implies these are
used for PPP Proxy estimates, the Case does not show how or why for either
method.
Note that the Operational period is set at 20 years, and not 30 years.
First mention of a Base Date set at May 2016 (not 2014) but does not seem to
be applied consistently in the Business Case.

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Table 41

Table 43

9.3

Table 44

Table 44,
Note 3
9.4, para 2

Table 45

Table 45
Note 1

NPC of availability
payments

9.7.1.1

Cash flow impact

This paragraph contradicts earlier statements about contribution to lower

project debt.

Table 46

Potential
revenues ticket
sales;
Average fare

Table 46
and
Note 2

Potential
revenues ticket
sales;
Average fare

Later in the Case, it assumes an average fare of only about $1.01. The current
Single trip, adult fare for ACTION is $4.50.
The Gold Coast tram has a flag-fall fare of $3.50.
Although the average of the foregoing rates would be somewhat lower
because of concession fares and interchanges with bus fares, the assumption
of a $1.01 fare for the tram seems extremely low.
It is also difficult to understand, given that it goes against the Governments
case by significantly increasing the operating subsidy.
Estimated average fare is actually cited as $1.35, but reduced to $1.01.
Neither figure is explained.

Risk adjusted
PSC
Total Costs

PPP Proxy, dot

point 2.
Bid costs and
financing costs
(including)
Base Case P75
Cost estimates

PPP Proxy
discount rate
ACT
Government
option of making a
contribution equal
to 50% of project
debt
Total Cost ($m
NPC) of PSC and
PPP Proxy

This table again uses the basic cost of $610m, but why discounted at all? What
is the Base Date?
23 Year costs (3 construction + 20 O&M)
The $610m does not include the cost of capital.
Fully discounted costs are again being presented as true project costs when
they are not.
Total O&M Costs discounted from $625m to $269m over 20 Y, giving a
discount rate of 8.7% (where from?).
See also Comments on Table 44.
Why discounted at all? What is the Base Date?
This statement implies that the subsequent PPP Proxy estimates include
financing costs, but the Business Case excludes the cost of capital in
preceding tables.

$610m Capex is now discounted to $475m (instead of $507m for PSC

estimate). Why discounted at all given that it was escalated over three years
fro $507m? What is the Base Date?
This means a discount rate of 8.7% pa over 3 years and O&M costs are
discounted at 12.27% pa over 20 years. Why?
Fully discounted costs are again being presented as true project costs when
they are not.
Also, figures are for 20 years only.

The different discount rates used for the PPP Proxy calculation is neither given
nor explained.
The independent assessment discusses in some detail this probable course of
action and gave details of interest savings achieved.

Error: Presented as PPP Proxy estimate but NOT in the title.

This is the most confusing of all the tables. While the PSC nominal and
discounted figures are know from previous tables, the is no explanation of how
the PPP figures were arrived at and presented only as NPCs. Where are the
nominal PPP estimates?
Neither the PSC nor the PPP Proxy includes the cost of capital.
Note that the fully discounted costs are again being presented as true project
costs when they are not.
Also, figures are for 20 years only.
This note says that the $804m is the NPC of the availability payments
[presumed over 20 years].
This cannot be the case, because cost of capital is not included and, otherwise
the PPP Proxy would be much greater than that shown.
Nowhere does the Business Case give a figure for the 20-year availability
payment, which the independent assessment estimated to be a minimum of
$85m to $102 m per year (in true 2014 prices).
Note that the transferred risk component of the PSC needs to be included in
the project cost, yet excluded from the PPP Proxy estimate for the contract
cost.

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9.8.3

Other Costs

This paragraph discusses other costs that need to be added to the overall
project cost to the ACT taxpayers, in addition to the contract cost.

9.9.1

Affordability signal

9.9.2

Costs in excess of
affordability;
strategies that
could be adopted.

Table 62

Key Assumptions

In respect of an affordability signal, the Business Case contradicts the ACT

Governments claim that release of such information would prejudice tendering.
The independent assessment refuted the Governments position as a selfservicing fallacy.
Two optional strategies are offered, neither of which would provide a suitable
compromise.
Other more acceptable options would be to either:
to cancel the project, or
to defer the project until after the next ACT election when the current
Government can test its claimed mandate for the project.
Model period is 23 years. There is potential for confusion in estimates base on
20 years versus 33 years.
Costs shown are raw PSC costs from Table 38.
Other assumptions for Consumer Price Index (2.75%), Wage price Index
(3.75%) and Construction Cost index (2.77%) seem about right and are
acceptable for the analysis. However, while paragraph 9.1.4 implies these are
used for PPP Proxy estimates, the Case does not show how.

DEFINITIONS REQUIRED (NO DEFINITIONS OFFERED IN THE BUSINESS CASE)

Term
ownership of the project
[Table 36; p117 of
Business Case
total values
[Table 24 of Business
Case]
Annualisation and
extrapolation
[Table 19 Business Case]
Average Escalation Rate

Base Date Value

Base Date-Business Case

Base Date-independent
assessment
Constant prices

Daily modelled outputs

[Table 19 Business Case]
Life cycle cost
[as used in Business Case]

Net Present Cost (NPC)

[Table 2 of Business Case]
Nominal $m
[used in Business Case]

Definition Query

Source
[otherwise by author]

No definition offered in Business Case.

Who in fact will own the infrastructure during and after the
concession period of 20 years? The ACT Government or the
contractor?
No definition offered in Business Case.
Presumed to be the same as nominal values.

No definition offered in Business Case.

Presumed to be values of daily modelled outputs converted
to annual outputs, by multiplying by 345 for car-related
outputs and 315 for public transport-related outputs.
The Business Case gives a Wage Price Index at 3.75% and
the Construction Cost Index at 2.77%. Assuming a ratio of
60%-40% wages/construction, an average of 3.16% is used
as the escalation rate in the revised, independent
assessment to obtain Base Date Values (BVD).
Future date values discounted to the Base Date by the
assumed Average Escalation Rate.

figures from Table 62 of

Business Case.
Weighting by author.

Not to be confused with

the Present Value (PV)
qv

May 2016 for the Business Case mentioned at paragraph

9.2.5 but no explanation on how used.
2014
No definition offered in Business Case.
All costs and benefits estimated in constant 2014-15 prices
and discounted to the present year.
No definition offered in Business Case.
Presumed to be those outputs (eg boardings, revenue) for
which values are estimated on a daily basis.
No definition offered in Business Case.
Presumed to comprise costs of upgrades to infrastructure
and even purchase of additional trams if necessary, but
excludes costs of routine operations and logistics
(engineering, maintenance and supply).
No definition offered in Business Case.
Presumed to be the total PVs of nominal costs, as
discounted at the given rate.
No definition offered in Business Case.
Costs or revenues to be met or received at a future date.
Same as then year dollars.

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[Table 19 of Business
Case]

Different to normally
accepted definition

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Present Value (PV)
[Table 24 of Business
Case]
Raw cost estimates
Real $m
[Business Case Table 22]
Residual value
[6.2.8.2 of Business Case]

Value driver assumption

[9.3, p132 of Business
Case]
Value of time real
escalation
[Table 19 Business Case]

No definition offered in Business Case.

Future values discounted to a base date at a given discount
rate.
Definition? Nominal less risk and adjustment for competitive
neutrality (para 9.2.2).
No definition offered in Business Case.
discounted net economic benefits of extending the
lifetime of the project beyond the 30 year horizon (note: the
economic analysis period reflects economic analysis
guidelines, not the proposed operating term). This assumes
a continuing stream of project benefits, renewal of the rolling
stock and ongoing operating, maintenance and replacement
costs.

The description given

under 6.2.8.2 is clear
except that it does not
say that it is for 30
years after the initial 30
year period. The
definition implies
forever.

No definition offered in Business Case.

No presumption offered.
No definition offered in Business Case.
Presumed to mean an assumed escalation rate with time of
costs and benefits.
Table 19 sets this at 1%.

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