Issues with Epping-Chatswood in my recent rail construction costs post

You may recall that in my recent post on Calculating rail line construction costs in light of the Eddington report, I compared the projected Eddington costs to empirical data (namely Mandurah and Epping-Chatswood). Well, Greg posted today that these costs have in fact blown out quite substantially. Total cost for the project is now much higher than the figures that I used.

So I had a more detailed look at how much the Epping-Chatswood line is costing, and the results are somewhat more murky. According to the NSW Audit Office, the total cost was originally forecast to be $1.6 billion (in 2000 prices), but these did not include $447 million interest on borrowings. The total final forecast cost of the project was revised upward by another $241 million in July 2006. Total project cost is now in the order of $2.3 billion.

But that doesn’t really answer the question, the $447 million of interest has nothing to do with how much it actually costs to build something if you’re not borrowing money, so we can disregard this. Total cost in current dollars is then $1.97 billion (indexed from 2000 prices to 2007 prices) + $247 million (indexed from 2006 prices to 2007 prices) is about $2.22 billion.

But the issue still isn’t resolved – the cost I estimated was based on information from Thiess – the project’s principal contractor. They were building their part of the project for $860 million (indexed by me to $984 million). My mistake was to assume this was the total project cost – it isn’t. According to the Transport Infrastructure Development Corporation, The Thiess Hochtief Joint Venture (THJV) is responsible for tunnelling, station excavation, and rail systems works; RailCorp is responsible for all rail works associated with the connection of the new line to the CityRail network; and A W Edwards is responsible for the fit-out of the new stations, construction of the station entrances and the urban domain works. I note on Thiess’ webiste, their cost has increased to $980 million – which is nearly exactly the same as my indexation of $984 million (or $78.72 million per km).

The upshot of this is that the per km cost that I worked out was basically accurate – but only if you want to cost tunnel with rail and station shells, but no station fit-out or station construction at the line termini. The problem is that this figure – whilst really good for costing new rail projects – is basically useless for comparison to Eddington because Eddington costs are all inclusive. The all inclusive Epping-Chatswood cost is $177.6 million per km. This is still only 51% of the Eddington cost.

Anyway, I hope that clears a few things up and makes my costs as accurate as possible – thanks for the tip Greg! The revised per km costs are set out in the table below.

Project/Study

Underground rail cost

Surface rail cost

NCCCS

41.14*

4.12*

Eddington

347

42.3#

Mandurah

13.7

Epping-Chatswood (Thiess)

78.72^

Epping-Chatswood (total)

177.6

* does not include stations
# includes land acquisition
^ includes only tunnel, rail and station shell cost

Advertisements

9 Responses

  1. […] The soon to open Epping-Chatswood line in Sydney runs underground for 12.5 km. It cost $860 million to build. Given $860 million figure was not given a year, I’ll assume that it’s in 2002 dollars (the year the project started), giving us a cost of $984 million in 2007 dollars. The per km cost is $78.72 million. However, the Thiess portion of the project only covered tunnelling, rail and station shells. Total project cost was higher – $2.22 billion in 2007 dollars. This gives at total per km cost of $177.6 million. To find out how I calculated these figures, click here. […]

  2. Phin, you’re right, financing costs aren’t part of the project – Perth paid cash for the Mandurah line (they had cash!) and they can’t be used for benchmarking eg if BHP built a new iron ore line, they can’t include financing costs in the project justification because it is up to the Board how they do it (retained earnings, issue more shares, borrow from the market). They all have the same “denominator” ie the weighted average cost of capital (WACC).

    Harder to apply that rigour to public finance but it can be said that it is unlikely that the rail project alone put the state in hock and the financing choice is a political one (taxes, fees, debt, land swaps or whatever).

    But yes, no good if you are left with station shells. The photos of MAcquarie Park I’ve seen look pretty plain so doesn’t look an extravagant job – looks a bit like Airport line stations like Mascot. The days of Melbourne’s Museum with dozens of escalators, stair cases, tiles everywhere, are clearly over.

  3. Have you done your corporate finance Phin?

    Off topic, but I love these paradoxes like why is it, if BHP or a government have hundreds of projects with NPV>0, why they don’t do all of them, if the market for cost of finance is truly perfectly elastic , as microeconomics says it is.

    In reality they are discovering other facets of the project are highly inelastic eg supply of skilled labour, but in theory, if every lump of iron in the ground could be dug up now without affecting the price of iron, and if every share or bond that could be issued to the market were taken up at the current market price (pure elasticity) shouldn’t the board of BHP or the government just go and do it?

    Corporate finance textbooks talk about agency theory and so on, that Divisional managers lie to their Boards, overstate the NPVs to get projects up so their empires get larger, and the Boards have only one blunt tool, rationing of finance to stop them.

    But then microeconomics reaches its limit, because it can’t explain behaviour inside a company. Presumably large firms exist because there is some benefit in pooling finance and investment decision making, which implies that despite the high opportunity cost of NPV>0 projects forgone, shareholders prefer this approach.

    Otherwise you would spin off every little business operation till BHP only operated one digger on one little mine, this being the limit of the manager’s authority to make investment decisions given him by the shareholders.

    Still keeps me thinking…

  4. I suppose to answer my own question – because microeconomics IS wrong, because BHP operates in monopolistic competition, can’t sell every piece of iron without lowering the price, can’t issue more shares or debt for projects of the same risk profile without watering down the companies value, by shareholding or beta, and it competes with itself for labour.

    That leaves the risk profile between projects the only thing for the Board to really manage, maybe with an angle on how can they acquire other businesses by plotting and scheming to pay them less than their value.

  5. Thanks Riccardo. On the issue of station fit-out, I was up in Sydney a few weeks ago and was surprised at how quickly the Airport line stations have grown to look shabby compared to the last time I was there. For all the problems with the loop – you have to give them credit for the quality of the station fit-out, especially Parliament.

    I’ve always managed to avoid finance at university (thank god!), but you make a very good point – if you believe the assumptions of neo-classical economics, everything with a positive NPV would get done. Yet it doesn’t, largely because many assumptions inherent in neo-classical economic theory (like perfect competition, efficient credit markets; and even long run utility/profit maximisation, constant returns to scale etc) just don’t hold up a lot of the time.

    It’s interesting looking at the share market – shares should be worth the discounted rate of return over the life of the company. But they aren’t – over the short to medium term it’s often speculation which has little to do with the inherent value of a company. Shareholders often drive mad behaviour. Look at Ford and GM – they’re basically dead because they didn’t bother to fund their pension and heathcare plans, preferring instead to pay dividends. ExxonMobil – currently making massive amounts of money – is making the same mistake by not funding future liabilities. Keynes got this one basically right I believe.

    cheers,
    Phin

  6. […] hadn’t changed. Moreover, we had some good discussion on the issues here, here, here and here; and Riccardo did a great series of posts on improving capacity on the Pakenham line. Recently […]

  7. […] The soon to open Epping-Chatswood line in Sydney runs underground for 12.5 km. It cost $860 million to build. Given $860 million figure was not given a year, I’ll assume that it’s in 2002 dollars (the year the project started), giving us a cost of $984 million in 2007 dollars. The per km cost is $78.72 million. However, the Thiess portion of the project only covered tunnelling, rail and station shells. Total project cost was higher – $2.22 billion in 2007 dollars. This gives at total per km cost of $177.6 million. To find out how I calculated these figures, click here. […]

  8. Incredible… this is a invaluable websites

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: