Channel Deepening S-EES
Department of Sustainability and Environment
Planning Panels Victoria
8 Nicholson Street
East Melbourne, Vic. 3002

May 6, 2007
Dear Chairperson,

Channel Deepening Project – Submission to Panel Hearing

    I wish to make the following submission to the SEES Panel Hearing.
I also wish to speak at the Panel Hearing.

  My submission relates to Chapter 16 ‘Benefit-cost analysis and economic impact assessment’.   This chapter ‘considers the economic aspects of the project from an analytical perspective’.

The second and third paragraphs read (page 16-2):
   ‘A benefit-cost analysis(BCA) shows that the project can be expected to generate benefits of $1936 million over the appraisal period (to 2035) in present value terms. The costs of the project both to PoMC and others) are estimated to be $590 million in present value terms. This excludes expenditure up until the end of 2006 and fuel excise payments requires, The benefits of the project exceed its costs by $1346 million.’
   ‘ With a benefit/cost ratio of 3.3, the project surpasses the normal threshold economic criteria for the assessment of infrastructure projects.  Further, the analysis shows that this conclusion is robust over a wide range of assumptions for key project parameters.’

A ‘benefit-cost’ analysis is not a cost-benefit analysis  

    I wish to draw attention to the fact that the ‘benefit-cost analysis’ which has been undertaken is not the same thing as a full cost-benefit analysis. The two processes give very different results.
    With a cost-benefit analysis of a project, the costs of the project are set against the net benefits which accrue from the project to derive the real overall net benefit or loss.
   With a benefit-cost analysis, the costs of the project are set against the gross benefits (ie before relevant costs are deducted) to derive a ‘benefit/cost ratio’.
    Table 16-14 (page 16-37) shows that the figure of $1936 million, used to produce the benefit/cost ratio of 3.3, represents gross benefits, not net benefits (viz. 1936 divided by 590 equals 3.28).  If the estimate of net benefit (as shown in Table 16-14) were used, the benefit-cost ratio would be 2.1.

The choice of a ‘benefit-cost’ analysis, together with a ‘benefit/cost ratio’, rather than a standard full cost-benefit analysis is highly significant. It indicates that the economic case for the CDP is dubious, to say the least. It leads to the suspicion that a deliberate attempt has been made to mislead the public into thinking that the two processes are the same.

What is the real benefit to Victoria? 
  The net benefit from a project is the difference between the benefits the project confers on the community, and the costs incurred locally to produce it.
   In the case of the CDP, the community is the State of Victoria, and the financial and environmental costs of the project are to be borne by the taxpayers of Victoria.
   Regarding costs, what is the justification for ‘excluding costs up and until the end of 2006 and fuel excise payments’ (page 16-2)?
   Table 16-14 shows the distribution of the benefits of the project.  Of the total gross benefits of $1936 million, the only Victorian beneficiaries specifically identified are’ Victorian importers/exporters’, having a gross benefit of $658 million, only 34% of the total.
   The benefit/cost ratio for these Victorian beneficiaries is therefore 1.1, (using the same method used to generate the overall 3.3 figure).
On page 16-32 it is stated that:
Once the project is completed, the reduction in freight costs (assuming competition results in a pass through of savings by shippers) will boost the incomes of Victorian importers and exporters. When this increased income is spent, it will boost the demand for other goods and services in Victoria and provide an ongoing stimulus to the state economy.

  This presumeably is the basis for estimating that the benefit/cost ratio for ‘Victorian interests’ is 1.9 (Table 16-15), not 1.1 (using Table 16-14).

    However, this estimate relies on the shippers passing on their savings, and the Victorian exporting and importing firms spending this on Victorian goods and services.  Why should any of this actually happen?  For example, the shippers may want to use their savings to help pay for new even deeper draft vessels, and the increased profits of the Victorian firms might go to overseas or interstate shareholders.

    The economic case as presented in the SEES statement is totally unconvincing.   Before the project proceeds, there should be a new economic evaluation, in the form of a full cost-benefit analysis, conducted by independent economists nominated not by the proponents of the project, but by the Victorian Auditor-General’s Office.  An important aspect to be considered is the estimation of economic impact and its translation into increase in GDP/GSP. The choice of methodology (eg,  an outdated input-output model) and the selection of economic multipliers can easily create gross exaggeration of the estimate.

Yours truly

Peter Goad

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