4.1 Introduction
The purpose of this assessment is to provide an indication of the commercial feasibility of the case study project. The outputs of this analysis would also inform which types of commercial delivery models have the potential to efficiently deliver the project objectives and to align with the State’s preferred risk allocation for this type of project.
This analysis assumes that either the State or a private investor (or investor group) funds the capital costs and charges users for road access in order to recover those costs. It is further assumed that the project is funded on a standalone basis (i.e. this assessment ignored financing cash flows). The analysis does not consider any cash flows or strategic benefits that may derive from integrating the project with other parts of the wider network.
In order to generate a measurable outcome this assessment is underpinned by a set of assumptions in relation to costs and revenue.
Cost assumptions are sourced from VicRoads. Revenue assumptions were generated by analysing traffic modelling data provided to EY for the region immediately surrounding the project.
We have used that data to construct and analyse a hypothetical scenario whereby the project is tolled and a curfew on commercial vehicles is applied to the local streets in the Yarraville and
Footscray region in order to redirect trucks to the new link or to an alternative route to the north. We then take the analysis a step further by considering the implications of restricting access to private motor vehicles through the delivery of a dedicated freight scenario.
The cost and revenue projections we have developed are for the purpose of this case study scenario and carry a number of limitations. The cash flow model has been developed in good faith and in the belief that the information provided to us was not false or misleading. We have relied upon the inputs and assumptions provided to us. We have not audited or reviewed any of the inputs or assumptions provided to us. Accordingly, we express no opinion as to the accuracy, adequacy, completeness or reasonableness of the assumptions upon which the model is based. We note that it is usually the case that some events and circumstances do not occur as expected or are not anticipated.
Therefore, actual results will almost always differ from the forecasts and such differences may be material.
4.2 Revenue assumptions 4.2.1 Introduction
The case study project includes the provision of a series of network improvements and other measures aimed at reducing the number of freight vehicles on residential streets in Yarraville in the inner west of Melbourne.
The traffic modelling and benefits analysis concluded that the project would benefit both private and commercial vehicles through travel time and vehicle operating cost savings.
On that basis, the analysis assumes that to recover some (if not all) of the capital expenditure and operating costs incurred, the users of the new link (i.e. private and commercial vehicles) will be charged. This section describes the revenue assumptions we have applied.
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A study of the potential for dedicated freight infrastructure in Australia Ernst & Young ÷ 104
4.2.2 Curfew assumption
The project route is designed to remove trucks from Yarraville and Footscray. Previous work by VicRoads nominated the extension of the current truck curfew in the inner west to maximise the utilisation of the new route by commercial vehicles (i.e. so that the curfews apply at all times of the day and apply to all heavy vehicles).
The current truck curfew arrangements in Yarraville are as follows:129
► Francis Street: 8PM to 6AM – Monday to Saturday, 1PM to 6AM – Saturday to Monday
► Hyde Street: 24 hours a day, 7 days a week
► Somerville Road (Geelong Road to Hyde Street): 8PM to 6AM – Monday to Saturday, 1PM to 6AM – Saturday to Monday
In line with the previous work by VicRoads, we have assumed that these curfews would be extended across the whole day in order to test the financial viability of the case study project.
4.2.2.1 Curfew impact Inbound traffic
Inbound traffic refers to vehicles coming from the west and entering the project route via a ramp coming off the West Gate Freeway and driving towards the PoM precinct.
It is assumed that given the project objectives, the curfew would only apply to non-local commercial vehicles. As such a residual number of trucks will still be circulating on Francis Street and Somerville Road (and other local roads) to service local businesses’ needs.
On that basis the inbound traffic assumed in this financial assessment is based on the traffic modelling for the new link (i.e. without a curfew being applied) plus a proportion of the truck traffic that model predicts would remain on routes such as Francis Street and Somerville Road.
Table 20 presents the estimated impact that the Curfew would have on inbound traffic volumes on the new link during the morning peak (7-9 AM). Our assumptions in relation to expansion of demand from peak to daily and annual estimates are based on car factors used in recent projects. We
acknowledge that freight movements are different from private vehicle movements and require the development of unique demand expansion factors. However, for the purpose of this assessment, we think that the factors that we have applied provide a sufficient daily and annual traffic profile.
129 VicRoads, http://www.vicroads.vic.gov.au/Home/Moreinfoandservices/HeavyVehicles/RouteInformation/TruckCurfews.htm
Australian Government Department of Infrastructure and Regional Development Table 20: Traffic curfew impacts – inbound (AM peak)
2021 2031
Private cars Trucks Private cars Trucks Note
Project traffic (without
curfew) 505 254 489 365 1
Additional vehicles due to curfew
421 528
Project traffic (with
curfew) 505 675 489 893
Daily project traffic 3,467 4,636 3,358 6,132 3
Source: EY calculations and assumptions and Traffic modelling 1. Based on the traffic modelling data received from VicRoads
2. It is assumed that 75% of the commercial vehicles joining Whitehall St from Francis St and Somerville Rd in the project case will be directed to use the new link due to the curfew, with the remaining commercial vehicles seeking alternative routes.
3. The traffic modelling data is assumed to reflect the two-hour morning peak. This figure has been multiplied by 6.87 to estimate the total daily traffic. The daily traffic has been multiplied by 345 to estimate the total annual traffic on the new route (source: NSW appraisal guidelines).
Outbound traffic
Outbound traffic refers to vehicles coming from the Port of Melbourne precinct and heading west using the new route to reach the West Gate Freeway via a ramp coming off Hyde Street.
In line with the inbound traffic, the financial assessment is based on forecast traffic modelling for the new route in 2021 and includes a proportion of the traffic currently forecast to use Somerville Road and Francis Street to reflect the curfew applied to non-local commercial vehicles circulating in this area.
The table below presents the estimated impact that the Curfew would have on outbound traffic volumes on the new link.
Table 21: Traffic curfew impacts – outbound (AM peak)
2021 2031
Private cars Trucks Private cars Trucks Note
Project traffic (without
Daily project traffic 9,414 5,693 8,325 6,221 3
Source: EY calculations and assumptions and Traffic modelling 1. Based on the traffic modelling data received from VicRoads
2. It is assumed that 75% of the commercial vehicles joining Whitehall St from Francis St and Somerville Rd in the project case will be directed to use the new link due to the curfew, with the remaining commercial vehicles seeking alternative routes.
3. The traffic modelling data is assumed to reflect the two-hour morning peak. This figure has been multiplied by 6.87 to estimate the total daily traffic. The daily traffic has been multiplied by 345 to estimate the total annual traffic on the new route (source: NSW appraisal guidelines).
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Summary
The enforcement of a curfew has the potential to direct a significant amount of commercial traffic onto the new link.
In the AM peak in 2021, the curfew would add around 420 trucks inbound and around 168 trucks outbound. In 2031, an additional 528 inbound trucks and 156 outbound trucks are estimated.
This new level of traffic represents the potential market for the new link. The next section considers the level of tolls that could be applied for private and commercial vehicles.
4.2.3 Tolling assumptions
The project provides improved truck access between the west and the PoM, providing scope for growing freight vehicles to access the Port from the west 24 hours a day. Chapter 3 showed how these benefits would translate into travel time savings and reduction in operating costs for freight operators and private vehicle owners.
Reflecting the benefits flowing to the users of the project, it is assumed that a toll could be charged to recover some (if not all) of the capital expenditure and operating costs incurred.
An important consideration in relation to travel time savings and users’ willingness to pay to achieve them is the relativity of the travel time saving to the overall journey time. In the context of a longer trip, a given time saving is less significant than on a shorter trip. Also on a longer trip, small fluctuations in the reliability of travel time are more easily managed.
A hypothetical toll tipping point value has been calculated based on the time savings achieved on the project link compared to the best free alternative route.
The table below presents the estimated cost saving (both in time and distance) the project would generate for commercial motorists. In accordance with industry guidance, an estimated value has been applied both to time and distance savings in order to compare the cost of travel using the project and the best free alternative route.
Based on this comparison, the hypothetical maximum toll value would be around $5.50 for commercial vehicles. Due to the uncertainties in estimating accurate marginal toll levels, we have taken the conservative approach of assuming a toll of $5.00 for commercial vehicles.
Australian Government Department of Infrastructure and Regional Development Table 22: Tolling assumptions
Commercial
Project route Alternative Route^
Peak hour travel time^^(minutes) 15 26
Distance (kms)^^ 8.1 8.0
Estimated value of time per min* ($, 2010) $0.45 $0.45
Estimated value of time per min** ($, 2013) $0.50 $0.50
Total $7.55 $13.08
Difference $5.54
Source: EY calculations and estimates
^Alternate route utilising Millers Rd and Geelong Road
^^ Assumptions based on free flow conditions
* Source: “Guide to Project Evaluation – Part 4”, Austroads Report, 2012. A lower end average value of freight time (i.e. for a 4 axle-articulated truck) has been used (Table 3.4, page 21) $27.09/hour as of June 2010
**Source: June 2010 value indexed to March 2013 using PPI index as per Australian Bureau of Statistics website. Series ID A2314058K
At a tolling level of $5.00 for commercial vehicles, it is assumed commercial motorists would prefer to use the project instead of diverting onto alternate routes such as Millers Road and Geelong Road.
While the project is intended to be of greater benefit for commercial vehicles, it is anticipated that private vehicles will also use this route to avoid congestion and enjoy reduced travel times. In order to manage the influx of private vehicles onto the new route a toll charge of $1.00 per trip has been included in this assessment. At this price level, it is estimated that 95% of modelled traffic volumes would use the route. A simple sense-check that assumes an average car journey saves around 5 minutes, which equates to around $1.20 in average user value of time, confirms that this toll level and assumed level of reduction is reasonable.130
4.2.4 Traffic volume assumptions
The table below reflects the annual traffic volumes on the project link based on the combined curfew and tolling scenarios. The annual growth rate applied is consistent with the profile implied by the 2021 and 2031 traffic modelling results.
Table 23: Assumed project use – Combined curfew and tolling scenarios Assumed project use FY17 traffic Compound Annual
Growth* FY21 traffic FY31 Traffic
Private inbound traffic 1,150,889 -0.3% 1,136,323 1,100,710
Private outbound traffic 3,240,909 -1.2% 3,085,453 2,728,660
Commercial inbound traffic 1,429,994 2.8% 1,599,288 2,115,473
Commercial outbound traffic 1,898,671 0.9% 1,964,201 2,146,202
Source: EY Calculations and estimates
* Based on FY21 and FY31 traffic modelling data.
130 Value of time source: “Guide to Project Evaluation – Part 4”, Austroads Report, 2012. $13.17/hour as of June 2010
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4.3 General assumptions
The following additional assumptions underpin the estimated revenue and cost forecast:
► All revenue and cost estimates have been escalated for inflation by 2.5% per annum
► Construction period will start in FY14 and end in FY16. Operation period will start in FY17 and last 25 years
► Toll collection costs are equivalent to a flat rate of 10% of revenue collected
► The standard discount rate of 7% (real) has been applied, which equates to 9.50% (nominal)
► In calculating the Net Present Value (NPV) of the options, all future cash flows have been discounted back to 30 June 2013.
4.4 Summary of findings 4.4.1 Baseline scenario
The financial assessment shows that although the project will generate a wide range of economic benefits, the level of cost recoverability is likely to be limited.
Under the curfew and tolling scenario, the project would make an operating profit. However, this will not be substantial enough over the 25 year operating life to repay the initial investment and earn a positive NPV.
The two drivers limiting the financial viability of the project are:
► The high capital cost of the project ($449m in nominal terms)
► The expected traffic volumes on the new link, which is estimated to be approximately eight million private and commercial vehicles in its first year of operation, does not result in sufficient revenues to recover the initial up-front capital investment.
The table below presents the financial impacts of constructing the case study project and implementing the curfew and the tolling scenario:
Table 24: Financial impact under the Curfew and Tolling Scenario
FY13 dollars (millions) NPV Real Nominal
Revenue 229 947
Operating costs (36) (140)
Operating surplus 193 808
Capital expenditure (372) (449)
Financial impact (179) 359
Source: EY Calculations
4.4.2 Cost recovery under a prioritised freight scenario
This section takes the analysis a step further by considering the implications of implementing a priority freight scenario.
Given the scenario outlined above already performs poorly from a cost recovery perspective, any measures to restrict access to private motor vehicles and limit cost recovery from those users would further undermine the cost effectiveness of the project. Also, Chapter 3 showed that the
performance of the link would be good when access is provided to both cars and trucks, which means
Australian Government Department of Infrastructure and Regional Development
that preventing cars from using the link would provide little upside in user benefits for heavy vehicles.
The table below presents the financial impacts of constructing the case study project and
implementing the priority freight scenario. This confirms the poor scope for cost recovery for the project to be provided as a dedicated freight link.
Table 25: Financial impact under the Curfew and Tolling Scenario
FY13 dollars (millions) NPV Real Nominal
Revenue 190 801
Operating costs (36) (140)
Operating surplus 154 662
Capital expenditure (372) (449)
Financial impact (219) 213
Source: EY Calculations
4.4.3 Other sensitivity analysis
This section looks at specific scenarios and sensitivity analysis to support the financial analysis.
4.4.3.1 Indicative breakeven analysis – toll pricing
A key driver in the commercial viability of the project is the revenue generation from tolling. To assess this, a breakeven analysis has been conducted that indicates the degree to which tolls would need to be adjusted beyond the assumed baseline level linked to the analysis of the tolling tipping point. In this test we have used a simplified scenario where the change in toll level does not affect traffic levels. Table 26 presents these results and shows that commercial vehicle tolls will need to more than doubled or private vehicle tolls be increased tenfold in order to reach breakeven based on the current traffic volume forecast. In reality, the toll increases would need to be much higher once the likely reduction in traffic is also taken into account.131
Table 26: Breakeven tolling analysis
FY13 dollars (millions) Commercial toll Private toll NPV $
Assumed toll 5.00 1.00 (179)
Breakeven point (on a standalone basis) 10.76 - 0
Breakeven point (on a standalone basis) - 10.41 0
% impact 215% 1041%
Source: EY calculations
While this analysis provides an interesting perspective on what would be required to achieve full cost recovery from either user group, the tolls levels are unrealistically high and, if implemented, would be expected to result in significant diversion and under-utilisation of the new link.
However, if there was evidence that freight values of time were significantly higher (i.e. up to double the current estimate as referenced by the national guidelines), then these higher toll levels might be feasible.
131 The breakeven analysis has been conducted on a standalone basis i.e. an increase in commercial vehicle tolls only and an increase in private vehicle tolls only.
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4.4.3.2 General sensitivity analysis
The following table presents a standard range of sensitivities of the financial analysis based on a number of operating variables that may impact the project.
It shows that NPV remains negative under all scenarios and that the results are also sensitive to variations in capital cost of the project and forecast demand.
Table 27: Sensitivity analysis
Sensitivity scenarios NPV $ (millions)
Current NPV (179)
Opex + 10% (183)
Opex - 10% (176)
Capex +10% (217)
Capex -10% (142)
Demand +10% (156)
Demand -10% (202)
Source: EY Calculations
4.4.4 Key findings
The outcome of this assessment suggests that the project would not generate sufficient revenue from tolling to recover capital expenditure on a NPV basis. This problem would be exacerbated should the project be delivered as a priority freight link. As we showed in Chapter 3, doing this would also undermine the wider public benefits of the project by diverting traffic back onto the streets of Yarraville, making it difficult to justify a subsidy from Government to fund the project.
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