Posted 28/11/2022 by Rodney Bogaards
The Australian Government’s largest infrastructure commitment in the October 2022–23 Budget is $2.2 billion for the Suburban Rail Loop (SRL) in Victoria. The October 2022–23 Budget started a budget repair fiscal narrative, which included a focus on increased ‘value for money’. The SRL funding announcement precedes the evaluation of the SRL business case by Infrastructure Australia to recommend whether the project represents value for money and should be placed on the Infrastructure Priority List.
Background to the Suburban Rail Loop
The SRL is a multi-stage infrastructure project announced by the Victorian Government in August 2018. The project aims to build a 90-kilometre rail line connecting major metropolitan train lines from the Frankston line to the Werribee line, through Melbourne Airport, with up to 12 underground stations (Figure 1). The project will establish 3 transport hubs at Clayton, Broadmeadows and Sunshine. These hubs will connect the SRL with regional services so passengers outside Melbourne will not have to travel through the central business district.
The proposal aims to address Melbourne’s urban sprawl and radial transport system by supporting the distribution and growth of housing, employment and other land uses in Melbourne’s middle and outer suburbs. It also aims to enhance access to health, education and other services for regional Victorians.
Source: ‘Suburban Rail Loop’, Suburban Rail Loop Authority, Victoria’s Big Build website, accessed 8 November 2022.
Planning for the loop
Planning and initial works for the project occurred in 2019 and 2020, with construction expected to commence in late 2022. The Victorian Government plans to deliver the SRL in 3 sections over several decades:
- SRL East is the first section, running between Cheltenham and Box Hill
- SRL North is the second section, running between Box Hill and Melbourne Airport
- SRL West is the third section, running between Melbourne Airport and Werribee.
According to the Victorian Parliamentary Budget Office (VPBO), as at 18 August 2022 the Victorian Government had committed $11.8 billion for the SRL. The Australian Government has announced that it will contribute $2.2 billion(Budget measures: budget paper no.2: October 2022–23, p. 160). The project is the largest Australian Government infrastructure commitment in the October 2022–23 Budget. In the Victorian 2022–23 Budget, the Government indicated that it expects SRL East, the first section only, to cost between $30 and $34.5 billion, and expected the first trains to run in 2035 (p. 12).
SRL value for money considerations
The economic appraisal of SRL East and SRL North – components of the SRL to be delivered by 2053 – undertaken by KPMG on behalf of the Victorian Government estimated a net social benefit of between $3 billion and $22.9 billion, and a benefit–cost ratio of between 1.1 and 1.7.
The KPMG analysis has not received wide-ranging support. Criticisms of the economic analysis as well as the decision-making processes that led to the Victorian and Australian Government’s support for the SRL have come from a range of sources. Table 1 provides a short chronology of key commentary on appraisals for the SRL. It is clear that value for money for this project has yet to be demonstrated.
Table 1 Chronology of SRL economic appraisal discussions
| Date |
Commentary |
| September 2022 |
The Victorian Auditor-General’s Office (VAGO) suggested the SRL business case did not support ‘informed investment decisions’ because it only analysed part of the SRL project (SRL East and SRL North) and did not fully meet government evaluation guidelines. VAGO found the business case overstated the benefits because it used a lower ‘discount rate’ of 4% to calculate the current value of future economic benefits rather than the 7% stipulated in government evaluation guidelines.[1] It also went against the evaluation guidance by including ‘wider economic benefits’ (WEBs) in its analysis.[2] The benefit–cost ratio for the project was 0.51 when calculated in line with Treasury guidance material by excluding WEBs and other non-standard benefits and using a discount rate of 7%. This means that for every dollar invested in the SRL the community would only receive benefits of about 50 cents in return. |
| 27 August 2022 |
The VPBO found that using a 7% discount rate, the benefit–cost ratio for SRL East and SRL North (the first two sections of the project) was between 0.6 and 0.7, meaning that for every dollar spent on SRL East and SRL North the community would only see a benefit of between 60 and 70 cents. This means that further investment in SRL East and SRL North is likely to result in a net social cost to the community. |
| July 2022 |
The Grattan Institute criticised Labor’s May 2022 election commitment of $2.2billion for SRL East before it was properly assessed by Infrastructure Australia – the Australian Government’s independent adviser on infrastructure planning and priorities. |
| July 2022 |
The Rail Futures Institute (an independent transport think tank) and other transport experts urged a rethink of the SRL because it would monopolise public transport spending in Victoria for decades and delay other more urgent and beneficial infrastructure. |
| May 2022 |
When responding to Labor’s $2.2billion election commitment, Paul Fletcher, then Minister for Communications, Urban Infrastructure, Cities and the Arts, indicated that the Federal Department of Infrastructure had done a preliminary review of the SRL business case and advised against federal funding for the project, citing concerns such as insufficient risk mitigation, no detailed costs, value capture being unproven and no delivery plan. |
| November 2021 |
Infrastructure Australia received a Stage 1 submission from the Victorian Government related to the SRL proposal. The submission focused only on problem definition as per the process laid out in Infrastructure Australia’s Assessment Framework. This submission did not constitute a detailed case for investment. As a result of that submission, Melbourne middle and outer suburban transport connectivity was added to the Infrastructure Priority List as an ‘early-stage proposal’ in June 2022. Infrastructure Australia is currently engaging with the Suburban Rail Loop Authority (SRLA) as it proceeds with the development of a Stage 2 submission to examine potential investment options before it commences the final Stage 3 submission on the development of a business case. |
| August 2021 |
The Age newspaper reported that the project did not go through the usual Victorian Government decision-making processes. Moreover, according to the Guardian, Infrastructure Victoria did not recommend the project and was not consulted before the Victorian Government’s announcement. |
Value for money in decision making
Following the delivery of the October 2022–23 Budget the Treasurer discussed the SRL funding in an interview with radio station 3AW and indicated this infrastructure investment decision was about getting ‘value for money’ for the Australian community.
While value for money can be subjective and can be measured in many ways, the concept has formed a fundamental part of the October 2022–23 narrative about responsible budgeting. The Government notes that ‘the Budget realigns $6.5 billion of existing funding in infrastructure projects to ensure value for money…’, among other factors (Budget strategy and outlook: budget paper no.1 :October 2022–23, p 20). Similarly, the Minister for Finance noted that, as part of the budget repair strategy, the Government was ‘… not proceeding with the Hells Gates Dam project and deferring [other] projects until business cases are completed and viable pathways to delivery are determined and assessed’.
In addition, the Australian Government has been signalling a more influential role for Infrastructure Australia in the future as it awaits the findings and recommendation of the panel conducting a review of the organisation.
It is difficult to reconcile these sentiments with the decision to commit $2.2 billion to the SRL before Infrastructure Australia has assessed the SRL’s business case.
Some commentators have suggested that there is a need for greater independence in the infrastructure project selection process. For example, former chair of the House of Representatives’ Standing Committee on Infrastructure, Transport and Cities, John Alexander MP, endorsed Reserve Bank Governor Philip Lowe’s proposal that major infrastructure funding be run like monetary policy – at arm’s length from government. Mr Alexander noted in the Sun Herald on 27 March 2022 that ‘Ministers would still need to sign off on projects … but non-partisan experts would be responsible for deciding which major projects deserved funding’.
Similarly, the Grattan Institute has recently recommended, in relation to transport infrastructure, that the government should require a Minister to consider and publish IA’s assessment of a project, including the business case, cost-benefit analysis and ranking on national significance grounds, before approving project funding or making longer-term funding commitments.
[1]. A discount rate is the interest rate used to convert future values of costs and benefits into their present values so they can be meaningfully compared in the same time period, such as the present.
[2]. Wider economic benefits (WEBs) are benefits associated with changes in accessibility or land use that are not captured in traditional cost–benefit analysis. Victorian evaluation guidance from the Treasury and Transport departments say WEBs should be considered separately from primary benefits and excluded from headline cost–benefit analysis results.