ARTC Melbourne-Brisbane Inland Rail Alignment Study

Transcription

1 Melbourne-Brisbane Inland Rail Alignment Study Stage 1 Working Paper No. 5 Financial and Economic Assessment and Identification of the Route for Further Analysis

2 ATRC Contents Page Number Acronyms...ii 1. Introduction Background to Melbourne-Brisbane Inland Rail Study objectives, stages and working papers Roles of the Lead Technical Consultant and Financial and Economic Consultant Role of Working Paper No Performance specification Outcomes of Working Paper No. 1 demand analysis and method Outcomes of Working Papers Nos. 2-4 capital and operating costs Working Papers Nos. 2 and Working Paper No Potential demand for high speed inland rail The higher speed/courier train concept Potential demand on a minimum upgrade inland railway Border railway Issues driving the optimal timing of an inland route and scope to add coastal route capacity Preliminary performance specification Methodology and assumptions Financial analysis approach Key assumptions Financial appraisal scenarios Operator and ownership scenarios/assumptions Preliminary private sector assumptions Economic analysis approach Employment generation, regional benefits and wider economic benefits Economic appraisal Base Case and scenarios Incorporation of demand forecasting Economic benefits Optimal alignment Route through northern Victoria and southern NSW Optimal inland route on approach to Brisbane Optimal inland route in central NSW Optimal inland route Financial and economic assessment Scenarios included in appraisal ACCC regulation of maximum access prices Key findings and results Financial results Economic results Results alternative demand scenario Route identified for further analysis in Stage Areas of further analysis in stages 2 and 3 47

3 ATRC Contents (continued) Page Number List of tables Table 4 Working papers 3 Table 5 Melbourne-Brisbane (and backhaul) forecast tonnes (intercapital freight, Central Case) 5 Table 6 Inland rail performance specifications 13 Table 7 Key financial appraisal assumptions 14 Table 8 Additional financial appraisal assumptions 15 Table 9 Key economic appraisal assumptions 18 Table 10 Southern route options comparative table 28 Table 11 Brisbane approach route options comparative table 31 Table 12 Inland route options 35 Table 13 proposed capital spend on the North-South Corridor (coastal route) 36 Table 14 Assumptions for specific scenarios 37 Table 15 Indicative maximum regulated revenue limits by capital scenario 38 Table 16 Financial present value analysis by scenario ($ millions) 39 Table 17 Financial results: average annual cash flow by scenario ($ million) 41 Table 18 Financial present value analysis (equity investor perspective) ($ millions) 41 Table 19 Sensitivity analysis: demand and capital cost ($ million) 42 Table 20 Sensitivity analysis: capital costs and discount rate/wacc ($ million) 42 Table 21 Summary of economic appraisal results (incremental to the Base Case) ($ million) 43 Table 22 Economic: breakdown of economic costs and benefits by route (incremental to Base Case) 44 Table 23 Appraisal results with demand ($ millions) 45 Table 24 Financial present value analysis with demand ($ millions) 46 List of figures Figure 2 Map of the far western sub-corridor 1 Figure 3 Potential northern Victoria and southern NSW routes 25 Figure 4 Potential routes on approach to Brisbane 30 Figure 5 Potential routes through central NSW 32 Figure 6 Inland route options 34 Figure 7 Inland rail route identified for Stage 2 analysis 47 List of appendices Appendix A Glossary Appendix B Stakeholders consulted Appendix C Bibliography and reference list Appendix D Additional information on economic parameters Appendix E Technical Analysis of the Route Options

4 Disclaimer This report has been prepared by PricewaterhouseCoopers (PwC) at the request of the Australian Rail Track Corporation (), provide economic and financial analysis of the inland rail project. The information, statements, statistics and commentary (together the Information ) contained in this report have been prepared by PwC from material provided by the, and from other industry data from sources external to. PwC may at its absolute discretion, but without being under any obligation to do so, update, amend or supplement this document. PwC does not express an opinion as to the accuracy or completeness of the information provided, the assumptions made by the parties that provided the information or any conclusions reached by those parties. PwC disclaims any and all liability arising from actions taken in response to this report. PwC disclaims any and all liability for any investment or strategic decisions made as a consequence of information contained in this report. PwC, its employees and any persons associated with the preparation of the enclosed documents are in no way responsible for any errors or omissions in the enclosed document resulting from any inaccuracy, mis-description or incompleteness of the information provided or from assumptions made or opinions reached by the parties that provided Information. PwC has based this report on information received or obtained, on the basis that such information is accurate and, where it is represented by as such, complete. The Information contained in this report has not been subject to an Audit. The information must not be copied, reproduced, distributed, or used, in whole or in part, for any purpose other than detailed in our Consultant Agreement without the written permission of the and PwC. Comments and queries can be directed to: Scott Lennon Partner PricewaterhouseCoopers Ph: scott.lennon@au.pwc.com Melbourne Brisbane Inland Rail Alignment Study Working Paper No. 5: Stage 1 Financial and Economic Page i

5 Acronyms ABS ADO AFT ATC ATEC ATSB BAH BCR BITRE BOOT BTE BTRE BCA CCM CPI DBFM DoT DITRDLG EIS ESA EIRR FBIRA FEC GATR GDP GFC GST gtk hr IA IRR kg km km/h L LTC MJ mm mt NPV Australian Bureau of Statistics Automotive Diesel Oil Australian Freight Terminals Australian Rail Track Corporation Australian Transport Council Australian Transport and Energy Corridor Pty Ltd Australian Transport Safety Bureau Booz Allen Hamilton Benefit cost ratio Bureau of Infrastructure, Transport and Regional Economics Build, Own, Operate, Transfer Bureau of Transport Economics Bureau of Transport and Regional Economics Cost Benefit Appraisal Capital Cost Model Consumer Price Index Design Build Finance Maintain Department of Transport, Victoria Department of Infrastructure, Transport, Regional Development and Local Government Environmental Impact Statement Equivalent Standard Axle Economic internal rate of return Food Bowl Inland Rail Alliance Financial and Economic Consultant Great Australian Trunk Rail Gross domestic product Global Financial Crisis Goods and Services Tax Gross tonne kilometre hour Infrastructure Australia Internal Rate of Return kilogram kilometres kilometres per hour Litre Lead technical consultant MegaJoule millimetres million tonnes Net present value A-ii

6 NPVI NSW ntk p.a. PB PwC PV Qld QR RBA RoA RTA SBR SKM SNP SPV SSFL TEU t hrs t pa VOC WP Net present value: investment ratio New South Wales Net tonne kilometre per annum Parsons Brinckerhoff PricewaterhouseCoopers Present value Queensland Queensland Rail Reserve Bank of Australia Return on Assets Roads and Traffic Authority of NSW Surat Basin Railway Sinclair Knight Mertz Short North Project Special Purpose Vehicle Southern Sydney Freight Line Twenty-foot equivalent unit Tonne hours Tonnes per annum Vehicle operating cost Working paper A-iii

7 1. Introduction In March 2008, the Australian Government announced that the Australian Rail Track Corporation () had been asked to conduct the Melbourne-Brisbane Inland Rail Alignment Study. The announcement stated that in developing a detailed route alignment, the would generally follow the far western sub-corridor identified by the previous North-South Rail Corridor Study and shown on the map. This study, completed in June 2006, established the broad parameters for a potential future inland rail corridor between Melbourne and Brisbane. A map of the far western sub-corridor is provided below. Figure 1 Map of the far western sub-corridor Source: LTC A-1

8 1.1 Background to Melbourne-Brisbane Inland Rail th The railways of NSW, Victoria and Queensland date from the 19 century. They were constructed using different gauges and developed for different purposes. At present, the only north-south rail corridor in eastern Australia runs through Sydney. North of Sydney the railway runs fairly close to the coast. For that reason, the existing Melbourne-Brisbane line is referred to as the coastal route throughout this working paper. In September 2005, the Australian Government commissioned the North-South Rail Corridor Study, which undertook a high level analysis of the various corridors and routes which had been proposed for an inland rail alignment to provide an additional rail line to move freight 1 from Melbourne to Brisbane by rail. The Financial and Economic Consultant (FEC) has had the benefit of reviewing this and a range of prior studies on inland railway proposals and these are listed in a bibliography in Appendix 2. In announcing the Melbourne-Brisbane Inland Rail Alignment Study, the Minister for Infrastructure, Transport, Regional Development and Local Government requested a customer-focused and consultative study involving discussions with state governments, 2 industry, local government and major rail customers. 1.2 Study objectives, stages and working papers The objectives of the Melbourne-Brisbane Inland Rail Alignment Study (the study) are to determine: the optimum alignment of the inland railway, taking into account user requirements and the economic, engineering, statutory planning and environmental constraints. The alignment will be sufficiently proven up so it can be quickly taken through the statutory planning and approval process and into the detailed engineering design and construction, should a decision be taken to proceed; the likely order of construction costs +/-20% the likely order of below rail (infrastructure) operating and maintenance costs; above rail operational benefits; the level and degree of certainty of market take up of the alignment; a project development and delivery timetable; and a basis for evaluating the level of private sector support for the project. The study is being carried out in three stages, as follows: Stage 1 Identification of the Route for Further Analysis; Stage 2 Engineering, Environmental and Land Base Analysis; and Stage 3 Development of the Preferred Route. The majority of the Study s activities are being undertaken by two consultants, a Lead Technical Consultant and a Financial and Economic Consultant, whose activities are coordinated by. These consultants have responsibility for specific working papers, which are produced as in each stage of the study to document progress. 1 Ernst & Young 2006, North South Rail Corridor Study, Executive Report, Commissioned by the Department of Transport and Regional Services, p 9 2 Albanese, A. (Minister for Infrastructure, Transport, Regional Development and Local Government) 2008, Media Release: Inland rail Alignment Study Underway, 28 March 2008 A-2

9 A list of the planned working papers and the consultant holding primary responsibility for each paper is shown below. Table 1 Working papers Stage Working Paper Lead Responsibility Stage 1 WP1 Demand and Volume Analysis FEC WP2 Review of Route Options LTC WP3 Capital Works Costings LTC WP4 Preliminary Operating and Maintenance Cost Analysis LTC WP5 Financial and Economic Assessment and Identification of the Route for Further Analysis FEC WP6 Design Standards LTC WP7 Preliminary Environmental Assessment LTC WP8 Preliminary Land Assessment LTC WP9 Engineering Data Collection LTC WP10 Development of Alignment Options LTC WP11 Capital Works Costings LTC WP12 Economic and Financial Analysis and Confirmation of the Preferred Route FEC WP13 Preferred Alignments Environmental Assessment LTC WP14 Preferred Alignments Land Assessment LTC WP15 Refinement of Preferred Alignments LTC WP16 Capital Works Costing LTC WP17 Delivery Program LTC WP18 Economic and Financial Assessment FEC WP19 Policy Issues, Options and Delivery Strategies FEC Stage 2 Stage 3 Note: FEC and LTC relate to the Financial and Economic Consultant and Lead Technical Consultant respectively Roles of the Lead Technical Consultant and Financial and Economic Consultant The study s activities are headed by two lead consultants whose activities are coordinated by. The LTC is responsible for engineering and environmental work and associated activities, including railway operational analysis. The FEC is responsible for financial and economic analysis. The two consultants work jointly and collaboratively with each other. The LTC is Parsons Brinckerhoff (PB) and the FEC is PricewaterhouseCoopers (PwC). Each consultant acts independently and each has a lead responsibility for specific working papers. Whilst this occurs the other consultant plays a support role for that particular working paper. PB has engaged Halcrow to support it in alignment development, operations and maintenance costing and Connell Wagner to support it in engineering and alignment development. Connell Wagner has in turn engaged Currie and Brown to assist in capital costing. A-3

10 PwC has engaged ACIL Tasman to undertake volume and demand analysis and support it in economic review, and SAHA for peer review. 1.3 Role of Working Paper No. 5 The purpose of Working Paper No. 5 as defined in the scope for the Financial and Economic Consultant is to provide an: economic and financial analysis and identification of the preferred route, to determine the route that generates the maximum economic benefit. This step would evaluate the Albury and Shepparton routes to eliminate one option. In addition, this paper will evaluate the Toowoomba and Warwick options and identity a route for further analysis, based on seeking to maximise economic benefits. PwC, the FEC, has engaged ACIL Tasman to undertake volume and demand analysis and support it in economic review, and SAHA for peer review. The methodology behind this paper comprises: performance specification drawing from WP1 and preliminary outputs from WP2-4 to develop an outcome focused above and below rail performance specification for inland rail. This is required as the specification drives demand as well as financial and economic assumptions; optimal alignment the proposed inland railway would take advantage of existing rail lines in the far western sub-corridor and would require a new route from a point north of Moree to near Brisbane; a number of route and alignment options including upgrades or deviations to existing route sections have been generated by various parties in the past; financial assessment undertaking financial assessment on a below rail basis assuming it will be owned and operated by a private, commercial entity, to enable evaluation of the financial viability of inland rail under a range of operation start dates (i.e. 2020, 2030 and 2040); and economic assessment undertaking a rail freight user economic appraisal to capture benefits for rail and road users, as well as third parties (e.g. due to external environmental costs) to assess the net economic benefits of inland rail under the same three start date options. A-4

11 2. Performance specification 2.1 Outcomes of Working Paper No. 1 demand analysis and method Working Paper No. 1 was prepared by ACIL Tasman, and provides preliminary estimates and commentary on total freight on the Melbourne Brisbane corridor. The paper looks at total freight carried in the corridor by road and rail, and freight with and without an inland rail route. These preliminary estimates were developed as background to route selection and as an input to the economic and financial analysis. Based on an assessment of the current freight market by origin, destination and commodity, and forecasts of external drivers of demand such as gross domestic product (GDP), fuel prices and labour prices, ACIL Tasman undertook a survey, based on a questionnaire and interviews with key freight companies and customers to understand how modal choices are made. Then, incorporating assumptions for expected future journey time reliability and capacity of the current rail route and potential inland route, a logit model to estimate future mode shares was developed to estimated future rail tonnages with and without an inland route. Additional analysis was undertaken of coal, grain and other regional freight. The demand forecasts are based on a range of assumptions regarding commodity forecasts, GDP and contestable sections of the market. In addition, key assumptions in the logit model relate to forecasts of relative price, reliability, availability and transit time, specifically: transit time transit time for inland rail will be dependent on final route chosen; however, initially a door-to-door time of 30¾ hours inland and 33 hours coastal has been assumed in the demand forecasts (including a total of 5 hours of pickup and delivery time); availability linked to transit time the availability of the service to meet customer needs. If transit time is reduced by one hour, for example, cut off time can be put back an hour, hence additional freight can be contested since more availability-sensitive freight could now be served by rail; reliability (the percentage of goods available at the terminal when promised to the customer) inland rail reliability is assumed to be 15 percentage points higher than that of coastal, although still not equal to road reliability; and price price was measured in dollars per tonne door-to-door, and was based on a SKM price survey commissioned by the. The resulting market share for intercapital freight estimated by ACIL Tasman and broken down by commodity is shown in the table below. Table 2 Melbourne-Brisbane (and backhaul) forecast tonnes (intercapital freight, Central Case) Thousand tonnes Year Non-bulk 5,442 6,386 8,754 11,825 15,860 21,143 28,049 37, ,123 3,068 4,445 6,450 9,365 13,584 Coastal 1,673 1,711 1,314 1,898 2,750 3,990 5,793 8,402 Road 3,769 4,304 5,318 6,858 8,665 10,703 12,891 15, ,023 1,199 1,390 Inland Agricultural products A-5

12 Thousand tonnes Year Inland Coastal Road ,167 1,346 Steel , ,285 7,313 9,869 13,159 17,454 23,039 30,295 39, ,384 3,381 4,819 6,900 9,905 14,234 Coastal 2,068 2,090 1,574 2,210 3,123 4,438 6,331 9,049 Road 4,217 4,798 5,911 7,569 9,511 11,702 14,058 16,438 10,808 12,566 16,934 22,631 30,102 39,874 52,646 69, ,250 6,027 8,593 12,302 17,661 25,379 Coastal 3,850 3,892 2,930 4,115 5,816 8,264 11,789 16,849 Road 6,959 7,916 9,753 12,489 15,693 19,308 23,196 27,123 Inland Coastal Road Other bulk Inland Coastal Road Grand Total (thousand tonnes) Inland Grand Total (million ntk) Inland Source: ACIL Tasman modal share model, cited in Table 15, WP1 In addition to the intercapital city freight above, ACIL Tasman also found that an inland railway would induce substantial quantities of coal freight over relatively short distances, divert up to 1 million tonnes (mt) a year of grain from other rail routes and road onto parts of the inland railway, and attract 1 mt a year of regional freight and freight from outside the corridor. The present intercapital rail mode share between Melbourne and Brisbane (averaging the two directions) varies between 20-22% for non-bulk, to 60-90% for the various bulk commodities, about 24% overall, by tonnes. In the preliminary WP1 findings, it is forecast in the Central Case, to become 34% once the inland route is assumed to be open in 2020, rising slowly to 45% by 2050 as the fuel, labour and other assumptions continue to exert influence. On the base assumptions the inland/coastal split would be about even, with the inland route taking more of the non-bulk freight and the coastal route taking more bulk freight such as steel. Overall Melbourne-Brisbane tonnage would be 7.0 mt in 2020 and 12.8 mt in 2040, with inland rail capturing 0.4 mt in 2020 (the first year of operation) and 3.4 mt in Source: ACIL Tasman modal share model, cited page vii, Working Paper No. 1 A-6

13 In February 2009, SAHA International conducted a peer review of WP1. One of the main issues identified by SAHA is the diminishing reliability of forecasts which extend over 70 years. The extent to which this issue impacts the results will be tested in Stage 2 by capping tonnages at 2040 levels as a sensitivity test or within core results. Overall, developing the most accurate possible understanding of likely inland rail demand is critical to assessing both financial and economic viability. The preliminary demand forecast developed above is further discussed and analysed in Section 5 of WP5, and will be focus of additional work in Stage Outcomes of Working Papers Nos. 2-4 capital and operating costs The LTC developed the three working papers after WP Working Papers Nos. 2 and 3 The objective of WP2 was to review the technical merits of each route option and provide input into subsequent working papers. It involved the development of a number of engineering data, environmental constraints and operational measures. Some of these are input factors into the capital costs in WP3 and the operational (below rail) cost of WP4. WP3 comprised the costing of route options developed in WP2 to develop capital cost profiles on a common basis. The costings cover new construction route segments together with any upgrading required of segments that are part of s existing network. Key items used from WP3 are the capital costs in Tables 16 and 17 as used in the financial and economic appraisals. The outcomes of WP2 and WP3 have been combined and analysed to identify the preferred options from a technical point of view. This analysis has been included in Appendix D to this document and has formed an input into the financial and economic analysis in Section Working Paper No. 4 Working Paper No. 4 involved development of preliminary operating and maintenance costs for inland rail, to provide input data on the effect of each route segment on above rail operating costs and track maintenance costs. Key items used from WP4 are the operating/maintenance costs in Tables 10 and Potential demand for high speed inland rail The higher speed/courier train concept There have been some conceptual proposals under development for a high speed (160 km/h) version of a Melbourne-Brisbane inland railway. Such a concept would cater primarily to the time sensitive freight market (e.g. less than container load: mail, parcels, express pallets, just-in-time manufactured parts) with a terminal-to-terminal transit time of 14 hours, but could also accommodate lower speed ( km/h) general freight trains. A 14 hour freight train service is likely to use a shorter train, possibly of six vehicles with a power car at each end similar to an express passenger train. It has been suggested that a 14 hour transit time service would provide a service competitive with air freight offering overnight delivery and same-day delivery services. It would be A-7

14 significantly faster than express road freight operators who currently achieve terminal-toterminal transit times of hours. This courier train transit time is also 30% to 55% faster than the hour Melbourne-Brisbane transit time range which has been analysed in prior studies. Achieving this faster transit time requires shortening the route to 1,595 km compared to the Central Case of 25¾ hours recommended by the LTC of 1,783 km. It would also require straightening of the rail line with substantially more sections of new track as opposed to lower cost options more focused on upgrading existing railway lines. One such proposal is being developed by the Great Australian Trunk Rail (GATR) System 4 Pty Ltd which has publicly released its business plan to generate support for the concept. GATR is proposing a steel tollway open to all rail freight users and GATR estimates the 5 capital cost of a 14 hour transit time line at $5 billion. Work completed by the LTC for this study indicates that to establish a Melbourne to Brisbane inland corridor meeting the specifications laid down by GATR would cost (conservatively) over $8 billion, exclusive of the 6 costs of procuring appropriate rollingstock to operate at the speeds proposed. To efficiently sort and process this time-sensitive freight, GATR also envisages developing significant logistics warehousing infrastructure on private sidings at either end of the inland railway line. Complementing the courier train, GATR is also proposing that their proposed inland line would operate slower ( km/h) containerised general freight trains and an even higher speed passenger train service (up to 250 km/h). High speed trains require greater grade separation at road crossings and more advanced signalling and safety equipment, and they consume a larger number of train paths than slower train services when operating on the same track. Given the significant capital cost of achieving a 14 hour transit time, the courier train would need to earn a base load of revenue to underwrite viability of the high speed line and the container train and passenger train would provide an incremental boost to returns. In other countries where time sensitive freight is moved on high speed lines, the freight trains make use of infrastructure already established for a high speed passenger train service. However, we are not aware of sufficient demand to underwrite such a passenger service (discussed further below). A courier train such as the GATR concept would appear to be competing with air freight and express road freight. Assessing the merit of this concept requires an assessment of existing volumes and pricing/yields in the Melbourne-Brisbane component of these markets. Whilst 7 air freight accounts for less than 1% of the total domestic freight task, its pricing is much higher-yielding, with prices generally being on a per kilogram (kg) rather than per 20-foot equivalent unit (TEU) basis. However, data on the size of both the domestic air freight and express road freight markets are poor. The Department of Infrastructure, Transport, Regional Development and Local Government (DITRDLG) reports that the domestic air 8,9 freight market was approximately 200,000 tonnes in Air freight schedules indicate 4 GATR 2007, Business Plan, [Online, accessed 29 January 2009], URL: t&task=view&id=5&itemid=6 5 GATR 2008, Submission to Infrastructure Australia, 14 October Cost derived by using benchmark 'all up' costs for the route over different terrains. This includes allowance for land acquisition. 7 ABS 2004, Cat. No , Australia Now, Year Book Australia, Transport - Transport activity, available at: nt.gov.au/soe/2006/publications/drs/pubs/568/set/hs34ausstats-transport-activity.doc 8 The international air freight market for Australia for export and imports is approximately four times the size of the domestic market, but the international air freight market would not compete with a Melbourne-Brisbane courier train. 9 DITRDLG 2007, Fact Sheet 5 - Air Cargo Security - the background, current as at 20 December 2007, available at: w.infrastructure.gov.au/transport/security/aviation/factsheet/factsheet5.aspx A-8

15 that Melbourne-Brisbane represents about 5-10% of the Australian domestic airfreight market or 10,000-20,000 tonnes per annum (t pa). The average price per kilogram of air freight (assuming a 100 kg parcel) varies substantially but it is likely to be between $10 and 10 $30 per kg, which generates an indicative total Melbourne-Brisbane air freight market broadly in the range of $ m pa. The express (next day delivery) road freight market is larger than air freight but official data on its size are not available and its pricing per kilogram is often around half that of air freight. However, initial indications suggest that for a courier train to be financially viable it is likely to have higher prices than express road freight which may limit the amount of volume such a train captures from this market segment. GATR analysis suggests that its proposal would create a rise in Melbourne-Brisbane rail freight market share from 25% to 75% to 80%. Such a rise in market share would equate to million new tonnes shifting to rail. The containerised general freight trains on a GATR style high speed alignment would be allocated the less attractive departure time slots and often face holding periods in passing lanes, as the courier train would require priority to meet the 14 hour transit time and/or more passing loops or lanes would need to be provided, adding to capital cost. To attempt to mitigate this issue, the GATR proposal features 20 km 11 long passing lanes placed at regular intervals along the inland route. Despite the use of long passing lanes, the courier train is still likely to create some delays or speed reductions for the containerised general freight trains, which may result in a less attractive transit time and service quality on a GATR style inland route, than that provided by on the coastal route following its upgrades. Consequently, the extent of likely access revenue from containerised general freight trains appears uncertain. The viability of a higher speed passenger train service at 250 km/h is also uncertain. The Melbourne-Brisbane corridor is the third most travelled passenger air route in Australia with million journeys in The resultant passenger train transit time would be likely to be in the 7-9 hour range compared to a scheduled 2 hours 10 minutes by air. Overseas experience suggests that such a rail journey time is at or beyond the limit at which rail competes with air. Airfares on the route vary from special conditional deals as low as $80 one way to over $600 for fully flexible (one way) economy. Hence given the significantly longer transit time for rail, the rail fare would need to more often be below $100 to have some attraction to passengers. However, operating 250 km/h passenger trains in conjunction with 160 km/h courier trains as well as km/h general freight trains is likely to further complicate crossing arrangements and train path scheduling. Moreover, the viability of a higher speed passenger train service at such fare levels would therefore appear uncertain and its ability to make a significant contribution in track access fees to fund the 13 capital costs of the line would appear low. Further, operation at 250 km/h would require 10 Airfreight prices per kilogram have substantial variation depending on factors such as flag-fall (minimum) charge components, next flight or next day delivery, fuel surcharges and average consignment weight. The BITRE report door-to-door airfreight prices of $1.36/ntk in which for a Melbourne-Brisbane air distance of 1,370km for a 100 kg parcel equates to only $1.86/kg. However, quotes from leading air freight operators indicate rates per kg in the range of $20-40 depending mainly on whether next flight or next day delivery. (See: Bureau of Infrastructure, Transport and Regional Economics 2008b, Freight rates in Australia to , Information Sheet 28, available at: 11 The 20 km long passing lanes are operationally superior to traditional 1-2 km passing loops as the lanes enable trains to retain some momentum during a crossing rather than the need to come to a complete halt in short passing loops with subsequent higher fuel costs from restarting. However, a 20 km passing lane has a capital cost of typically 6-8 times that of a shorter passing loop. 12 Bureau of Infrastructure, Transport and Regional Economics 2008a, Aviation Statistics: Australian Domestic Airline Activity , available at: 0publication% pdf 13 For example, a hypothetical operation with three return daily high speed passenger train services with say 300 seats per train, an 80% load factor and a $100 average fare would generate potentially $52.6m in revenue from million passengers (equating to a rail market share of almost 20%). Based on current express passenger access charges, the approximate revenue from the above operation (e.g. 400 gross tonnes per train and 1,700 km) is about $11m pa. A-9

16 upgrading of all existing track on the route as such operations require track with higher geometry standards, and maintained to higher standards, than existing Australian main line track. Overall, the high speed/courier train concept is innovative and it would potentially represent an enormous step change in rail and supply chain performance. However, the incremental capital cost of the proposal would not appear to be supported by the potential extra annual revenue streams. The FEC remains interested in reviewing any new demand forecast information for such a high speed/courier train concept from stakeholders. The FEC will also seek to develop an indicative volume forecast for a courier train type service as part of Stage 2 of this study. However, given the uncertainty over courier type train freight volumes, it is likely that the primary focus of Stage 2 analysis of the inland route will be on options with transit times in the hour range. 2.4 Potential demand on a minimum upgrade inland railway With a series of minor upgrades, a limited number of shorter deviations of new track (e.g. Boggabilla-Goondiwindi) and by potentially upgrading parts of the line at different times to optimise staging, a basic inland rail alignment could be established between Melbourne and south-east Queensland at a lower capital cost. However, transit time analysis by the LTC suggests that such an alignment may have a significantly inferior transit time to the upgraded coastal alignment. is targeting a Melbourne-Brisbane rail transit time of hours (terminal-to-terminal) on the existing rail alignment post upgrading of the Main South, opening of the SSFL and Short North, and upgrading of the North Coast line. The LTC estimates that the likely transit time for the least capital cost inland alignment is about 31½ hours for $2.05 billion excluding contingency (see Figure 4 in Section 4 of WP5). A key principle in assessing demand for an inland alignment is that it needs to be significantly superior in terms of reliability, operating costs and transit time to the existing Main SouthNorth Coast lines. Consequently, a minimum upgrade inland alignment is unlikely to be able to attract significant tonnage from the existing coastal rail alignment or from road. Hence the economic and financial analysis has focused on options which provide a transit time broadly similar to the future coastal route transit time and the very basic option has not yet been evaluated. 2.5 Border railway The Australian Transport and Energy Corridor Pty Ltd (ATEC) has long been a proponent and advocate for establishing a Melbourne-Brisbane inland railway and a number of other proposals for new rail freight lines mainly along. The company has commissioned a number of studies, and its recommendations for the Melbourne-Brisbane corridor were provided to the North-South Rail Corridor Study. ATEC has recently proposed construction of a 310 km 'Border Railway' from Moree to Toowoomba which would provide a standard gauge connection from the NSW rail network (and via existing tracks, from Melbourne) to a proposed freight terminal at Toowoomba. ATEC estimates the capital cost of the Border Railway at approximately $1 billion. The Border Railway would connect to another railway involving ATEC being the 210 km Surat Basin Railway (SBR) linking Banana (near Toowoomba) to Wandoan to connect to the Queensland Rail line and then onto the Port of Gladstone. The SBR has an estimated at approx $1 billion. The Surat Basin Railway Joint Venture comprises ATEC, Anglo Coal, Xstrata Coal and Queensland Rail. In July 2007 the SBR joint venture obtained an exclusive A-10

17 mandate with the Queensland government for the development of the SBR as a privately financed open user rail corridor. 14 An Environmental Impact Statement (EIS) has been prepared for the SBR and the joint venture is now working towards a construction completion target for the SBR of early ATEC also has a related entity (Australian Freight Terminals or AFT) which is focused on the long-term development of high quality, intermodal freight terminals at key strategic sites throughout Australia. AFT has acquired land at Charlton, near Toowoomba, Queensland (the most advanced project) and between Parkes and Dubbo, New South Wales. Other sites are under consideration. Further information about the various ATEC proposals is available at: Issues driving the optimal timing of an inland route and scope to add coastal route capacity Any analysis of when would be the best time to construct an inland railway involves a range of issues and assumptions. These include: analysis perspective and assumed inland rail ownership the optimal timing point will vary depending on whether the inland railway is owned by, by another government entity or by a separate private entity. This is because as owner/operator of the existing route has more incentive to expand capacity and volumes on the existing route to retain those volumes. Furthermore, if an inland railway were to open, it would dilute returns on the existing route. By contrast, a different owner of an inland route would analyse the investment as a standalone proposition and not consider lost margins for. For the purpose of Stage 1 of this study, the analysis has assumed ownership and operation by a separate private entity so that the results are independent from. Within Stage 2, we will, as a sensitivity test, conduct the financial analysis from an perspective; capacity and Base Case project implementation to what extent does the coastal route have realistic capacity expansion options? For example, there is a risk of delay (or only partial implementation) of rail freight capacity projects such as the Short North Project (SNP) between North Strathfield and Broadmeadow, Newcastle due to factors such as 15 environmental or community concerns. The objective of the SNP is to alleviate the curfew that operates to the north of Sydney which can delay some freight trains (often by 2 to 4 hours). It aims to improve the separation of freight and passenger trains so as to expand freight capacity to four freight train paths per hour for 22 hours per day and improve reliability by 10 percentage points. The curfew prevents freight trains from operating on the CityRail electrified network during the weekday morning and afternoon peak periods due to the need to provide passenger trains with priority. The SNP has some similarities with the current Southern Sydney Freight Line (SSFL) project albeit SNP has a much larger scale. The SSFL establishes a dedicated freight rail line on the southern approach to Sydney by establishing a new freight line from Macarthur to Chullora. The SSFL encountered a series of delays and budget issues which may also impact the SNP and which need to be analysed within the risk analysis for stage 2; 14 The EIS for the SBR is available at: 15 The SNP is also known as the Northern Sydney Freight Corridor Project and it is an initiative of the Australian Government (with project management support by TIDC) to remove operational impediments to rail freight traffic between Strathfield and Broadmeadow. For further details see: A-11

18 passenger train expansion the effect of future expansion in passenger train frequencies on the existing coastal route to cater for population growth as this may absorb some of the new capacity which is to be created. If the key parts of the extra coastal route capacity are required by passenger trains the optimal timing for an inland railway may be earlier; and achievability of improved reliability whether the upgrade of the coastal route can improve reliability towards the levels likely to be achieved on a new inland rail route (i.e. >90%) as is forecast by. The coastal route has more traffic and parts of it will, post upgrade, remain more impacted by worse grades, curves and rainfall events which are generally factors detrimental to reliability. If the reliability on the coastal route is not broadly equivalent, the optimal timing for an inland route becomes earlier. For Stage 1 analysis, this WP has assumed that the SNP ($830m capital expenditure) is fully implemented regardless of any future establishment of an inland railway and hence it is included in the Base Case in both the financial and economic appraisal. This is discussed further in Section Preliminary performance specification From consultation with the Study Steering Committee and, a range of performance specifications was developed for inland rail that drives demand and a number of cost and revenue items for operation of the proposed rail alignment. Given the existence of the coastal route between Melbourne and Brisbane via Sydney, it was concluded that for an inland rail corridor to be viable it must provide, as a baseline, a superior service to Melbourne Brisbane freight than that offered by the coastal route. The parameters that define a superior service will be further developed through consultation throughout the study, but are anticipated, at this stage, to include: journey time below the threshold demanded by customers, and not at any disadvantage when compared to the coastal route; equivalent or better reliability of journey time than that provided by the coastal route; equivalent or lower operational costs (fuel and crew) than the coastal route; and equivalent or lower access charges when compared to the coastal route. Individual factors identified in connection with this performance specification are presented in the table below. A-12

19 Table 3 Inland rail performance specifications Attribute Performance Requirements Maximum freight train transit time (terminalterminal including crossing loop delays) Target driven by a range of customer preferences between 23 and 28 hours Gauge Standard (1,435 mm) (with potential for dual gauge in some sections e.g. Queensland). Desirable max freight operating speed 115 km/h (@ 21 tal) (passenger trains if any could be km/h) Maximum Axle loads 21 tonnes at 115 km/h (for containers) (sensitivity tests at 23 and 25tal) Reliability Not less than coastal route (implications will be analysed in Stage 2) Maintainability To provide marginal access charges equivalent or lower than coastal route (b. implications to be analysed in Stage 2) Operating costs End-to-end, lower than coastal route Minimum vertical clearance above top of rail 7.1 m for new structures, any amendment to existing structures to be dependent on economic benefit Assumed max train length 1,800 m Factors to be optimised Inland rail route optimal distance (MelbourneBrisbane) To be optimised in the course of the study; within the range of 1,650-1,950 km Maximum desirable ruling grade To be optimised in the course of the study Maximum allowable gradient To be optimised in the course of the study Minimum horizontal geometry radius for 115 km/h To be optimised in the course of the study Minimum horizontal geometry radius for 100 km/h To be optimised in the course of the study Crossing loops To be optimised in the course of the study Corridor width To be optimised in the course of the study A-13

20 3. Methodology and assumptions 3.1 Financial analysis approach Key assumptions The table below summarises the generic assumptions that apply to the proposed inland rail project, these are applied across all scenarios in the financial appraisal. Table 4 Key financial appraisal assumptions Generic assumptions Level Notes Project life Through to years after the last scenario begins full operations Cost and revenue estimates All real 2008 dollars Real dollars are used due to the longer duration of the analysis. Alternatively, if a nominal $ analysis approach was to be used, it could result in substantial inflation driven compound cost growth making results more difficult to interpret. Long-term demand growth (container rail freight) 3.1% p.a. Linked to long term GDP growth with the basis explained in WP1 Consumer Price Index (CPI) 3% Upper end of RBA target range Construction cost index CPI + 1% The 1% real escalation is only applied to capital cost from 2009 through to 2020 to reflect the tendency over the past decade for major construction costs to grow at faster than CPI. Beyond 2020 construction costs escalation reverts to CPI only. Goods and Services Tax (GST) All costs exclusive of 10% GST ATO rate as at January 2009 Type and tenor of debt Amortising credit foncier structure The debt is drawn down over the 5 year construction period, and interest is capitalised during this period. The loan is repaid (principal and interest) over a 15 year term post construction, with no interest only periods applied. The interest rate on the loan has been assumed to be 5% p.a. No refinancing has been assumed at this stage Financial appraisal scenarios The financial appraisal was conducted on the following scenarios, compared against the inland rail operating from 2020, 2030 and 2040 (a five year construction period for the inland railway is assumed prior to these dates): Low Capital Cost scenario with development of inland rail based on a target of 27⅔ hours transit requiring low-level capital costs; Central Case scenario with development of inland rail based on a target of 25¾ hours transit requiring mid-level capital costs; and High Capital Cost scenario with development of inland rail based on a target of 23¾ hours transit requiring high-level capital costs. The different transit times reflect specific options emerging from the LTC (see WP2-4) and are within the range suitable to customers. A-14

21 3.1.3 Operator and ownership scenarios/assumptions South of the NSW-Queensland border, the inland route traverses track that is owned mostly by. North of the border, the track is owned by Queensland Rail. As a result there is a spectrum of possible ownership and funding and operational control roles for the inland rail alignment, for example it could be: owned privately and run by ; owned and operated by ; run by a new entity such as a Special Purpose Vehicle (SPV), e.g. through Build, Own, Operate, Transfer (BOOT) or Design Build Finance Maintain (DBFM) models; and owned and operated by a private, commercial entity. In establishing the study the Australian Government was clear it requires an assessment of likely private sector interest in the project and it also suggested the analysis be conducted from a national interest perspective (rather from the financial perspective of ). Consequently for Stage 1 we have assumed that the inland railway will be funded, owned and operated by a private, commercial entity within a proprietary limited corporate ownership structure. As a result the following assumptions have been made in Stage 1: access revenue and below rail maintenance costs for track from Junee to Melbourne accrue to only and therefore are not allocated to our scenarios; access revenue and below rail maintenance costs from the route using the Queensland Rail corridor on approach to Brisbane, have been included in the scenarios with no payment for the use of the corridor being included in the analysis; and revenue for coal on the Werris Creek Narrabri existing track has been included as project revenues in all scenarios. These coal volumes reflect the demand projections in s Interstate and Hunter Valley Rail Infrastructure Strategy. In Stage 2, ownership and operational structure will be further assessed, and we will test whether economic and financial returns change under ownership of both alignments. This alternative analysis perspective would need to reflect synergies in operations and dilution of traffic volumes, given that the establishment of an inland railway would reduce the financial returns to from the existing main south and coastal route; that is, assuming the same road to rail mode shift Preliminary private sector assumptions WP5 provides a preliminary assessment of the financial and economic merit of inland rail. It will also provide preliminary indications on whether or not the project commercially attractive on a standalone commercial basis, and provide insights on timing. The assessment of the financial viability of the project has been conducted under the following initial assumptions: Table 5 Additional financial appraisal assumptions Financial assumptions Central Case level Notes Financial analysis perspective NPV of standalone (non) private track owner Financial impact of ownership to be tested as a sensitivity in Stage 2 of this study Corporate income tax rate 30% ATO rate as at January 2009 Average depreciation rates 2-3% Simplified weighted average of track components A-15

22 Financial assumptions Central Case level Notes Consumer Price Index (CPI) 3% Upper end of RBA target range Cost of debt (nominal) (%) 8% Indicative estimate from early 2009 Cost of equity (nominal) (%) 14% Synergies Economic Consulting WACC Review of 's Interstate Network May Cost of debt (real) (%) 5% Simplified nominal estimate less CPI Cost of equity (real) (%) 11% Simplified nominal estimate less CPI Long-term gearing (%) 50% Long-term WACC (post-tax real) (%) 8% Synergies Economic Consulting. However, this preliminary assumption will be further tested in Stage 2 as for banks to provide 50% gearing requires prudent interest coverage ratios (e.g. EBITDA of >3 times interest) and where net cashflow is relatively low a lower gearing will be more likely. Simplified estimate with 50:50 debt: equity mix The above simplified financial assumptions reflect typical setting achievable in normal economic conditions. It is noted that during the current Global Financial Crisis (GFC) that some of these assumptions (e.g. proportion of gearing, debt margin and dollar debt level) may be difficult to achieve. However, it is expected that the GFC will progressively ease prior to the earliest expected year for financial close and construction commencement which is assumed to be around (for the results for the 2020 operation commencement). The above simplified WACC estimate of 8% (post-tax real) is a preliminary (top-down) estimate for use in Stage 1 of this study and it is not calculated using the full Capital Assets Pricing Model. 3.2 Economic analysis approach This appraisal has been undertaken in broad consistency with the relevant guidelines for cost benefit analysis (BCA) as provided by the Australian Transport Council (ATC) 2006 National Guidelines for Transport System Management in Australia, jurisdiction-based 17 guidelines, and other mode-specific guidelines as required, e.g. Austroads. In Stage 2 of this study the appraisal will also address the Infrastructure Australia (IA) criteria. The appraisal objective is to analyse the economic merit of the proposed inland rail in line with state and national guidelines for economic appraisal. According to Austroads: Benefit-Cost Analysis (BCA) is a technique for assessing the economic efficiency of resource allocation. It allows us to compare alternative approaches to individual projects and to set priorities amongst competing projects. It uses as its framework the values of all 18 costs and benefits to the community which can be quantified in money terms. Economic appraisal of the proposed inland railway has been undertaken to assess the project merits to aid future government and private sector evaluations, and as such, guide 16 Synergies Economic Consulting WACC Review of 's Interstate Network (May 2007) accessed at ssessment.pdf 17 Jurisdiction-based guidelines include the Queensland Treasury 2006 Cost-Benefit Analysis Guidelines, Victorian Department of Transport (DoT) 2007, Guidelines for Cost-Benefit Analysis, the NSW Treasury 2007, NSW Government Guidelines for Economic Appraisal 18 Austroads 1996, Benefit Cost Analysis Manual, Sydney, 1996 A-16

23 the efficient allocation of resources. This is done by determining whether inland rail is economically viable (i.e. the total discounted incremental benefits of the project exceed the total discounted incremental costs over a specified period). The appraisal uses a rail freight BCA framework. This framework assesses the potential change in economic welfare with the scenario by considering the following parameters: project and Base Case capital costs; project and Base Case recurrent costs; rail operating costs; freight value of travel time; road and rail crash costs; and external costs (such as air pollution, noise, and greenhouse gases). The appraisal builds on previous appraisals, including: rapid economic appraisal undertaken in the North-South Rail Corridor Study in June 2006 analysed four broad route alignments or sub-corridors (far western, central inland, coastal and hybrid inland/coastal), combined with two alternative routes via Shepparton or via Albury. This study found that, based on the alignments, timeframes and costs assumed, none of the scenarios resulted in positive net economic benefit, with a BCR of for unconstrained $3.1 billion; and economic analysis undertaken by the Bureau of Transport Economics (BTE), in October 2000 the Australian Government commissioned the BTE to undertake an economic benefit-cost analysis of the ATEC proposal (as at October 2000) for a new rail corridor linking Melbourne and Brisbane, and all associated ATEC assumptions. The BTRE analysis found that, based on the ATEC demand forecast and ATEC estimated capital costs, the rail corridor resulted in a benefit-cost ratio (BCR) between 3.6 and 5.1 (noting that the demand forecasts used assumed a significant shift in road freight, and the capital costs assumed were significantly lower than assumed in this Study, ranging from $ billion (2000 dollars). Adjusting the BCRs with the higher capital cost range $ billion developed in this study would see these BCRs fall by around half. It is also noted that an earlier BTE report analysing the inland railway found the project to be economically unviable. This study builds on these previous studies with a focus on analysing and refining a route for further analysis within the far western sub-corridor. This BCA uses an NPV economic measure of performance which is the difference between the present value (PV) of total incremental benefits and the PV of total incremental costs. Scenarios that yield a positive NPV indicate that the incremental benefits of the project exceed the incremental costs over the evaluation period. Other economic BCA measures (e.g. the Benefit-Cost Ratio, Economic Internal Rate of Return and NPV divided by Capital Cost (NPV:I) will be presented in future stages of this study. The general assumptions used in this economic appraisal are presented in the table below. 19 The NSRCS included access revenue and externalities as the project s economic benefits whilst the appraisal approach in WP 5 excludes access revenue from the economic analysis as this is a financial transfer. A-17

24 Table 6 Key economic appraisal assumptions Economic assumptions Central Case level Notes Economic analysis perspective National interest perspective Appraisal is conducted from a national interest perspective Base year 2008 All values are expressed in constant dollars and all prices are expressed in 2008 dollars unless otherwise stated Evaluation period 2008 to 2080 The evaluation period starts in 2008 and ends in 2080 (40 years after the last scenario begins full operations) (1) Economic analysis discount rate (pre-tax real) 7% Sensitivity 4% and 10%. Future net benefits are discounted to the base year using a real 7% discount rate Freight value of travel time (non urban) $0.81 per tonne hour Source: ABS, Austroads and NSW RTA parameters and compositions Train operating costs Inland rail 2.1 cents/ntk (resource cost) Inland rail is estimated to be 5% lower than the coastal route due to flatter terrain and shorter distance. These preliminary assumptions will be validated in Stage 2 of the study. Coastal rail 2.2 cents/ntk (resource cost)) Source for inland rail basis: LTC WP4 Road operating costs Road (unperceived) 4.8 cents/ntk Source: RTA parameters Net economic value from induced freight 0.42 cents/ntk It has been assumed that the gross value of induced products less production and transport costs is equivalent to 20% of inland rail operating costs Crash costs Road crash costs cents/ntk Source: Booz Allen Hamilton (BAH) 2001 rate inflated to 2008 dollars Rail crash costs cents/ntk Air pollution costs (rural) Road air pollution costs cents/ntk Rail air pollution costs cents /ntk Noise pollution costs (rural) Road noise costs cents/ntk Increased road maintenance costs Increased road maintenance costs $0.0100/ntk (1) Rail noise costs cents/ntk Source: BTRE 1999, Working paper 40 inflated to 2008 dollars Source: BTRE 1999, Working paper 40 inflated to 2008 dollars Source: Laird, P. 2005, University of Wollongong Note: operations are modelled to commence in either 2020, 2030 or Employment generation, regional benefits and wider economic benefits In Stage 2 of this Study, the FEC will estimate: wider economic benefits of the project such as agglomeration with extra employment generated from centres such as Parkes becoming larger freight hubs will be assessed to understand impact on the economic appraisal; A-18

25 direct and indirect employment generation during both the construction and operational periods of the project using either general equilibrium or input-output analysis; and other regional economic development benefits such as availability of inland rail facilitating new regional train services Economic appraisal Base Case and scenarios Initial demand forecasts were used to help inform the development of options relating to the Base Case and several other scenarios for the inland railway. For each of these scenarios, inland rail services were assumed to commence in 2020, 2030 and A five-year construction period for the railway is assumed prior to these years. Base Case scenario without inland rail and freight travelling by road or existing rail lines. Assumes business as usual upgrades to the capacity and transit times of the existing coastal route; Central Case scenario with development of inland rail based on a target of 25¾ hours transit requiring mid-level capital costs, and upgrades to the coastal route in line with the Base Case; Low Capital Cost scenario with development of inland rail based on a target of 27⅔ hours transit requiring low-level capital costs, and upgrades to the coastal route in line with the Base Case; and High Capital Cost scenario with development of inland rail based on a target of 23¾ hours transit requiring high-level capital costs, and upgrades to the coastal route in line with the Base Case. As indicated above, the Base Case or without project case assumes that no inland rail project proceeds. Investment in the coastal route, which forms the Base Case, is also assumed under each of the inland rail scenarios Incorporation of demand forecasting The economic appraisal is based on the demand modelling outputs provided by ACIL Tasman as part of Working Paper No. 1. These forecasts are incorporated into the economic appraisal to identify: changes in rail and road freight volumes following the opening date of the projects; and changes in freight volumes attributable to rail and road mode stayers, mode diverters and induced trips. As the demand outputs were provided for the years , there was no requirement to further interpolate or make assumptions on demand over the appraisal period. In addition, as the freight demand was estimated in annual terms, an annualisation factor was not required in this appraisal. ACIL Tasman incorporated assumptions into the demand forecasts concerning the ramp-up of freight volumes, and hence a ramp-up period is inherently incorporated into the economic appraisal through the application of demand projections. This was assumed by ACIL Tasman as road and rail users take time to adjust their freight consignment patterns to the new infrastructure. Further detail on the demand forecasting can be found in Section 2.1 or in WP Economic benefits The most significant benefits of the inland rail relate to savings in rail user costs due to a reduction in freight hours and freight kilometres compared with the Base Case. Benefits will A-19

26 also accrue to third parties through the reduction of external costs, such as environmental externalities. The residual value of assets remaining at the end of the analysis period is also captured in the appraisal. There are some benefits that are not generally measured in rural areas and subsequently have not been included in this appraisal, including reduced road congestion and urban separation (removal of freight transport from multiple routes in urban areas to one or more dominant routes). There may be some scope to incorporate these into the appraisal if it is possible to estimate the proportion of road and rail tonne kilometres generated in urban areas. The approach used to estimate each of the benefits included in the BCA is presented below. More detail on the methodology used to estimate freight travel time, operating cost savings and the net economic value of induced freight is presented in Appendix D. Savings in freight travel time costs The approach used in this appraisal to measure inland rail benefits incrementally to the Base Case, is based on defining the service being provided as freight transport for either rail or road mode of travel. This approach, along with the method to apply a freight travel time to 20 net tonne kilometres (ntk) draws upon the economic approach used by BTRE in October The demand forecasts generate freight volumes (in ntk) for rail freight on the new and existing lines and for road freight. In order to estimate the value of freight transit time savings for rail users, these volumes were converted to hours travelled in tonne hours by estimating trip numbers and hours per average trip based on average loads and transit times. The resulting tonne hours per trip derived for each mode, and for the Base Case and each scenario, were then combined with a time value for freight in transit to determine: the benefits of existing (coastal) rail traffic travelling faster on the new line;21 the negative benefit of existing road traffic travelling slower when it changes to the new rail network; and the benefits of induced rail traffic travelling on the new line. The time value for freight transit used in this appraisal was determined by applying average road vehicle loads with Austroads 2007 values for non urban freight travel time. Separate vehicle travel times were then weighted against semi and B-double vehicle compositions to 22 determine an average regional freight travel time value of $0.8 per tonne hour. This travel time value was applied to tonne hour demand to estimate the change in freight travel time cost. 20 Tonne kilometres are calculated by the weight of a train and the distance it runs. This can be expressed as the total weight of a train (gross tonne kilometres or gtk) or the weight of the cargo (net tonne kilometres or ntk). 21 Werris Creek-Narrabri coal volumes were not included in the time savings analysis as it assumed unlikely to be realised given it is currently being freighted on existing rail, and for the Low Capital Cost scenario this rail line will form the Inland rail line. This is a conservative assumption for the Central Capital Cost scenario, as it is expected that approximately half of this coal volume uses the existing Werris Creek-Narrabri railway and half uses the new Inland rail route. 22 In 2000, the BTRE Brisbane-Melbourne Rail Link: Economic Analysis used ATEC transit time analysis to derive value of time for freight in transit ranging from $0.00 to $2.99/tonne hour in the appraisal (dependent on freight type), and cited a value of $0.60 per tonne hour sourced from Austroads. A-20

27 Savings in train and road operating costs The project case will result in reduced kilometres on the road network, as well as fewer tonne kilometres of rail travel due to the new rail links providing shorter distances compared to the existing coastal rail link. As a result, this will produce lower operating costs. For existing rail users, total resource operating cost savings including depreciation, fuel and crew costs were estimated per ntk based on preliminary estimates for inland rail of 2.1 cents per ntk. The train operating cost per net tonne kilometre for coastal rail was based on an uplift of 5% to the inland rail costs. For road-rail diverters, road operating costs were estimated at 4.8 cents per ntk based on RTA literature, combined with vehicle mix and tonnage assumptions. For induced rail users, operating costs were captured in the benefit estimating net economic value from induced freight, so were not included in the operating cost estimates in order to avoid double counting. The resulting costs per ntk were combined with net tonne kilometres to determine: the benefits of existing rail traffic with lower operating costs on the new line;23 and the benefit road-rail diverters with lower operating costs on the new line. Net economic value from induced freight The ACIL Tasman demand projections have identified a segment of demand that will be induced if the inland rail is constructed, i.e. that is not diverted but is totally new traffic that emerges exclusively because of the project. This freight comprises a relatively minor proportion of total rail demand (between 3-10% per annum of total net tonne kilometres estimated to travel on rail under the Low Capital Cost scenario). As the inland rail is estimated to induce new freight volumes, it is expected that there would be an economic benefit for the producers of this freight, otherwise such traffic would not materialise. This implies that: in the base case the gross value of the products, less production and transport, results in a negative outcome, hence these producers do not transport their products; and for a scenario with inland rail transport costs can be assumed to have fallen as this is the only component likely to have changed as a result of the inland rail. This can be assumed to result in the gross value of the product, less production and transport costs, becoming a positive number due to the inland rail. In order to incorporate the producer surplus from the net economic value of induced products into the appraisal, it has been assumed that 20% of the inland rail operating costs of 2.1 cents per ntk represent the value of these products. This is explained further in Appendix D. Savings in crash costs As the project case is estimated to result in reduced freight vehicle kilometres on the road network, and data indicate that there are reduced fatalities on rail compared to road, it is expected that the project case will result in road crash cost savings. These road crash cost savings are offset by any induced trips to rail in the project case, which result in positive crash costs. 23 Train operating costs for Werris Creek-Narrabri coal were not assumed to change under the project compared to the Base Case, as it is assumed to travel on existing rail. This is a conservative assumption for the Central Capital Cost scenario, as it is expected that approximately half of this coal volume uses the existing Werris Creek-Narrabri railway and half uses the new Inland rail route. A-21

28 Booz Allen Hamilton (BAH) estimated crash costs for rural road and rail per net tonne kilometre, which indicates that there are cost savings on rail freight compared to road freight. These values (inflated from 2001 to 2008 dollars) are 0.40 cents per ntk for road and 0.03 cents per ntk for rail. Existing and induced rail net tonne kilometres are multiplied by rail crash costs, and road freight net tonne kilometres were combined with the road crash costs to estimated net project case crash costs incremental to the Base Case. Reduced environment externalities air pollution, greenhouse gas and noise costs As with accident costs, as a result of reduced freight vehicle kilometres on the road network resulting from inland rail coming into operation, it is expected that the project case will result in reduced road air pollution, greenhouse gas and noise costs. The saving in road externalities is offset by induced rail trips in the project case, which result in positive externality costs. BTE provides estimates of rail charges under a competitively neutral regime compared with road, which includes costs per ntk for pollution and noise costs. These 1999 noise and air pollution values were also incorporated into the BTE 2000 Brisbane-Melbourne Rail Link: Economic Analysis. These values (inflated from 1999 to 2008 dollars) are: pollution costs 0.01 and cents per ntk for road and rail respectively; and noise costs and cents per ntk for road and rail respectively. BAH estimated greenhouse gas costs for rural road and rail per net tonne kilometre, which indicates costs of cents per ntk for road and cents per ntk for rail. Reduced road maintenance costs The shift of some road freight onto rail as a result of inland rail is likely to result in reduced road maintenance. As the BCA incorporates ongoing rail maintenance, it is relevant to also consider any change in road maintenance costs in the appraisal. Laird (2005) Revised land freight external costs in Australia proposes an average cost of cent per ntk for road maintenance from articulated truck operations on arterial roads. This is based on: an estimate of an average for articulated truck operations on all roads as 1.25 cents per ntk based on methodology similar to that used by a NSW Commission of Inquiry into the Road Freight Industry; a unit cost of 7.45 cents per Equivalent Standard Axle (ESA) kilometre; and data published by the National Road Transport Commission (1998) as part of its Second Determination of Annual Heavy Vehicle Charges. 25 Residual value Each of the project scenarios, as well as the Base Case, assigns a residual value to the key components of fixed infrastructure, rollingstock and land with economic lives which extend beyond the final year of the evaluation period. 24 The Laird initial study in 2003, Land freight external costs in Queensland, was commissioned by Queensland Transport and released to the Queensland Minister for Transport. 25 Laird 2005, p 10 A-22

29 For this reason the economic appraisal includes the residual values of rail assets. The residual value reflects the fact that some assets may have economic lives that extend beyond the evaluation period. Each asset item is depreciated in a straight line fashion to determine the incremental residual value based on construction year, and residual values are entered in the last year of the evaluation period (2080) to represent the unused portion of assets that have lives greater than the evaluation period. A-23

30 4. Optimal alignment A key objective for the study is to determine the optimum alignment of the inland railway within the far western sub-corridor, taking into account user requirements and the economic, engineering, statutory planning and environmental constraints. In the North-South Rail Corridor Study, the far western sub-corridor resulted in the optimal cost to transit time ratios and the most advantageous benefit-cost ratios. This study expands on the previous 2006 review, with Stage 1 focused on developing a preliminary assessment of the economic and financial position of the inland rail project as a mechanism to identify a route for further analysis. To assist in understanding demand and cost differences for the key route options within the far western sub-corridor, the Lead Technical Consultant and the Financial and Economic Consultant have undertaken consultation with a range of stakeholders. A list of stakeholders consulted by the LTC and FEC to date for Stage 1 is provided in Appendix A. Further consultation will be undertaken during stages 2 and 3 of the study. In order to develop Central, Medium and High Capital Cost route alignments, there are key route decisions relating to the north, south and mid-sections of the corridor: Key route decisions in the south and north Two key decisions on the optimal route are required at the southern and northern ends of the alignment being: route through northern Victoria and southern NSW via Shepparton or Albury; and route on approach to Brisbane via Warwick or Toowoomba. Decisions on upgrade options in the mid-section of the corridor There are also over 50 route options through NSW (mainly between Junee and Moree and within that mainly between Narromine and Moree) which are presented in WP2. These route options involve a mix of upgrading existing track or establishing new shorter connections to reduce transit time. The merit of these options is assessed in Section 4.3 where they are ranked using a process of comparing capital cost per minute of transit time saving. An analysis of the various routes from a technical point of view, comparing journey time against capital cost for all options, has been completed by the LTC and is included in Appendix D of this document. The following sections build on this analysis and address the economic and financial differences for route options in northern Victoria and southern NSW, and on the approach to Brisbane. 4.1 Route through northern Victoria and southern NSW The two key route options through northern Victoria and southern NSW are: Albury route option which either: uses all existing track from Melbourne to Parkes (including the deviation at Wodonga now under construction); or uses the existing line through Albury (including the deviation at Wodonga) then uses the existing lines through to Parkes, but incorporating a new direct connection from Junee to Stockinbingal (by-passing Cootamundra); or A-24

31 Shepparton route option follows the existing broad gauge Mangalore-Tocumwal line via Shepparton that will require re-building and conversion to standard gauge. It then requires a more direct standard gauge track from Finley-Jerilderie where it follows the disused standard gauge line to Narrandera. From here there are two alternatives: construction of a new direct connection through to Caragabal and Forbes where it rejoins existing standard gauge track through to Parkes; or using existing track from Narrandera to Junee where it uses a new direct connection from Junee to Stockinbingal (by-passing Cootamundra) Details of all the potential Albury and Shepparton routes analysed for this study (with associated maps) are presented in WP2, prepared by the LTC. A summary level map of the three favoured alignments along the two route options is provided below. Figure 2 Potential northern Victoria and southern NSW routes Source: LTC In the figure above the orange line represents the primary Shepparton route. The optimal Albury routes are represented by the green line and the purple line. All other lines are variations that have been considered, but were proved to be less viable. A number of previous studies have supported the Albury route as the superior route, as discussed below. North-South Rail Corridor Study conclusions The FEC has reviewed work completed in the North-South Rail Corridor Study to assist in the Shepparton or Albury route decision analysis. The NSRCS found that whilst the A-25

32 Shepparton alternative gained marginally more regional freight (mainly million extra tonnes of grain) through better servicing southern NSW and northern Victorian traffic, this potential extra access revenue was not deemed to offset other disadvantages including higher capital cost. It should be noted that the NSRCS assumed that the Shepparton route would use the line from Narrandera to Junee where it would rejoin the via Albury route. The current study has regarded the primary Shepparton route as including a new line from Narrandera to near Forbes. This gives a reduced transit time at a higher capital cost. The two routes via Shepparton are compared in Table 9. It was concluded in the NSRCS that the Albury route was the superior route due to it having: faster transit time it has a transit time 0.8 hours faster (48 minutes) that would translate 26 into lower operating costs ; lower capital costs its capital cost was estimated in 2006 by Hyder Consulting as $480m lower; and an established and operable Class 1 freight line in comparison to much of the Shepparton alternative, which requires new construction or major reconstruction of formations and full track construction, likely to result in lower environmental and planning approval costs and risks under the Albury route. Other studies and analysis In response to the NSRCS, the Greater Shepparton City Council engaged Maunsell AECOM in 2007 to perform a review of the study to gain a better understanding why Albury was considered a more attractive alternative than Shepparton. The Maunsell report suggested that: infrastructure costs for the Shepparton route were possibly over-stated by $200m (reducing the capital cost difference from the NSRCS to $280m); costs as a result of future capacity increases on the Albury route were also not considered; indirect economic benefits of the Shepparton route were not considered (e.g. new employment created) and there were some inconsistencies in the way economic benefits were presented in the 2006 study; the comparison of travel times was not on a like by like basis and via Shepparton is only 8-16 minutes slower; the potential for a capital cost contribution from the Victorian Government was not taken into account; 27 and the Shepparton route has better potential to achieve double stacking.28 In 2008, a follow-up study by Sinclair Knight Mertz (SKM) was commissioned by the Food Bowl Inland Rail Alliance (FBIRA), a group of 18 local councils between Mitchell Shire and Narrandera, and was project managed by the Greater Shepparton City Council. The SKM study mainly recapitulated the previous Maunsell study findings but it also provided some new analysis including findings that: 26 This transit time comparison between the Shepparton and Albury routes assumed the Shepparton route would use the Narrandera to Junee line. 27 Victorian Government is contributing $171m for current upgrading of the track that it already leases to between Melbourne and Albury. 28 Maunsell/AECOM 2007, Melbourne to Brisbane Inland Rail: Evaluation of Shepparton Route, prepared for Greater Shepparton City Council, April 2007 A-26

33 an additional 1.4 mt of regional freight in 2008 (rising to 1.7 mt in 2020) could be attracted to rail if an efficient standard gauge alignment is established via Shepparton. SKM estimate this as an additional $30.7m revenue to the NSW Rail Infrastructure Corporation (RIC) and ; freight users in the region will benefit from cheaper transporting costs and alternative transport options; as a result of capturing a higher share of the freight market onto rail there is reduction in road maintenance costs from having fewer trucks on the road. This same mode shift will also generate carbon and fuel savings; the Food Bowl line will possibly provide an additional 128 direct jobs in the long run (ongoing roles). This excludes construction jobs, as these would be recognised in both the Albury and Shepparton routes; and benefits from offering double stacking for the Melbourne-Perth route (via Shepparton, 29 Roto and Broken Hill) could be realised, given other rail track upgrades are performed. Furthermore, the Victorian Department of Transport also made a submission to observing that previous studies have not given sufficient credit to the Shepparton route with regards to the alternative route providing: additional growth benefits to the Food Bowl region; synergies and induced benefits from the a new rail link in the national rail network; and potential for new rail operating and marketing strategies i.e. as a result of double stacking. Updated preliminary assessment There are several key factors to optimise this route decision, which are also represented in previous studies. These relate to the differentials in: capital cost; transit times; operating and maintenance costs; demand; capacity; and other factors including risk of residential encroachment, noise, safety, and environmental impacts. In assessing comparative demand between the two routes, it is important to point out that the main superfreighter container train service is highly unlikely to stop at either Shepparton or Albury to collect or discharge freight. Consultation with train operators indicates interest in some superfreighter services stopping for a freight exchange at Parkes, where the inland line would meet the line from the west via Broken Hill, but any other stops (aside from brief stops to refuel or change crew) would be avoided to minimise transit time and operating costs as well as to improve reliability. Consequently, most additional southbound freight generated from the Shepparton catchment area would need to be serviced by a separate intra-state general freight train with potential north bound rail amenable freight also possibly requiring a separate new interstate service. In addition, establishing a new link through Shepparton would in effect provide an inland railway with two active southern sub-routes as some trains 29 SKM 2008, Benefits from developing the Melbourne to Brisbane inland railway along the Food Bowl alignment, commissioned by FBIRA A-27

34 bound for Parkes and Brisbane are still likely to travel via Albury because the transit time is broadly similar or less. The following table compares the key performances indicators of the Albury and Shepparton route options. In addition to these performance attributes, the LTC indicates that there are no capacity issues for one or two decades on either route. Table 7 Southern route options comparative table Parameter Via Shepparton to Caragabal* Via Shepparton through Junee* Via Albury (do nothing) Via Albury (with Cootamundra by-pass) Transit time Melbourne-Parkes assumed average speed of 88 km/h for flat and straight, and 60 km/h for high gradient and curvy (2) Capital cost Mangalore-Parkes (2008 $ million) 1, Regional demand (million net tonnes in 2030) Track maintenance cost $m pa (in 2030 in ( $ million) ) Incremental access fees $m pa (in 2030 in 2008 $ million) Shepparton-Mangalore 0.7 (1) Route distance Melbourne-Parkes (km) Source: LTC * Including deviations at Finley, Berrigan and Jerilderie Note: (1) mainly Shepparton-Mangalore and some Shepparton-Parkes and Shepparton-Brisbane access fees from induced freight; and (2) as per reference train specs highlighted in WP 4; (3) based on applying LTC WP4 per km maintenance rate for new ($8,000 per kilometre) and existing rail lines ($25,210 per kilometre). Of the parameters analysed above, for the key results being capital costs and transit time, the Albury routes offer superior outcomes. The fastest Shepparton route offers a transit time that is about 30 minutes faster, but this comes at a significant extra capital cost (which adds over $900 million to the project). The longer Shepparton route (through Junee) is slower than either Albury alternatives, and it has a net extra capital cost ranging from $665 million to $804 million (in comparison to both Albury routes). Therefore it appears the least attractive of the southern route options. The advantages of the Shepparton route, being more regional freight and more suitable for double stacking, do not appear to offset the present sizable advantages of the Albury route, most notably the minimal capital expenditure required to get 30 almost comparable transit time. The capacity of the Albury route, now being duplicated, will not be constrained for a long time. Consequently, a route via Albury appears to be the route for any initial inland railway for further analysis in this study. Stage 2 of this study will accordingly focus on route options via Albury. This preliminary conclusion does not preclude a future standard gauge inland railway being established later through Shepparton which could provide extra capacity in the event the Mangalore-Junee section becomes constrained. In the event extra capacity is required for this southern section of a potential inland route, the land corridor between Shepparton- 30 The greatest impediment to double-stacking from Melbourne is the Bunbury Street tunnel which affects both routes equally. Further, part of the infrastructure strategy involves upgrading the current Melbourne to Sydney line (through Albury) for double-stacking by 2015/16 A-28

35 Tocumwal-Narrandera is available for potential future use, provided that the disused line from Tocumwal to Narrandera is retained. In relation to rail servicing more of the future general freight demand from the Shepparton catchment area, arguably, if volumes continue to build, there may become an economic case for conversion of the existing broad gauge line to a significantly improved standard gauge line between Tocumwal and the port of Melbourne as this is the destination of much of this regional traffic. If such a line was to be established, it could also include a standard gauge triangle at Mangalore to facilitate fast connection for Shepparton traffic onto the inland railway for northbound journeys towards Brisbane, Sydney or Perth. The LTC estimates the cost of standardising the line between Shepparton and Mangalore including a triangle to be in the range of $ m. 4.2 Optimal inland route on approach to Brisbane The optimal route for the section on the approach to Brisbane, between Inglewood and Acacia Ridge has also been the subject of debate and significant analysis in prior inland rail studies. The Toowoomba and Little Liverpool Ranges represent a considerable cost and operational challenge to an inland rail project meeting the required performance criteria. The challenge in developing an optimal route for the Inglewood to Acacia Ridge section is balancing transit time with capital expenditure and achieving an effective ruling grade of not more than 1 in 67. Considerable design work and analysis has been performed by the LTC in this region, which has gone beyond the depth of a range of prior studies. This analysis has confirmed (with even more detailed review to follow in Stage 2) that almost 50% of the capital cost estimated by the LTC for an inland railway is incurred over this last 26% of the route distance as the line descends from an elevation of 690 m at Toowoomba or 450 m at Warwick to m over a horizontal distance of approximately km. Akin to the route through northern Victoria and southern NSW, two distinct route options emerge being: Warwick route a new greenfield route via Warwick to the existing standard gauge Sydney-Brisbane line near Tamrookum. This could have the potential to reduce distance and costs by providing a more direct link to the south side of Brisbane. Such a line would cross the range to the east of Warwick and traverse parts of the Main Range National Park near the NSW/Queensland border; and Toowoomba route a new corridor direct from Inglewood to Millmerran and Oakey, near Toowoomba, and then a new Gowrie to Grandchester link; thence using the proposed Southern Freight Rail Corridor from Rosewood to Kagaru. The specific details of all the potential Toowoomba and Warwick routes which were analysed for this project (with associated maps) are presented in WP2 prepared by the LTC. A summary level map of the alignments for the route options is provided below. A-29

36 Figure 3 Potential routes on approach to Brisbane Source: LTC In the map above the green line represents the optimal route through Toowoomba whilst the purple line presents the best Warwick alternative, all other lines are variations considered but were proved to be relatively less viable. In relation to the relative advantages and disadvantages of both routes key differentiating factors include: the Toowoomba alignment has been subject to significantly more detailed design work as it is the preferred route for both QR and Queensland Transport, meaning it would be faster to progress to commencing construction. Some land acquisition has already been undertaken with associated cost; the route via Toowoomba (including new links from Inglewood to Millmerran) has also been preferred in separate analysis undertaken by two potential private proponents of an inland railway (GATR and ATEC). The analysis undertaken by the LTC has surpassed any previous studies in detail and depth. This analysis by the LTC indicates that capital cost of either a new (shorter) Inglewood to Millmerran deviation or upgrading and straightening the existing corridor via Warwick is similar. Hence given the deviation provides significant transit time saving this appears the superior route; the Warwick route retains sizable cost issues due to the descent of the escarpment requiring 24 km long viaducts and three spirals to meet maximum ruling grade specification of 1 in 67; the Warwick route has some significant environmental impacts and uncertainties as it traverses national parks which create a constraint to the feasibility of this route; in relation to regional freight the route via Toowoomba provides a more direct connection for coal. The extent of general freight which is generated in the Toowoomba or Warwick catchments which is amenable to being serviced by a separate intra-state general freight train is uncertain. ACIL Tasman has recognised the potential for further rail transport of coal, subject to port capacity and government policy, on a line passing near Toowoomba. At this stage however, only 5.5 mt pa has been recognised, plus 5 mt of existing coal; and A-30

37 there appears some community interest in improving the frequency and transit time of the existing Toowoomba-Brisbane rail passenger service. Whilst catering a frequent higher speed passenger service within an inland freight railway would create some incremental costs and capacity sharing issues, there are probable synergies and opportunities for sharing of capital costs between the Queensland Government and the inland rail developer to provide greater combined economic benefits. Like the analysis for Albury versus Shepparton route options, the key factors to optimise this route decision are the differences in capital cost, maintenance and operating costs, transit times, demand, capacity and other factors (e.g. risk of residential encroachment, noise, safety, environmental impacts). The following table compares key performances attributes of the Warwick and Toowoomba route options that have been predicted, as a result of detailed work by the LTC and FEC. In addition to these performance attributes, the LTC indicates that there are no capacity constraints for one or two decades on either route. Table 8 Brisbane approach route options comparative table Parameter Via Warwick Via Toowoomba* Difference Transit Time Moree - Acacia Ridge (mins) (19) Route distance Moree - Acacia Ridge (km) (34) 2,279 1, (1) 10.8 (10.8) (0.27) (14.9) Capital cost (Moree-Acacia Ridge 2008 $million) Regional demand (million net tonnes in 2030) Track maintenance cost $m pa (in 2030 in 2008 $million) 0 (2) Incremental access fees $m pa (in 2030 in 2008$s) Source: LTC *assuming route includes new deviations between Inglewood & Millmerran and Gowrie-Grandchester and the incorporation of the southern freight corridor (Rosewood to Kagaru). Notes: (1) Due to no coal freight projected via Warwick route; (2) based on applying LTC WP4 per km maintenance rate for new rail lines ($8,000 per kilometre) The results in the comparative table above indicate that the route via Toowoomba has stronger economic merit based on its lower capital costs and the access to additional regional freight (mainly coal) that the option allows. The FEC remain interested in reviewing viable low cost routes through Warwick which achieve a grade of better than 1 in 67, but in the absence of such information, Stage 2 of this study will focus on inland route options via Toowoomba. 4.3 Optimal inland route in central NSW With the optimal routes now identified at either end of the proposed Melbourne to Brisbane inland rail line, there is a need to combine and optimise these selections with the mid-section of the line; central NSW. Around 50 options have been analysed by the LTC and are summarised in WP2. Following the analysis of journey time against capital cost included in Appendix D, three different routes options were chosen to give three different alternatives for the entire inland route: The three selected options are: A-31

38 Low Case route making use of the existing corridor from Parkes to Narromine, Dubbo, Werris Creek, Narrabri and Moree, with upgrades and deviations where appropriate (i.e. avoiding the need for train reversals at Binnaway and Werris Creek); Central Case route making use of the existing corridor from Parkes to Narromine, Dubbo thence to Premer, with upgrades and deviations where appropriate (i.e. avoiding the need for train reversal at Binnaway). A new greenfield route from Premer to Emerald Hill, then along the existing corridor to Moree and beyond; and High Case route a new connection from Narromine to Curban (on the Dubbo to Coonamble line), from Coonamble to Gwabegar and from Gwabegar to Narrabri. This route makes use of flatter country to the north of the existing corridors, skirting both the Warrumbungle ranges and the Pilliga forest. Figure 4 Potential routes through central NSW Source: LTC In the map above the green line represents the route selection for the high case; the purple is the Central Case and the orange is the route for the Low Case. Again, all other lines represent alternatives that were considered, but were proved to be relatively less viable. A-32

39 4.4 Optimal inland route Combining the analysis above, three cases have been identified to be subject to economic and financial analysis. These options have been selected to give: Low Case slow transit time (low capital costs); Central Case medium transit time (mid capital costs); and High Case fast transit time (high capital costs). The current coastal route transit time (of 33 hours) has been used as an initial point of reference through this process. However, the demand modelling from WP1 focused on the future target coastal route transit time (terminal to terminal) following s planned upgrades. This is estimated by to be 28 hours terminal to terminal (BrisbaneMelbourne). The three cases are best depicted in the map below. A-33

40 Figure 5 Inland route options Source: LTC It can be observed in the map above that the three routes vary only in the central NSW region and slightly between Junee and Stockinbingal. The specifics of each route are outlined in the table below. The table below provides a summary of each of the cases. To accurately reflect terminal to terminal journey times, the LTC has analysed the impact of differing spacing between A-34

41 crossing loops, both on capital cost and consequent delays. This analysis is included in Appendix D, with the times and costs in the table below reflecting the inclusion of these crossing loops. Loops have been included at closer intervals in the fast case to further reduce journey time and provide greater discrimination in the financial and economic assessment. Table 9 Inland route options Route Selected Corridor Route distance (km) Loop spacing (km) Transit time (terminalterminal) Capital cost ($billion) Including contingency (+20%) (1 ($billion) ) Slow case Existing corridor from Melbourne to North Star, upgraded and with by-passes of Binnaway and Werris Creek. Route into Brisbane via Toowoomba. 1, Central case Existing corridor from Melbourne to Premer, upgraded and with by-pass of Binnaway. New route from Premer to Emerald Hill. Route into Brisbane via Toowoomba. 1, Fast case Existing corridor from Melbourne to Narromine, new route from Narromine to Narrabri. Route into Brisbane via Toowoomba. 1, Source: Appendix D (LTC) Note: (1) LTC advised of an upper and lower bound to the capital expenditure per optimal route selected. These are a further +/-35% of the capital cost including contingency. We have reported the mid level in this paper. A-35

42 5. Financial and economic assessment Two forms of analysis have been performed in this paper: financial and economic. From the financial perspective this study has viewed the inland rail, as a stand-alone operation under private ownership. Economically the analysis needs to incorporate the coastal route, inland route and road transport to capture all benefits and costs associate with the introduction of an inland rail line. The follow sections highlight the scenarios relevant to both these analyses. 5.1 Scenarios included in appraisal Base Case scenario without inland rail This scenario incorporates the business as usual option of upgrading the capacity and improving the transit times of existing routes; Melbourne-Sydney and Sydney-Brisbane to cover growth in freight demand. The combination of these routes is captured by, defined as the north-south corridor, and referred to throughout this document as the coastal route. The development of a Base Case is important to ensure we can better measure true economic benefit/cost and financial performance from alternative scenarios on an incremental scale. Although there may not be a ceiling or maximum level of rail traffic on the coastal route, there may well be a time when to meet the growing demand considerable upgrade involving significant capital outlay, disruption to service and so on will be required to ensure capacity is met on the coastal route. Preliminary demand analysis and forecasted capital spend suggests coastal capacity will not be reached before 2080 (if all capital spend on coastal route is performed), the limit of this study. Planning and Development Unit advised of the assumptions made for the Base Case. Below is a summary of forecast capital expenditure on the coastal route. Table 10 proposed capital spend on the North-South Corridor (coastal route) Year Section Construction required for northsouth corridor (coastal) With SNP ($ million) Without SNP ($ million) Required for inland rail ($ million) 2011 Brisbane to Sydney 22 loop extensions and 4 new loops $260 $ Brisbane to Sydney, Northern Sydney Freight Works (SNP - Stage 1) $ Cootamundra to Melbourne duplication Seymour to Tottenham $300 $300 $ Brisbane to Sydney 17 passing lanes of 14 km each $481 $ Cootamundra to Melbourne duplication Wodonga to Junee $300 $300 $ Brisbane to Sydney 16 passing lanes of 14 km each $480 $ Sydney to Cootamundra SSFL enhancement $50 $50 - $2,701 $1,871 $600 Marketable capacity (excluding paths at undesirable times of day) 31 paths/day 14 paths/day Maximum capacity 98 paths/day 64 paths/day Total Source: 2008, Interstate and Hunter Valley Rail Infrastructure Strategy and consultation A-36

43 It has been assumed in relation to both the Base Case and the project scenarios that the SNP will occur regardless of whether there is any investment in the inland rail. Within Stage 2 further analysis is required to confirm the Base Case. For example, it is noted that the Northern Sydney Rail Freight Corridor Program (also called the Short North Project) has been listed by the NSW Government as a priority project for funding by 31 Infrastructure Australia with a total cost of $4.075 billion. Key scenario assumptions Headline financial analysis looks at inland rail as a standalone investment by a private, commercial entity within a proprietary limited corporate ownership structure. This disregards revenue loss or coastal route capital cost savings. Low Capital Cost scenario (27⅔ hour transit) The Low Capital Cost scenario is based on providing a route with transit time that is comparable with the coastal route transit times. Therefore it was necessary to determine the lowest and most cost efficient route based on these criteria. The efficiency frontier in Figure 4 highlights the method used for this route selection. Central Case scenario (25¾ hour transit mid capital cost) The Central Case is based on providing a route with transit time that is somewhere between the Low Capital Cost and the High Capital Cost scenarios. The efficiency frontier was used to determine the most time to cost effective routed this is best detailed in Appendix 4. High Capital Cost scenario (23¾ hour transit) The high capital cost scenario is based on providing a route with comparatively faster transit time. In order to achieve a transit time of 23¾ a higher capital cost was estimated by the LTC in WP3. The table below summarises the route distances, capital costs and terminal to terminal transit times of the three scenarios compared to the Base Case. Table 11 Assumptions for specific scenarios Assumption Description Base Case (28 hr) Low Capital Cost (27 ⅔ hr) Central Case (25¾ hr) High Capital Cost (23¾ hr) Distance (km) 1,862 1,891 1,783 1,706 Capital cost ($2008 millions incl. 20% contingency) 2,701 2,815 3,090 3,613 Capital cost ($2008 millions including contingency) / minute Average speed (km/h) IA Report to the Council of Australian Governments, December 2008 p 68 accessed at A-37

44 5.2 ACCC regulation of maximum access prices It has been assumed that track owner establishes an access undertaking with the ACCC akin to the regulatory framework utilised by. We have also assumed for Stage 1 that access charges for inland rail are set at broadly the same reference tariff levels that applies for the existing main south and coastal routes and that QR applies for coal. The charge levels for superfreighters are set at levels to be road competitive which results in revenues generally being well below the potential ceiling or maximum charge levels for specific corridors. The table below provides an indicative illustration of how a maximum revenue limit per annum could be set for inland rail. Table 12 Indicative maximum regulated revenue limits by capital scenario Assumption Description Low Capital Cost (27⅔ hr) Central Case (25¾ hr) High Capital Cost (23¾ hr) 2,815 3,090 3,613 Regulatory WACC (@8% post-tax real) Depreciation (@3% straight-line) Efficient operating and maintenance Costs (2020 estimate) Indicative maximum revenue pa Capital cost ($2008 s million incl. 20% contingency) Overall, under most scenarios, revenues per annum for inland rail are typically only 15% to 25% of the potential maximum limit. Consequently, there is some scope to apply higher access charges, but this requires an elasticity analysis to assess the extent of tonnage losses which may result from this strategy and this will be evaluated as part of Stage 2 of this study. A-38

45 6. Key findings and results WP5 is a preliminary analysis presenting work in progress, and as such, the results below will be superseded by updated analysis over the course of the study. These preliminary Stage 1 results below are likely to change over the course of the study, as capital costs are further optimised and demand is further analysed to identity extra tonnages. Preliminary results indicate routes via Albury and Toowoomba have greater economic benefit and represent the route identified for further analysis. 6.1 Financial results A more detailed breakdown of the key financial components is provided below. These figures represent the present value of the revenue and cost lines for the project discounted at a real WACC of 8%. Table 13 Financial present value analysis by scenario ($ millions) Present 8% real WACC ($ million) Low Capital Cost (27⅔ hr) 32 Central case (25¾ hr) High Capital Cost (23¾ hr) 2020 Revenue (242) (236) (211) Capital costs (1,499) (1,651) (1,934) NPV (1,045) (1,275) (1,691) Revenue Operating costs (50) (49) (44) Capital costs (321) (352) (412) NPV (174) (224) (312) Operating costs 2040 The above preliminary results indicate that, based on WP1 tonnage forecasts and existing access charge levels, below rail revenue is not sufficient to recover the significant capital outlay required for the construction of any of the three scenarios. Consequently, a Melbourne-Brisbane inland railway, as at Stage 1, does not appear financially viable as a standalone commercial entity. As part of upcoming analysis within Stage 3 of this Study, we will consider alternative funding structures including the likely funding implications for governments so as to package an inland railway into a more viable project. The Low Capital Cost scenario has better financial performance indicating that the additional tonnage attracted from faster transit times does not appear to justify the extra capital cost. In addition, while delaying the opening by 10 or 20 years sees some improvement in the financial NPV this is mainly due to the NPV discounting process which reduces the 32 Note: coal revenue assumptions for Stage 1 are based on a simplified assumption of $2/tonne for Toowoomba-Brisbane coal, and $1/tonne for Narrabri coal. In addition, Werris Creek Narrabri revenues are capped at $40m, reflecting an approximation of the impact of regulated maximum prices on revenues generated on this part of the corridor. A-39

46 significance of the initial capital cost and to aa lesser extent due to tonnage growth. Hence the viability of the project is only modestly better in 2030 and 2040 compared to Overall, for the inland railway to reach financial viability it is likely to require a combination of additional tonnages, reductions to the capital cost and/or a range of funding contributions from different sources. A further observation from Table 16 is that the Low Capital Cost scenario has higher revenue than the other two scenarios. This can be explained by: Access charging assumptions and minimal variation in tonnage between scenarios: the Stage 1 analysis assuming container freight access charges are broadly consistent with existing charges used on the coastal route with a two part tariff based on a variable component per GTK and a flagfall component per train kilometre. The ACIL Tasman demand modelling contained in WP1 had results which had only minor rises in tonnage for faster transit times. Consequently, the Low Capital Cost has the higher container freight access revenues due to being longer and having only slightly less tonnage; and Werris Creek Narrabri coal revenue not captured for all scenarios: the location of the three options for the inland rail lines relative to the existing Werris Creek-Narrabri line and the Gunnedah Basin coal mines will influence how much coal tonnage uses the inland railway. As the Low Capital Cost scenario uses the existing line which has good proximity to the mines it has been assumed that all Werris Creek-Narrabri coal tonnages and access revenue is allocated to the Low Capital Cost Scenario. For the Central Capital Cost inland railway route, which is further to the west, it is expected that approximately half of this coal volume uses the existing Werris Creek-Narrabri railway and half uses the new Central Case inland rail route. For the High Capital Cost scenario which is further west again, all Gunnedah Basin coal volumes are assumed to use the existing Werris Creek Narrabri railway. It is noted that this coal currently uses existing track and this revenue is likely to be captured with or without inland rail proceeding. However, it has been assumed that this coal access revenue is allocated to the project to part-fund capital outlays on other parts of the inland railway, and thereby improves its viability. It is important to note that access revenue and below-rail maintenance costs from Junee to Melbourne accrue to and therefore are not allocated to the three scenarios. This is up to 30% of realised revenues accrued from Melbourne-Brisbane traffic (superfreighter) on the inland rail line. Similarly, for freight that originates or terminates outside the corridor (e.g. Brisbane to Perth) only access revenue obtained from using inland rail is recognised in the analysis. WP1 highlighted that freight demand volumes for intercapital rail freight between Brisbane and Melbourne (both ways) varied slightly with changes in transit times, average of 1% 33 increase in demand per hour saved in transit time. These small increases in freight demand per transit time savings result in the higher cost (faster transit time) scenarios have worse financial outcomes. The table below summarises the average annual real revenues and costs for the projects under each scenario. 33 WP 1 Draft, Figure 20. A-40

47 Table 14 Financial results: average annual cash flow by scenario ($ million) Average annual cashflow from year of operation ($2008 million) Central Case (25¾ hr) Low Capital Cost (27⅔ hr) High Capital Cost (23¾ hr) 2020 Total capital costs per scenario (3,064) (3,355) (3,915) Revenue (average pa) Operating costs (average pa) (47) (47) (42) Tax (average pa) (24) (18) (6) Interest costs (average pa) (21) (23) (27) (3,111) (3,416) (3,993) Revenue (average pa) Operating costs (average pa) (47) (47) (42) Tax (average pa) (28) (20) (7) Interest Costs (average pa) (31) (34) (40) Average cashflow Average cashflow 2040 Total capital costs per scenario The above table highlights that pre-interest costs, the project has modestly positive operating cashflows. However, given the size of the capital cost (and associated interest expense) the average annual net cashflow reduces to relatively low levels. The table below illustrates the NPV financial results from an equity investor s perspective which includes an interest cost within cashflows at a 50% gearing (debt: equity). Table 15 Financial present value analysis (equity investor perspective) ($ millions) Indicator Low Capital Cost (27⅔ hr) 2020 Financial NPV (@ 11% return on equity (1,250) Central Case (25¾ hr) 2040 (138) 2020 (1,447) High Capital Cost (23¾ hr) 2040 (162) 2020 (1,803) 2040 (205) The NPV outcomes above remain negative and are broadly similar to the Project NPV results. Financial sensitivities Given the findings that the most viable scenario is the Low Capital Cost case, the following sensitivities have been performed to illustrates the scope to improve (or worsen) NPV outcomes with +/-35% changes in capital cost and demand. A-41

48 Table 16 Sensitivity analysis: demand and capital cost ($ million) NPV Low Capital Cost 8% WACC 2040 Demand -30% Demand (as per WP1) Demand +30% Lower bounds (capital costs -35%) (120) (62) (8) Capital costs (232) (174) (121) Upper bounds (capital costs +35%) (344) (286) (233) This table indicates that even if capital costs are reduced to the lower bound of the estimates supplied by LTC, and forecast demand increased by 30% the project remains not financially viable as a standalone commercial project. Table 17 Sensitivity analysis: capital costs and discount rate/wacc ($ million) NPV Low Capital Cost Case 2040 Lower bounds (capital costs -35%) 6% real post-tax WACC 8% real post-tax WACC 10% real post-tax WACC (8) (62) (57) Capital costs (198) (174) (123) Upper bounds (capital costs +35%) (388) (286) (190) The table above highlights that at different discount rates the overall project viability remains negative. At lower discount rates the financial NPV loss reduces, which is the case because the NPV is negative and a lower rate of return is required in order to breakeven financially. The preliminary financial assessment results indicate that the inland railway does not appear financially viable as a standalone commercial project. The Low Capital Cost scenario has better financial performance indicating that the additional tonnage attracted from faster transit times does not justify the extra capital cost. In addition, delaying the opening by 10 or 20 years sees the financial NPV improve but viability remains weak with the improvement in NPV due mainly to the discounting process reducing the significance of the initial capital cost and to a lesser extent accumulation of greater tonnages. Overall, to reach financial viability is likely to require a combination of additional tonnages, reductions to the capital cost and/or funding contributions from a range of different sources. A-42

49 6.2 Economic results The methodology for this BCA uses a conventional incremental-to-the-base-case analysis. It also looks at the north-south freight corridor from a holistic or national perspective, to incorporate incremental costs and benefits from the development of the inland rail line. This initial economic assessment has been completed which includes costs and benefits accruing to likely user and non users of the inland rail benefits including freight time savings to end customers, train operator and road freight cost savings, road maintenance savings and environmental externality cost savings resulting from development of inland rail. The preliminary economic assessment covered the same three scenarios (listed above) with three different opening years incrementally to the Base Case to represent the net economic benefits to community that are expected from the proposed railway. The three inland rail scenarios assumed that the coastal route upgrades would take place regardless of inland rail development occurring. The table below summarise the economic NPVs for each scenario, with varying operational start dates. As with the financial results, the scenarios appear to have a better performance by delaying the opening 10 or 20 years but viability remains marginal as the improvement in results is due mainly to the NPV discounting process which reduces the significance of the initial capital cost. Table 18 Summary of economic appraisal results (incremental to the Base Case) ($ million) Inland rail scenario Low Capital Cost ($2.81b capex and 27 ¾ hrs) 2020 Economic 7% real discount rate (860) 2030 (379) 2040 (160) Central Case ($3.09b capex and 25¾ hrs) 2020 (846) 2030 (350) 2040 (133) High Capital Cost ($3.61b capex and 23 ¾ hrs) 2020 (976) 2030 (399) 2040 (147) Previous studies of the inland rail project have included access charges as a benefit. However, access charges are considered financial revenue rather than an economic benefit, because they comprise a direct transfer of money between supply chain participants. Operators will use the new rail line if their willingness to pay exceeds their expenditure from doing so. This expenditure is comprised of both perceived costs (e.g. access charges, etc) and unperceived costs (depreciation, etc). By definition, freight would not switch to the inland route unless there was a private net benefit from doing so and access charges are a key determinant of this decision. However, this economic appraisal is concerned with assessing the direct effects on the national community of operators' decisions to switch to inland rail (which already takes into account access charges). The national perspective ensures that all transfers (such as access charges) are netted out. Some of the conventional economic effects of freight re-assignment include changes in the opportunity cost of freight in transit, unperceived resource cost corrections and reductions in negative externalities. The table below highlights the breakdown of benefits and costs by category. A-43

50 Table 19 Economic: breakdown of economic costs and benefits by route (incremental to Base Case) Present value 7%) $ million Low Capital Cost (27⅔ hr) Central Case (25¾ hr) High Capital Cost (23¾ hr) 2020 PV of total benefits Operating cost savings (rail users) Value of time savings (rail users) Net economic benefit of induced freight (producers) Crash cost savings (road & rail users) Environmental externalities (non-users) Value of residual assets (in 2081) (Financial) (1,276) (1,398) (1,643) (268) (257) (250) (1,008) (1,141) (1,392) (860) (846) (976) PV of total benefits Operating cost savings (rail users) Crash cost savings (road & rail users) Environmental externalities (non-users) Value of residual Assets (in 2081) (Financial) (330) (362) (426) (66) (63) (61) Capital expenses (financial) (264) (299) (365) NPV (@7%) (160) (133) (147) Road maintenance savings (financial) PV of total costs Operating expenses (financial) Capital expenses (financial) NPV (@7%) 2040 Value of time savings (rail users) Net economic benefit of induced freight (producers) Road maintenance savings (financial) PV of total costs Operating expenses (financial) Overall the scale of a range of the economic benefits is relatively low. These can be explained by a number of factors including: mode shift from road to rail is modest compared to that of the shift from the coastal route (rail to rail), as a result externality savings are minimal; as the inland line mostly traverses rural areas unit rates for benefits are lower compared to urban rates; induced freight creates more externality costs, as induced freight in not included in the study s Base Case. This results in net externality costs; and A-44

51 extent of travel time savings is low due to s planned improvements on the coastal line. The improvements are forecasted to allow for a transit time of 28 hours. The table above does highlight that the main economic benefits are found through time savings (through the coastal to inland rail shift), operating cost savings (as a result of shorter/flatter route and more efficient track) and road maintenance savings (through road to rail shift). Due to the range of adjustments likely to various key inputs and assumptions, sensitivity analysis of these economic results will be deferred until Stage Results alternative demand scenario Results with demand The financial and economic results discussed above are based on ACIL Tasman s assessment of demand as presented in WP1. Included for comparison with these results, Table 21 shows the financial appraisal results based on demand assumptions. The demand forecast has a more responsive elasticity than estimated by ACIL, with customers more willing to switch modes for changes in price, availability, reliability and transit time. The s more optimistic forecasts of rail market share are based on a methodology that interpolates from shares on eight intercapital routes (including Adelaide and Perth), rather than from survey information as formed the basis for ACIL Tasman s approach. Whist its forecasts were developed for a different purpose (capacity planning on the coastal route, with no reference to an inland route), they can be used to develop an upside scenario in this study. ACIL Tasman replaced its logit formulation with a version of the s work and reran the Base Case (i.e. no inland rail) and other inland rail cases. Table 23 presents the financial and economic appraisal results for the low case with demand and mode share assumptions. Table 20 Appraisal results with demand ($ millions) Inland rail scenarios ACIL demand: demand: Low Capital Cost ($2.81b capex and 27⅔ hrs) Low Capital Cost ($2.81b capex and 27⅔ hrs) Financial NPV of project 8% Real WACC) (1,045) (423) (174) (921) (344) (130) Financial NPV for equity investor 11% real return on equity) (1,250) (413) (138) (1,191) (382) (125) (860) (379) (160) (558) (178) (37) Economic 7% real discount rate As indicated in Table 23, incorporating the demand assumptions results in the Low Capital Case improving its financial NPV by between 10-20% at a real WACC of 8%, and the economic NPV also improves by more than 30%. However, inland rail still does not appear financially or economically viable. In terms of the financial results under this alternative demand scenario, the higher demand results in higher financial revenue. However the increase in revenue is not significant enough to fund the capital and operating costs of the proposed route. The route remains A-45

52 unviable financially because the increase in revenue is not significant enough to fund the capital and operating costs of the proposed route. This is presented in Table 24. Table 21 Financial present value analysis with demand ($ millions) Present 8% real WACC ($ million) ACIL demand: demand: Low Capital Cost (27⅔ hr) Low Capital Cost (27⅔ hr) 2020 Revenue (242) (242) Capital costs (1,499) (1,499) NPV (1,045) (921) Revenue Operating costs (50) (50) Capital costs (321) (321) NPV (174) (130) Operating costs Route identified for further analysis in Stage 2 Overall, the results of this preliminary financial and economic assessment are that the inland railway does not appear financially viable as a standalone commercial project. The economic results indicate that the Low and Central Capital Cases are broadly equivalent and they also appear unviable. The financial results show that the Low Capital Case has clear stronger performance, identifying this as the route for further analysis in Stage 2. As a result of this finding, combined with WP1-4 findings, a total route with the deviation options has been developed that will be examined in Stage 2 (see Figure 7). A-46

53 Figure 6 Inland rail route identified for Stage 2 analysis Source: LTC 6.5 Areas of further analysis in stages 2 and 3 Following this preliminary economic and financial analysis, further analysis which will be progressed within stages 2 and 3 of this study includes: optimising capital costs the LTC has some further ideas and innovations on route refinements and track components to further reduce the capital costs; re-evaluating the extent that faster transit times induce or attract extra rail freight including an assessment of likely demand for a 14 hour courier train style service. The extra freight tonnages generated in the Central (25¾ hour) and High Cost (23¾ hour) capital A-47