Why the economics of the Metro Tunnel do not stack up
Even under the most forgiving economic conditions, the economic viability of the Melbourne Metro Tunnel is now hanging by a thread. When we adjust the original business case to reflect the 42 percent explosion in projected costs and the 50 percent structural reduction in benefits due to the post-pandemic patronage gap, the net present value of the project drops from a whopping $18 billion surplus to a razor-thin $0.72 billion. This results in a benefit-cost ratio of just 1.06; This means that for every dollar invested, the government now receives only 6 cents of surplus value.
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Although a benefit-cost ratio greater than zero technically classifies the project as “feasible”, it is clear that this is just a back-end calculation. If train patronage remains low and it turns out we won’t be able to hit capacity constraints on the old network for another 15 or 20 years, then benefits could easily fall by more than half. If the infrastructure is valued below Australia’s standard 7 per cent interest rate, the project will become absolutely unsustainable and destroy billions of dollars in value.
The Melbourne Metro Tunnel saga serves as a stark warning for any heavy rail project imagined in a pre-pandemic world. For a long time, there was hope that the pandemic was a momentary interruption, a temporary interruption in the inevitable growth of public transport.
But here we are, almost six years after the pandemic began, and we’re not even close to the pre-pandemic peak. The Commuter Rail Loop business case written in 2020 assumed COVID-19 would reduce patronage by about 5 to 10 percent. Experience from Melbourne Metro suggests that losses would be five to 10 times greater, pushing the project further into disrepair before costs inevitably have a chance to balloon.
This fact reveals a fundamental contradiction in modern government policy. If governments are to commit to making working from home a permanent and prominent feature of the workforce, they also need to have the courage to roll back infrastructure targets.
We must realize that working from home has a huge infrastructural benefit in itself. By keeping employees at home two or three days a week, we naturally eliminate the rush-hour congestion these projects are designed to solve. If we lock in hybrid operation, we will need fewer roads, fewer trains and fewer expensive tunnels.
Isaac Gross is a senior lecturer in the Department of Economics at Monash University.
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