Channel Deepening
Supplementary Environmental Effects
Statement
Expert Witness Presentation
Planning Panels Victoria
Department of Sustainability and Environment
17 July, 2007
1
The Rules of the Game
 Economic analysis is conducted according to an
established body of theory and practice
 Neo-classical economics is the standard theoretical
framework for assessing the net worth of projects
 This standard is exemplified by the Economic Analysis
of Investment Operations, World Bank (WB, 2001) and
the Handbook of Cost-Benefit Analysis from the
Commonwealth Department of Finance (DOF, 2006)
2
Rules of the Game - Methodology
 Meyrick cites DOF, 2006 as their guide - we agree - and
also include WB, 2001 guidelines as a even more
relevant guide
 Meyrick has used cost-benefit analysis (CBA) - we agree
that this is the appropriate framework.
 SEES section 5.3 refers to a PWC/COPS economic
model - it is based on data from the Meyrick CBA inbound data determines the outbound results
 Economic impact analysis is not relevant here - CBA
data has provided the input that drives the economic
model - same result could have been achieved with a
export based toy factory!
3
Rules of the Game - Methodology continued
“Employment multipliers seldom measure actual benefits or opportunity costs and should
generally not be included in cost-benefit analyses. Likewise, ‘secondary benefits’ are often
another way of presenting primary benefits that have already been included in the analysis
or that represent transfers. While secondary effects of a project may be important for
distributional analysis or for planning purposes, their inclusion in a cost- benefit analysis
involves inappropriate double counting.”
DOF, 2006, pg 47
 DOF handbook agrees with our conclusion - no evidence
presented to privilege CDP over other transport
infrastructure investments at the macro-economic level.
 If the CBA is negative the economic impact is negative &
vice versa - the focus should be on the CBA analysis
4
Cost Benefit Analysis Rules! Ok
 What is the objective of the project? To create value in
the Victorian/Australian economy, and hence to improve
the welfare of Victorians & Australians.
 Meyrick agrees’ “the project would only proceed if
benefits exceed costs” SEES, Technical Appendix 4,
Section 2.1.
 Meyrick CBA says benefits>costs - the World Bank says:
“Good economic analysis should leave no doubts about the project’s contribution to the
country’s welfare”. WB, 2001, pg 3.
WB, 2001, pg 3
5
Setting the goal posts
 There must be a high probability that the CDP will
deliver net benefits, relative to doing nothing & net
benefits equivalent to any project of comparable
commercial risk
 Paid for by taxpayers, without repayment, it serves a
commercial enterprise. It is the marine equivalent of
extending the Sydney airport runaway - but without the
landing charges
 Direct financial beneficiaries are commercial operators
who will save money (much of it overseas), have a history
of cartel behaviour & are subject to strong economic
cycles
6
Is this a high probability outcome?
Can the CDP confidently deliver:
a efficient shipping market AND
sufficient cost savings per TEU, in the period 2008 to
2035 to repay a commercial return on the estimated
$500 to $1000m capital investment
compared with any other project(s) that could have
been made and/or business as usual?
Meyrick seeks to demonstrate that the net benefits are
positive (that is they have positive NPV) that is at least
equal to what else could have been earned in another,
equivalent investment.
7
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
 The SEES’ cost-benefit analysis forecasts net project
benefits or net present value (NPV) of $1.35bn
 Economists@Large have used the same economic
model with more conservative assumptions and
industry standard methods of calculation resulting in an
NPV of -$0.54bn
 SEES financial calculations, modelling assumptions
and cost omissions have caused the Channel
Deepening Project’s (CDP) NPV to be overstated
8
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
 The SEES’ cost-benefit analysis forecasts net project
benefits or net present value (NPV) of $1.35bn
 Economists@Large have used the same economic
model with more conservative assumptions and
industry standard methods of calculation resulting in an
NPV of -$0.54bn
 SEES financial calculations, modelling assumptions
and cost omissions have caused the Channel
Deepening Project’s (CDP) NPV to be overstated
9
The SEES’ cost-benefit analysis forecasts net project
benefits or NPV of $1.35bn
Channel Deepening Project Benefits & Costs (SEES)
2500
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES
10
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
 The SEES’ cost-benefit analysis forecasts net project
benefits or net present value (NPV) of $1.35bn
 Economists@Large have used the same economic
model with more conservative assumptions and
industry standard methods of calculation resulting in an
NPV of -$0.54bn
 SEES financial calculations, modelling assumptions
and cost omissions have caused the Channel
Deepening Project’s (CDP) NPV to be overstated
11
Economists@Large have reworked the economic
model with more appropriate assumptions resulting in
an NPV of -$0.54bn
Channel Deepening Project Benefits & Costs (EcoLarge)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
-500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES and analysis by EcoLarge
12
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
 The SEES’ cost-benefit analysis forecasts net project
benefits or net present value (NPV) of $1.35bn
 Economists@Large have used the same economic
model with more conservative assumptions and
industry standard methods of calculation resulting in an
NPV of -$0.54bn
 SEES financial calculations, modelling assumptions
and cost omissions have caused the Channel
Deepening Project’s (CDP) NPV to be overstated
13
SEES financial calculations, modelling assumptions
and cost omissions have caused the CDP’s NPV to be
overstated
 The method of calculating of Net Present Value (NPV) is
not to accepted industry standards
 Assumptions within the economic model are nonconservative
 Significant costs that should be in the economic model
have been omitted or under-estimated
14
SEES financial calculations, modelling assumptions
and cost omissions have caused the CDP’s NPV to be
overstated
 The method of calculating of Net Present Value (NPV) is
not to accepted industry standards
 Assumptions within the economic model are nonconservative
 Significant costs that should be in the economic model
have been omitted or under-estimated
15
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
16
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
17
Use of an inappropriately low discount rate, 6%,
overstates the net present value of the project.
NPV ($m)
2,500
NPV decreases as Discount Rate increases 1
2,000
• World Bank uses
discount rate of 10-12%.2
1,500
1,000
500
0
Discount Rate
4%
6%
8%
10%
12%
14%
16%
18%
20%
-500
Notes
1. Source: Extrapolated from data from SEES
2. Source: Beli, et al, 1997. Handbook on economic analysis of investment operations, World Bank
18
Use of an inappropriately low discount rate, 6%,
overstates the net present value of the project.
NPV ($m)
2,500
NPV decreases as Discount Rate increases 1
2,000
• World Bank uses
discount rate of 10-12%.2
Meyrick &
Associates
1,500
1,000
500
0
Discount Rate
4%
6%
8%
10%
12%
14%
16%
18%
20%
-500
Notes
1. Source: Extrapolated from data from SEES
2. Source: Beli, et al, 1997. Handbook on economic analysis of investment operations, World Bank
19
Use of an inappropriately low discount rate, 6%,
overstates the net present value of the project.
NPV ($m)
2,500
NPV decreases as Discount Rate increases 1
2,000
• World Bank uses
discount rate of 10-12%.2
Meyrick &
Associates
1,500
1,000
Economists@Large
500
0
Discount Rate
4%
6%
8%
10%
12%
14%
16%
18%
20%
-500
Notes
1. Source: Extrapolated from data from SEES
2. Source: Beli, et al, 1997. Handbook on economic analysis of investment operations, World Bank
20
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
21
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
22
In the valuation of any project, the WACC is the
appropriate discount rate to use1, which is
approximately 12% for PoM’s case
WACC = Weighted Average Cost of Capital = discount rate
WACC =
[
Equity (E)
Cost of Equity
E
] [
X
+
Debt (D) + E
Cost of D X (1 - tax rate)
X
D+E
Cost of Equity = Risk-free rate of return + Systematic Risk of PoM X Equity Risk Premium
Cost of Equity = 6.25% + 1.23 X 6%4 = 13.5%
WACC =
[
$758m 2
13.5% X
$837m
2
]
+
[
6.34%2 X (1 – 30%)
X
$78m 2
]
$837m 2
= 12.6% => discount rate ~12%
Notes
1. FINSIA, Financial Analysis and Valuation Handbook 2007
2. Port of Melbourne Annual Report 2007
3. Systematic Risk of PoM / Beta value may be higher than 1.2
4. Industry standard for Equity Risk Premium rate is 6%. E.g. Grant Samual, Qantas Target’s Statement (p6) p153
23
]
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
24
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
25
If we use a 12% discount rate, NPV reduces to $0.25bn
2500
Channel Deepening Project Benefits & Costs (6% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2000
2,000
1,500
1500
1,000
1000
500
500
0
1
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES
2
3
4
26
If we use a 12% discount rate, NPV reduces to $0.25bn
Channel Deepening Project Benefits & Costs (12% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2000
2,000
1500
1,500
1000
1,000
500
500
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES
27
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
28
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
29
Calculating the value of the CDP over 25 years is
against the industry standard of 10 years plus a
terminal value
• Forecasting is inherently difficult. It is difficult to forecast 5 years into
the future, let alone 25 years.
• Projects benefits are usually forecast 5-10 years into the future and
then a terminal value for ongoing benefits is included.
“Discounted Cash Flow analysis requires forecasting a company’s free cash flow
over a determined period,often 10 years”1
“Grant Samuel has prepared a high level discounted cash flow analysis of Qantas
based on a 10 year forecast model”2
Notes
1. FINSIA, Financial Analysis and Valuation Handbook 2007
2. Grant Samuel, Qantas Target’s Statement
30
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
31
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
32
If benefits are forecast for 10 years and a terminal
value is used, the NPV reduces to $1.02bn
2500
Channel
Deepening Project Benefits & Costs (25 yr benefits, 6% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2000
2,000
1,500
1500
1,000
1000
500
500
0
Notes
1
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
1. Source: Extrapolated from data from SEES
Source
2.
Extrapolated from data from SEES
2
3
4
33
If benefits are forecast for 10 years and a terminal
value is used, the NPV reduces to $1.02bn
Channel Deepening Project Benefits & Costs (10 yr benefits + TV, 6% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
1
Notes
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
1. Source: Extrapolated from data from SEES
Source
2.
Extrapolated from data from SEES
34
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
35
The method of calculating of NPV is not to accepted
industry standards

Use of an inappropriately low discount rate, 6%, overstates the net
present value (NPV) of the project

In the valuation of any project, the WACC is the appropriate
discount rate to use, which is approximately 12% for PoM’s case

If we use a 12% discount rate, NPV reduces to $0.25bn

Forecasting the benefits of the CDP over 25 years is against the
industry standard of 10 years plus a terminal value

If benefits are forecast for 10 years and a terminal value is used, the
NPV reduces from $1.35bn to $1.02bn

Using both a 12% discount rate and a 10 year forecast period leads
to the NPV reducing to $0.07bn
36
Applying a 12% discount rate to a 10 year forecast with
a terminal value, the NPV reduces to $0.07bn
2500
Channel
Deepening Project Benefits & Costs (25 yr benefits, 6% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2000
2,000
1,500
1500
1,000
1000
500
500
0
1
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES
2
3
4
37
Applying a 12% discount rate to a 10 year forecast with
a terminal value, the NPV reduces to $0.07bn
Channel Deepening Project Benefits & Costs (10 yr benefits + TV, 12% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES and EcoLarge analysis
38
Non-conservative assumptions and omissions have
led to overstating the economic case for the CDP
 The method of calculating of Net Present Value (NPV) is
not to accepted industry standards
 Assumptions within the economic model are nonconservative
 Significant costs that should be in the economic model
have been omitted or under-estimated
39
Non-conservative assumptions and omissions have
led to overstating the economic case for the CDP
 The method of calculating of Net Present Value (NPV) is
not to accepted industry standards
 Assumptions within the economic model are nonconservative
 Significant costs that should be in the economic model
have been omitted or under-estimated
40
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
41
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
42
Shipping industry forecasts based on world economic
growth over 30 years must be conservative
• All forecasts are based on world economic growth, trade
growth and container growth for 30 years
• A conservative rate of world growth has been used. General
trend – increase in shipping and an increase in ship sizes
globally
• Detailed predictions are difficult
• Container shipping industry is only 40 years old,
a 30 year forecast seems inappropriate
• The nature of the shipping industry
43
Shipping industry forecasts based on world economic
growth over 30 years must be conservative
“Shipping is cyclical and to a certain extent depends on trade cycles. Currently seen is a
worldwide boom …This (boom) has prompted warnings from shipbrokers that the charter
market could collapse”
(Deloittes Touche Tohmatsu, Key Issues in Global Shipping, Nov 2005)
"The market is hugely vulnerable to a downturn in demand. A renewed surge of ordering
activity in the opening months of the year appears to have exposed the containership
industry to the threat of collapse. It may be possible to get through the next three years
undamaged, but there are huge risks.”
(Howe Robinson, Quaterly Analysis, as reported in Lloyds List 25/4/2005)
“After four years of buoyant shipping markets, giving statistics never seen before, there
are a number of disquieting voices being heard predicting a severe correction of the
markets or even a new crisis recalling the sad days of the 80s”
(Barry Rogliano Salles (BRS) Shipping and Shipbuilding Markets in 2006, 2007)
44
Shipping industry forecasts based on world economic
growth over 30 years must be conservative
Increase in average container vessel size over time1
6,000
5,000
TEU
4,000
3,000
Ser ies1
2,000
1,000
0
20051
20102
20153
4
2020
20255
20306
20357
45
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p7
Shipping industry forecasts based on world economic
growth over 30 years must be conservative
400,000,000
Container Vessel Operating Cost Savings Due to Channel Deepening1
350,000,000
$350m
300,000,000
$300m
250,000,000
$250m
$200m
200,000,000
150,000,000
$150m
100,000,000
$100m
50,000,000
$50m
0
1
2
2010
3
4
5
6
7
2015
8
9
10
11
12
2020
13
14
15
16
17
2025
18
19
20
21
2030
22
23
24
25
2035
“(Vessel size) can be speculatively evaluated by reference to the past relationship between trade
volumes and ship size – though this does require some fairly imaginative analysis.” 2
46
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p49
2. Drewry Shipping consultants, Port of Melbourne Channel Deepening Study, 2001, p69
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
47
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
48
Assumptions in forecasts of fleet composition have
not been conservative
30.00%
25.00%
20.00%
2005
2010
2015
15.00%
2020
2025
2030
2035
10.00%
5.00%
0.00%
1500-
2000-
2500-
3000-
3500-
4000-
4500-
5000-
5500-
6000-
6500-
7000-
1999
2499
2999
3499
3999
4499
4999
5499
5999
6499
6999
7499
49
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have
not been conservative
30.00%
25.00%
20.00%
2005
2010
2015
15.00%
2020
2025
2030
2035
10.00%
5.00%
0.00%
Source:
1500-
2000-
2500-
3000-
3500-
4000-
4500-
5000-
5500-
6000-
6500-
7000-
1999
2499
2999
3499
3999
4499
4999
5499
5999
6499
6999
7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
50
Assumptions in forecasts of fleet composition have
not been conservative
Fleet composition, 2005
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
0- 1499
Source:
1500-
2000-
2500-
3000-
3500-
4000-
4500-
5000-
5500-
6000-
6500-
7000-
1999
2499
2999
3499
3999
4499
4999
5499
5999
6499
6999
7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
51
Assumptions in forecasts of fleet composition have
not been conservative
Forecast fleet composition with CDP, 2020
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
0- 1499
Source:
1500-
2000-
2500-
3000-
3500-
4000-
4500-
5000-
5500-
6000-
6500-
7000-
1999
2499
2999
3499
3999
4499
4999
5499
5999
6499
6999
7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
52
Assumptions in forecasts of fleet composition have
not been conservative
Forecast fleet composition with CDP, 2020
30.00%
•Drewry (2001) - 11 container vessels servicing
Melbourne were launched in 2000, with an
average capacity of 1760 TEU.
25.00%
20.00%
•Deloittes (2005) note that “The market for
smaller vessels remains buoyant” and offer
detail on orders for vessels as small as
850TEU
15.00%
10.00%
5.00%
0.00%
0- 1499
Source:
1500-
2000-
2500-
3000-
3500-
4000-
4500-
5000-
5500-
6000-
6500-
7000-
1999
2499
2999
3499
3999
4499
4999
5499
5999
6499
6999
7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
53
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts fleet composition, with CDP 2035
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
0- 1499
Source:
1500-
2000-
2500-
3000-
3500-
4000-
4500-
5000-
5500-
6000-
6500-
7000-
1999
2499
2999
3499
3999
4499
4999
5499
5999
6499
6999
7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
54
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, with CDP 2035
25.00%
20.00%
Meyrick&Associates’ forecast that no
ships under 3000 TEU will be involved
in servicing Melbourne is not
conservative.
15.00%
10.00%
5.00%
0.00%
0- 1499
Source:
1500-
2000-
2500-
3000-
3500-
4000-
4500-
5000-
5500-
6000-
6500-
7000-
1999
2499
2999
3499
3999
4499
4999
5499
5999
6499
6999
7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
55
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
90%
80%
70%
2005
60%
2010
2015
50%
2020
2025
2030
40%
2035
30%
20%
10%
0%
0- 1499
Source:
1500-
2000-
2500-
3000-
3500-
4000-
4500-
5000-
5500-
6000-
6500-
7000-
1999
2499
2999
3499
3999
4499
4999
5499
5999
6499
6999
7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
56
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
90%
80%
70%
2005
2010
2015
2020
2025
2030
2035
60%
50%
40%
30%
20%
10%
0%
0-1499
Source:
15001999
20002499
25002999
30003499
35003999
40004499
45004999
50005499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
55005999
60006499
65006999
70007499
57
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
58
0%
0-1499
Source:
1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
59
0%
0-1499
Source:
1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
60
0%
0-1499
Source:
1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
We estimate this limit will lie at or
below 4500 TEU.” (Meyrick & Assoc,
p10)
90%
80%
70%
There is no explanation of this
assumption.
60%
Drewry (2001) assume that ships of
over 7000 TEU will use the port,
although experiencing restrictions of
draft
50%
40%
30%
20%
10%
61
0%
0-1499
Source:
1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have
not been conservative
• A report commissioned by PoMC by London analysts, Drewry
Shipping Consultants Ltd, forecast that ships of over 7000 TEU
will come, albeit with draft restrictions affecting 90% of their
sailings.1
• Drewry Shipping consultants found that costs to container
shipping of draft restraints in 2030 would total nearly $31 million,
in contrast to Meyrick and Associates estimate of $381 million.2
• Despite making reference to this report, Meyricks and Associates
offer no explanation for this disparity.
62
Sources:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p49
2. Drewry Shipping consultants, Port of Melbourne Channel Deepening Study, 2001, p75
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
63
0%
0-1499
Source:
1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
64
0%
0-1499
Source:
1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
Drewry (2001) Ships of 3-4000TEU “have been specifically
designed for long term deployment to Australia and New
Zealand, and have been optimised to conform with current
physical restrictions (specifically draft, LOA, and air draft at
the schedule ports. Melbourne, as a must call port – and
one that cannot be economically served by feedering –
has consequently played a large part in shaping the
vessels’ design and configuration”
90%
80%
70%
60%
50%
40%
30%
20%
10%
65
0%
0-1499
Source:
1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions in forecasts of fleet composition have
not been conservative
Forecasts of fleet composition, without CDP
100%
90%
80%
“The willingness of shipowners to deploy somewhat larger
vessels, and work around the inefficiency that results from
draft constraints, is evidenced by the introduction (of 3900
– 4100 TEU vessels in the Asian and European trades)”
Meyrick&assoc p10.
70%
60%
50%
40%
30%
20%
10%
66
0%
0-1499
Source:
1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
67
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
68
Economists@Large have forecast a more conservative
estimate of fleet composition
Fleet composition, 2005
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
69
0%
0-1499
Source:
1500-1999 2000-2499 2500-2999 3000-3499 3500-3999 4000-4499 4500-4999 5000-5499 5500-5999 6000-6499 6500-6999 7000-7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet composition, 2010
60.0%
100.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
90.0%
30.0%
20.0%
80.0%
10.0%
0.0%
70.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
70
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet composition, 2015
60.0%
100.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
90.0%
30.0%
20.0%
80.0%
10.0%
0.0%
70.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
71
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet composition, 2020
100.0%
60.0%
Conservative estimate
Meyricks & Associates
50.0%
90.0%
40.0%
30.0%
80.0%
20.0%
10.0%
70.0%
0.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
72
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet composition, 2025
100.0%
60.0%
Conservative estimate
Meyricks & Associates
50.0%
90.0%
40.0%
30.0%
80.0%
20.0%
10.0%
70.0%
0.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
73
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet composition, 2030
60.0%
100.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
90.0%
30.0%
20.0%
80.0%
10.0%
0.0%
70.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
74
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet composition, 2035
60.0%
100.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
90.0%
30.0%
20.0%
80.0%
10.0%
0.0%
70.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
75
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
Fleet composition, 2005
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
0- 1499
Source:
1500-
2000-
2500-
3000-
3500-
4000-
4500-
5000-
5500-
6000-
6500-
7000-
1999
2499
2999
3499
3999
4499
4999
5499
5999
6499
6999
7499
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
76
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet
composition with CDP, 2010
30.0%
60.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
25.0%
30.0%
20.0%
10.0%
0.0%
20.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
15.0%
10.0%
5.0%
77
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet
composition with CDP, 2015
30.0%
60.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
25.0%
30.0%
20.0%
10.0%
0.0%
20.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
15.0%
10.0%
5.0%
78
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet
composition with CDP, 2020
30.0%
60.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
25.0%
30.0%
20.0%
10.0%
0.0%
20.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
15.0%
10.0%
5.0%
79
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet
composition with CDP, 2025
30.0%
60.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
25.0%
30.0%
20.0%
10.0%
0.0%
20.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
15.0%
10.0%
5.0%
80
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet
composition with CDP, 2030
30.0%
60.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
25.0%
30.0%
20.0%
10.0%
0.0%
20.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
15.0%
10.0%
5.0%
81
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
100.0%
90.0%
80.0%
70.0%
Fleet
composition with CDP, 2035
30.0%
60.0%
Conservative estimate
Meyricks & Associates
50.0%
40.0%
25.0%
30.0%
20.0%
10.0%
0.0%
20.0%
1
2
3
4
5
6
7
8
9
10 11 12 13
15.0%
10.0%
5.0%
82
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Economists@Large have forecast a more conservative
estimate of fleet composition
• These estimates are of great importance to the cost-benefit analysis of the CDP, as
nearly all calculated benefits are derived from the forecast use of larger ships.
100.0%
Meyrick&Assoc no CDP
100.0%
Meyrick&Assoc with CDP
90.0%
90.0%
80.0%
80.0%
70.0%
70.0%
60.0%
60.0%
50.0%
50.0%
40.0%
40.0%
30.0%
30.0%
20.0%
20.0%
10.0%
10.0%
0.0%
0.0%
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p10
Conservative estimate no CDP
Conservative estimate with CDP
83
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
84
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
85
Applying this conservative forecast to just container
vessel operating costs causes a reduction of NPV from
$1.35bn to $0.71bn
Channel Deepening Project Benefits & Costs (SEES)
2500
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES
86
Applying this conservative forecast to just container
vessel operating costs causes a reduction of NPV from
$1.35bn to $0.71bn
Channel Deepening Project Benefits & Costs (Conservative
Ship Size Composition, 25 yr forecast, 6% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES and EcoLarge analysis
87
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
88
Assumptions within the economic model are nonconservative
 Shipping industry forecasts based on world economic growth over 30
years must be conservative
 Assumptions in forecasts of fleet composition have not been
conservative
 Economists@Large have forecast a more conservative estimate of fleet
composition
 Applying this conservative forecast to just container vessel operating
costs causes a reduction of NPV from $1.35bn to $0.71bn
 Using this estimate of fleet composition as well as a 12% discount rate
and a 10 year forecast period plus terminal value, results in an NPV of $0.09bn
89
Using this estimate of fleet composition as well as a
12% discount rate and a 10 year forecast period plus
terminal value, results in an NPV of -$0.09bn
Channel Deepening Project Benefits & Costs (SEES)
2500
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES
90
Using this estimate of fleet composition as well as a
12% discount rate and a 10 year forecast period plus
terminal value, results in an NPV of -$0.09bn
Channel Deepening Project Benefits & Costs
(Conservative Ship Size Composition, 10 yr forecast + TV, 12% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
-500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES and EcoLarge analysis
91
Non-conservative assumptions and omissions have
led to overstating the economic case for the CDP
 The method of calculating of Net Present Value (NPV) is
not to accepted industry standards
 Assumptions within the economic model are nonconservative
 Significant costs that should be in the economic model
have been omitted or under-estimated
92
Non-conservative assumptions and omissions have
led to overstating the economic case for the CDP
 The method of calculating of Net Present Value (NPV) is
not to accepted industry standards
 Assumptions within the economic model are nonconservative
 Significant costs that should be in the economic model
have been omitted or under-estimated
93
Significant costs that should be in the economic model
have been omitted or under-estimated
• Direct costs – no details of the project direct costs. This is concerning as there
has been widespread concern about a cost blow-out. Industry insiders have
been quoted as saying “If (the Port of Melbourne) get away with $1 billion they'll
do bloody well”1
• Project finance costs – no consideration of how the project will be financed and
costs arising from servicing debt
• Ongoing maintenance costs – no discussion of costs relating to maintaining a
deeper channel
• Omission of sunk costs – costs already incurred of trial dredging, EES, SEES,
have not been included
94
Source:
1. Lucas, Clay, Digging in Deep, in The Age 22/3 2007
Significant costs that should be in the economic model
have been omitted or under-estimated
• Environmental costs – Meyricks & Associates identify 15 costs that “will not be
completely eliminated by mitigation measures” but have no cost assigned to
them. They claim that “There are no reliable tools for estimating the economic
costs”
• The field of environmental economics is a well established discipline that
provides many methods for evaluating such costs.
• Dismissing environmental costs is not a conservative assumption and is
inappropriate in a project where there has been so much comment over potential
environmental impacts. This is a major shortcoming of the Meyricks &
Associates cost-benefit analysis.
• Considering these many omissions, Economists@Large believe a present value
of costs figure of $1 billion dollars is a more conservative estimate.
95
Source:
1. Meyricks & Associates, Channel deepening: Benefit-Cost analysis, 2007, p46-48
Significant costs that should be in the economic model
have been omitted or under-estimated
Channel Deepening Project Benefits & Costs (SEES)
2500
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES
96
Significant costs that should be in the economic model
have been omitted or under-estimated
Channel Deepening Project Benefits & Costs
(Conservative Cost Estimate)
2500
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES
97
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
 The SEES’ cost-benefit analysis forecasts net project
benefits or net present value (NPV) of $1.35bn
 Economists@Large have used the same economic model
with more conservative assumptions:
- 12% discount rate
- Valuation over 10 years plus a terminal value
- Conservative estimate of future fleet composition
- Conservative estimate of costs
 These calculations yield an NPV of -$0.54bn.
98
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
Channel Deepening Project Benefits & Costs
(SEES)
2500
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES
99
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
Channel Deepening Project Benefits & Costs
(12% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2000
2,000
1,500
1500
1,000
1000
500
500
0
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES and analysis by Economists@Large
100
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
Channel Deepening Project Benefits & Costs
(10 yr benefits + TV, 12% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
2000
1,500
1500
1,000
1000
500
500
0
0
1
2
3
4
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES and analysis by Economists@Large
101
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
Channel Deepening Project Benefits & Costs
(Conservative Ship Size Composition, 10 yr forecast + TV, 12% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
-500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES and analysis by Economists@Large
102
Appropriate assumptions results in the CDP having a
negative NPV, a clear sign not to implement the project
Channel Deepening Project Benefits & Costs
(Conservative Cost Estimate & Ship Size Distribution, 10 yr forecast + TV, 12% discount rate)
NPV ($m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
-500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Source
Extrapolated from data from SEES and analysis by Economists@Large
103
Is this a high probability outcome?
Can the CDP confidently deliver:
a efficient shipping market AND
sufficient cost savings per TEU, in the period 2008 to
2035 to repay a commercial return on the estimated
$500 to $1000m capital investment
compared with any other project(s) that could have
been made and/or business as usual?
Ecolarge answer: this project is ‘brave’ & whimsical in its
willingness to spend capital on revenues that are so far in
the future - there is a high risk it cant deliver.
104
Cost Benefit Analysis - checklist







Determine the scope & the objectives
What are the constraints?
What are the alternatives?
Identify costs & benefits
Quantify/value costs and benefits?
Sensitivity test for uncertainty
Consider equity issues & intangibles
“Key steps in the cost-benefit process”. DOF, 2006, pg 9.
105
Cost Benefit Analysis - checklist
 Determine the scope & objective of the project? To create
value in the Victorian/Australian economy, and hence to
improve the welfare of Victorians & Australians.
 SEES analysis has provided an objective - positive NPV
 SEES CBA says benefits>costs
 Ecolarge says there are highly plausible low or negative
value scenarios - case not proven.
“Good economic analysis should leave no doubts about the project’s contribution to the
country’s welfare”. WB, 2001, pg 3.
106
Cost Benefit Analysis - checklist
 What are the constraints? That is what issues affect the
ability to deliver a useful CBA?
 SEES analysis - environmental impacts difficult to
quantify
 Ecolarge says - environmental benefits can be quantified
see DOF handbook for suggestions - pg 147
“Valuation methods: applications and conclusions Examples of public goods, the benefi ts
they provide, and valuation methods are shown in Table A.1. The goods include
educational and health services, safety, transportation services, recreational facilities,
and various environmental goods. Table AII.2 Examples of public goods, benefi ts and
valuation methods ”. DOF, 2006, pg 147.
107
Cost Benefit Analysis - checklist
 What are the alternatives?
 SEES analysis - with and without alternatives
 Ecolarge - disagree with the quantum of value in the with
& without scenarios
 Delay alternative highly feasible - inadequately
considered in SEES
 If higher returns are 13 years away, money invested late is
will get a stronger return immediately.
 In the meantime the capital is invested elsewhere (by
capital markets) at higher returns - benefiting Australians
DOF, 2006, Section 5.
108
Cost Benefit Analysis - checklist
 Identify costs & benefits
 SEES analysis - has done a adequate job of identifying
costs & benefits
 Next step quantify costs and benefits!
 Inadequate quantification of the discount rate - this is the
MOST important factor in this analysis
“However, the Governments borrowing rate does not refl ect the true opportunity cost of
the use of capital funds, known as the social opportunity cost of capital. The social
opportunity cost of capital (SOC) represents the return on the capital funds that could be
achieved by another project or programme.” DOF, 2006, pg 64.
109
Cost Benefit Analysis - checklist
 Quantify costs & benefits continued
Most common international practice is that a producer rate of discount is the appropriate
rate of discount to employ. This ensures that resources are used efficiently. Consumer
rates of discount should be used only in exceptional cases, where for some reason
resources have no opportunity cost and a programme involves only a comparison of
consumption streams.
However, in many cases a project specific discount rate is appropriate. These cases arise
when the risk of a project is borne by specific lenders who require a higher real rate of
return for participating in the project or where a project could be undertaken by the
private sector. .” DOF, 2006, pg 64.
110
Cost Benefit Analysis - checklist
 Quantify costs & benefits continued
 DOF indicates that there should be a figure for the long
term Treasury bond rate (about %6.4%) & another interest
rate to capture the risk premia (about 6%) associated with
commercial or near commercial enterprises that involve
production
 CDP is a production project where education for example
is a consumption project
For most evaluations of public projects, programmes or policies, this Handbook
recommends the use of a cost of capital or producer rate of discount. The use of a
producer rate of discount ensures that the true opportunity cost of capital is reflected in
the project evaluation and that resources are used efficiently. DOF, 2006, pg 66.
111
Cost Benefit Analysis - checklist
 Quantify costs & benefits continued - risk premia!
A method closely related to the SOC is to use an estimated project-specifi c cost of capital (PSCC)
as the discount rate. This method is based on the Capital Asset Pricing Model (CAPM) developed to
explain the relationship between the return expected by shareholders in any particular private sector
firm and the market risk characteristics of the shares. Market risk can be defi ned as the risk to
which all business enterprises are exposed through business cycle and other general business
conditions. In the CAPM framework, equity holders seek a risk premium in compensation for the
price volatility of their investment. Estimates of the size of the average market risk premium are
typically based on the risk premium for equity investments and, for Australia, are generally in the
order of 6 per cent2.
Most common international practice is that a producer rate of discount is the appropriate rate of
discount to employ. This ensures that resources are used effi ciently. Consumer rates of discount
should be used only in exceptional cases, where for some reason resources have no opportunity
cost and a programme involves only a comparison of consumption streams. ･ However, in many
cases a project specifi c discount rate is appropriate. These cases arise when the risk of a project is
borne by specific lenders who require a higher real rate of return for participating in the project or
where a project could be undertaken by the private sector. DOF, 2006, pg 66.
112
Rate of Return
Rate of Return
%
100.00%
90
(SEES)
Normal commercial projects must make
20% return before bankers will take a look
otherwise there is not enough gap between
the WACC and the net revenue to pay the
bankers/shareholders & the business itself this is an argument for delay!
90.00%
80.00%
70
70.00%
60.00%
50
50.00%
40.00%
30
30.00%
20.00%
10
10.00%
0.00%
1
2
2010
3
Notes
1. Source: Extrapolated from data from SEES
4
5
6
7
8
2015
9
10
11
12
13
2020
14
15
16
17
18
19
2025
20
21
22
23
24
2030
25
26
27
2034
113
Rate of Return
Rate of Return
%
(conservative ship size composition, costs $1bn)
100.00%
90
90.00%
80.00%
70
70.00%
60.00%
50
50.00%
40.00%
30
30.00%
20.00%
10
10.00%
0.00%
1
2
3
2010
4
5
6
7
8
2015
9
Notes
1. Source: Extrapolated from data from SEES and EcoLarge analysis
10
11
12
13
2020
14
15
16
17
18
2025
19
20
21
22
23
2030
24
25
26
27
2034
114
Channel Deepening
Supplementary Environmental Effects
Statement
Expert Witness Presentation
Francis Grey – Principal
Simon O’Connor – Senior Consultant
Craig Robertson – Associate Consultant
Roderick Campbell – Associate Consultant
PO Box 256
Noble Park VIC 3174
info@ecolarge.com
Tel: 03 9562 4472
Fax: 03 9562 4118
www.ecolarge.com
17 July, 2007
115