A proposed fast rail line from Newcastle and Sydney could cost $10.6 billion more than it is worth over a 50-year assessment period, the project’s business case indicates.

The Commonwealth Government has pledged an additional $250 million to undertake detailed design and scoping work for High Speed Rail between Newcastle and Sydney.

This will take the overall funding commitment to $659.6 million, that will help to ensure that the project is ready to begin construction within two years.

The Government has also released the project’s business case, which was prepared by the High Speed Rail Authority.

As outlined below, however, the document shows that the project’s viability is challenged when expected benefits are compared with its anticipated cost.

Set to be developed over the next two decades, the High Speed Rail between Sydney and Newcastle project is the first stage of an envisioned future high speed rail network that will connect Brisbane, Sydney, Canberra, Melbourne and regional communities across Australia’s east coast.

The project will connect Newcastle with Sydney Central and the new Western Sydney International Airport.

This will see high-speed trains travelling at up to 320 km/h along the route.

Under the business case’s preferred option, the project will be delivered in three sub-stages.

The first substage (Stage 1A) will connect Newcastle to the Central Coast. This is envisaged to open in 2037.

Subsequent stages will extend the line through to Sydney Central (Stage 1B) and Western Sydney International Airport (Stage 1C).

These will be open in 2039 and 2042 respectively.

According to the business case, the selection of Newcastle to Sydney as the network’s first stage addresses a number of strategic imperatives.

Already, the two cities anchor Australia’s biggest rail corridor. By 2061, the population along the fast-growing corridor is expected to reach 9.2 billion.

The project corridor is also home to some of Australia’s most dynamic industries such as clean energy, advanced manufacturing and defence.

As things stand, however, existing transport options across the corridor are limited, slow and congested.

By contrast, the business case argues that high speed rail along the network will help to slash travel times and unlock affordable housing opportunities across the Central Coast, Lake Macquarie and Newcastle.

According to the business case the project will:

• Slash travel times between Newcastle and Sydney from nearly three hours to just one hour and from Gosford to Sydney from 1 hour 20 minutes to just 30 minutes.
• Unlock the potential for up to 99,000 new homes across Newcastle and the Lower Hunter Valley, the Central Coast and Sydney by 2061.
• Boost the economy to the tune of $250 billion by 2086 and unlock 99,000 new jobs by 2061.
• Save more than 86,000 tonnes of carbon dioxide equivalent emissions by shifting away from carbon intensive travel. This is in addition to helping to unlock further potential to develop low-carbon industries.

Challenged business case

However, the document also reveals that the project’s economic viability is challenged.

Over a 50-year appraisal period, the business case puts the cost of building and operating all phases of the project at between $57.1 billion and $61.3 billion in 2024/25 dollars.

This includes construction costs of between $54.1 billion and $58.3 billion as well as operating costs totalling $3 billion.

Over that same period, expected project benefits range from only $50.8 billion to $59.7 billion.

As a result, in the best possible case scenario, the project is expected to deliver net benefits in present value terms of only $2.6 billion.

In the worst-case, the project’s cost will exceed benefits by a whopping $10.6 billion.

As a result, the project is assessed at having a benefit to cost ratio of just 0.8 to 1.

This means that for every dollar which is invested, the project is likely to return only between 80 cents and $1 in benefits.

The project viability is moderately improved if only Stage 1A and 1B are constructed (see table).

This would see the line go from Newcastle to Sydney Central but not extend to the new airport in Western Sydney.

In such a case, the project’s cost (construction and operational) would fall to a range of $40.5 billion to $43.5 billion and its return in net present value terms would improve to a range of -$5.4 billion to $6.5 billion.

(Of course, it should be acknowledged that the 50-year business case assessment most likely understates the benefits which the project will deliver across its lifecycle.

This is because the project will deliver benefits across multiple generations and will continue to deliver benefits well beyond the 50-year assessment period.)

Low discount rate use

Furthermore, the business case appears to present an overly optimistic appraisal as it uses a low discount rate of 4 percent.

This is well below the standard discount rate of 7 percent which is used by Infrastructure Australia.

The ‘discount rate’ is the rate which is used to ‘discount’ expected future project benefits and costs so as to determine what these are worth in current terms.

When a lower discount rate is used, a more favourable outcome will be calculated as the present value of the expected benefits (which are not realised until after the line opens) will appear to be higher relative to the costs (which are mostly incurred during construction).

By contrast, when a higher discount rate is applied, the value of future project benefits will be calculated as being comparatively smaller relative to its (mostly upfront) costs.

Were the standard 7 percent discount rate to have been adopted, the project’s bottom line calculation would be even more challenged compared with that presented above.

In its business case, the High Speed Rail Authority defended the use of a lower discount rate.

It said that comparatively higher discount rates tend to underestimate the value of mega-scale infrastructure projects as these projects create much longer term benefits (which often extend for multi-generations well beyond the 50-year assessment period) relative to their very high upfront costs.

It points out that lower discount rates have been applied on projects such as Inland Rail and Victoria’s Suburban Rail Loop as well as UK projects such as London Crossrail, High Speed Rail 1 and High Speed Rail 2.

A welcome investment

Despite this, Commonweal Minister for Infrastructure, Transport, Regional Development and Local Government Catherine King welcomed the latest announcement.

“High Speed Rail between Newcastle and Sydney will change the way people live, work and travel in our country’s most populous region,” King said.

“It will connect the Newcastle and Central Coast communities to Sydney in a way that has never been done before.”

“The Albanese Government is focused on delivery. This development phase will lay the foundations for delivery of High Speed Rail between Newcastle and Sydney, ensuring we secure the rail corridor and undertake detailed planning before we start building.

“Carefully planned, costed and detailed preparation takes time, but it means when construction starts, it is built to last.”

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