Economic/ financial evaluation: Why so often unsatisfactory? Urban Rail Overview The record of success..does it matter? Why? How to do better? Conclusions

Success?

Poor Success - Does It Matter? Opportunity cost Decision-making The changing market Our profession and influence

Decision-making Is Flawed Define Options Compare options (profit) Implement? Result A B C A = 50 B = 65 C = 70 Yes > C C=20 (not 70) Is C Best? Is any MRT best?

Causes of Poor Success 1. Decision-making by individuals/ organ’s 2. The framework for project development 3. MRT project characteristics 4. Characteristics of project dev’t process 5. The financing regime

1) Decision-making - Individuals Individual decisions: Are not rational, unbiased Take an ‘inside view of problems’ Do not recognise uncertainty Are subject to escalation of commitment

>>> Decision-making - Organisations Reinforces individual biases Organisations have agendas (survival) Want objective analysis? …….. or reward ‘good’ forecasts …….. while pessimism = disloyalty Use ‘scientific’ forecasts as advocacy

2) Framework for Project Dev’t The C20th ‘rational comprehensive model’ pervades everything …… But the political nature of policy/ project dev’t should be centre-stage Requiring a different framework >>>

Framework for project dev’t Appraisal ECONOMIC – value for money POPULAR – what the people think POLITICAL the political agenda and political process Policy dev’t Lobbying Consultation Focus groups Public opinion

3) MRT project characteristics Have many proponents, few opponents Are costly Require land ….and imp’n, often in CBD Have increasing complexity/ interfaces Require forecasts = f( the future 10-40 yrs) ……. which are: subjective …demanding….. uncertain… unverifiable - yet comprehensible

4) Project Development Process Projects dev’d over many years…many stakeholders/ discontinuities Many decisions req’d. Each is critical Involves = 1+2+3+4 Yet planning…imp’n…& ops are separated No ‘template’ of what to do exists And ever-reducing resources for planning

World Council for Sustainable Development What Is Required? “Reinvent the process of planning, developing, financing and managing mobility infrastructure” World Council for Sustainable Development in ‘Mobility, 2001’

What Is Required……. A financing regime with incentives A managed project development process Technical support to the process A code of professional ethics

A Managed Project Development Process >> Define a continuous, managed process ….linking Planning >>> Imp’n >>> Operations Start by developing robust, acceptable project Focus on institutions + decision-making ….on quality front-end planning Opportunity risk-based management … and on before/after studies

A Project Development Process Feasibility Study Pre-feasibility Study Concept Study D4 ? Financing Approval? Prelim eng’g, contract docs Construct, equip, comm’n D6 D7 D5 Operations

Technical support Req’t: provide timely, comprehensible, and balanced information to decision-makers Continuously planning > imp’n > operations Based on credible forecasts …. which require a ‘reality check’ ………..and comp. risk assessment Appraisal methods to help develop consensus

Economic/ fin’l outturn Project implementation Forecasting and the Project Development Process Project operational 1. Original forecast 3 Managed outturn Economic/ fin’l outturn 2. Benchmarked forecast (range shows risk) Project implementation

Conclusions MRT project development is poor…. economic/ financial appraisals are misleading This matters The reasons are deep and pervasive Radical change is necessary Procurement changes offer opportunities There are 4 components The role of economists needs to change