Business case expectations: Transport Infrastructure Project Analysis

1. Business case expectations:Transport Infrastructure Project Analysis Susan GillettMetropolitan Transport ForumTuesday 22 June 2010

2. DTF Project analysis What part of “no” don’t you understand?

3. Project Investment Analysis • Frameworks and policies • Long term planning • Context for investment • Business Case consideration

4. Asset Management Framework Monitoring & Optimisation of Existing Asset Base In-Operation Investment Development Process & Guides ‘Action for Victoria’s Future’Government Policies Service Strategy Asset Strategy Multi-Year Strategy Strategic Assessment Options Analysis Investment Management Standard (ILM & ICB) Investment Evaluation Policy Guidelines Business Case Business Case Coverage eGovernment Investment Evaluation Framework & Methodology Guidelines ‘Gateway’ Risk-Assessments at Strategic Points Procurement Strategy Partnerships Victoria and Alliance Guidance Material Funding Strategy Different funding treatments for ‘Sustain’ Vs ‘Growth’ Investment Solution Implementation

5. Investment LifeCycle Guidance DTF website: www.lifecycleguidance.dtf.vic.gov.au Launched July 2008

6. Project Investment Analysis • Frameworks and policies • Long term planning • Context for investment • Business Case consideration

7. Long Term Planning • Service Strategy • Drivers • Risks • Opportunities • Challenges • Asset Strategy • Supporting sustainable service delivery • Multi-year Strategy • Scheduling

8. Four Dimensions of Strategic Capital Planning Service Delivery Moderated future demand Indicative (unabated) future demand (using indicators or proxies such as demographic growth) Demand Management Strategies Service Gap Service Gap Service Gap Service Gap Planned new investment over time, to replenish existing capacity (sustain)or to increase/ improve existing capacity Capacity of existing infrastructure to support Service Delivery over time Time

9. Rehabilitation 4300 Home Detention Prisoner Projections Trendline with No Action 4200 Bail Support CCS Redevelopment 4100 Prisoner Population • Least likelyscenario 4000 3900 • Most probablescenario 3800 3700 • Possible scenario. 3600 3500 3400 3300 2006 2008 2010 2012 2014 2016 ‘Futures Scenarios Modelling’ Example:Prisoner Numbers

10. Project Investment Analysis • Frameworks and policies • Long term planning • Context for investment • Business Case consideration

11. Melbourne’s Daily Movement

12. Transport Challenge

13. Victoria’s Transport Challenge • East West Link Needs Assessment • Investigation to identify the best transport solutions for connecting Melbourne's eastern and western suburbs • 20 recommendations • Critical projects included: • Melbourne Metro Rail Tunnel • Regional Rail Link • Intermodal Freight Terminals • Victorian Transport Plan • VTP supports Victoria’s growth by transforming our transport network • $38 billion investment over 12 years

14. Project Investment Analysis • Frameworks and policies • Long term planning • Context for investment • Business Case consideration

15. What DTF looks for • Alignmentwith Government priorities. • Service need / urgency and risks. • A strongevidencebase. • Robustnessof submission, including costings(over whole-of-life). • Funding and procurementoptions. • Readinessof initiative. • Impactof individual decisions on overallasset base.

16. Strategic Assessment • Used by decision makers to assess whether there are sufficient grounds for the proposal and if its development should continue at this time; and • Forms basis for project objectives and scope, and description of the service need in the business case 2. Analyse Options 3. Evaluate to Determine Preferred Option 4. Recommendation 5. Implementation Strategy 6. Executive Summary • Confirm Service NeedDescription of Service NeedStakeholder IdentificationProject Objectives and Scope

17. What is a Business Case? - Purpose Grouped elements 1. Identify/Confirm Service Need 2. Identify Options 4. Recommendation 5. Implementation Strategy 6. Executive Summary • Builds on solutions outlined at strategic assessment stage to present detailed single view of options’ costs / benefits / risks / interdependencies / governance, to meet identified need. • Recommends preferred option to meet the service delivery needs,based on detailed analysis of benefits, costs, risks and opportunities. • Provides living blue print of project to be referenced by sponsor / advisors / management, to inform all high-level decision making and change requests …… through to post-delivery evaluation of benefits. • 3. Evaluate to Determine the Preferred Option: • Social & Environmental Analysis • Economic & Financial Analysis • Risk Analysis & Management • Budget Analysis & Funding Strategy • Procurement Strategy

18. Using a business case • In a business case options, including a “do nothing” option, are evaluated to identify a preferred option • Central agencies seek to assess: • the supporting evidence base • The relative merit of the options considered (or omitted) • the rigour of the analysis and assumptions of the individual project in the context of • competing projects • service specific issues • budgetary capacity

19. How much…. The business case should: • Present costs and benefits of options, by year: • Whole of life costs - capital and operational. • Benefits should be genuine, attributable and measurable. • Separately identify asset disposal aspects. • Determine the ratio of discounted costs to discounted benefits: • Discount costs to benefits (C:B) to a point in time • Public good investments may have C:B<1 • Assess TBL (social/environmental/economic) aspects: • Did this analysis alter the recommended option • Were the criteria and weightings valid? (sensitivity analysis)

20. Case study: Melbourne’s Public Transport System 3 Modes + Myki • Trains (Metro) • 160 six car sets • 830 km of track • 214 million passengers carried in 2009 • Trams (Yarra Trams) • 500 Trams • 3rd largest network in the world (249 km of double track) • 179 million passengers carried in 2009 • Buses • 30+ operators • 100 million passengers carried in 2009

21. Melbourne’s Public Transport System Vertically integrated franchise model • State owns infrastructure, stations and majority of rolling stock • Privately owned rolling stock is leased to franchisee • Franchisee provides an operational service, and also maintains the rolling stock and infrastructure (i.e. track, signalling,) • Bus operators have separate contracts

22. Why Franchise? • International Expertise – Innovation/Best Practice • Government can focus on strategic matters • Improved performance since PTC days • Efficient asset management, vertical integration and reduced access issues – creates incentives • Given patronage growth need maximum flexibility to shift resources where most needed

23. What is DTF looking for? • Sustainability of offer is critical • Working in Partnership is important ie. short-term issues and strategic network issues • Political risk remains with Government • Adequacy of resources eg. in: • Running the tender process • Contract managing the franchise agreement • High quality due diligence, a critical ingredient to an efficient tender process • Understanding State service outcomes and expectations • Clarity on role of Government vs role of operator

24. What is DTF looking for? (contd) • Proper consideration of commercial principles • Performance regime • Contract term • Adequate consultation with market at various stages • Before a decision is made to franchise • Once high level commercial principles are developed • When detailed contracts have been drafted • Interactive tender workshops throughout tender phase

25. ……. In Conclusion