Channel Deepening Supplementary Environmental Effects Statement Expert Witness Presentation

1
Channel Deepening Supplementary Environmental
Effects StatementExpert Witness Presentation
17 July, 2007
Planning Panels VictoriaDepartment of
Sustainability and Environment
2
Neo-classical economics is the standard
theoretical framework for assessing the net worth
of projects
The Rules of the Game

• Economic analysis is conducted according to an
  established body of theory and practice

• 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)

3
Meyrick has used cost-benefit analysis (CBA) - we
agree that this is the appropriate framework.
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

• 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!

4
DOF handbook agrees with our conclusion - no
evidence presented to privilege CDP over other
transport infrastructure investments at the
macro-economic level.
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

• If the CBA is negative the economic impact is
  negative vice versa - the focus should be on
  the CBA analysis

5
Meyrick agrees the project would only proceed
if benefits exceed costs SEES, Technical
Appendix 4, Section 2.1.
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 CBA says benefitsgtcosts - the World Bank
  says

Good economic analysis should leave no doubts
about the projects contribution to the countrys
welfare. WB, 2001, pg 3.
WB, 2001, pg 3
6
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
Setting the goal posts

• 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

7
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.
8
Economists_at_Large have used the same economic
model with more conservative assumptions and
industry standard methods of calculation
resulting in an NPV of -0.54bn
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

• SEES financial calculations, modelling
  assumptions and cost omissions have caused the
  Channel Deepening Projects (CDP) NPV to be
  overstated

9
Economists_at_Large have used the same economic
model with more conservative assumptions and
industry standard methods of calculation
resulting in an NPV of -0.54bn
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

• SEES financial calculations, modelling
  assumptions and cost omissions have caused the
  Channel Deepening Projects (CDP) NPV to be
  overstated

10
The SEES cost-benefit analysis forecasts net
project benefits or NPV of 1.35bn
Channel Deepening Project Benefits Costs (SEES)
NPV (m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES
11
Economists_at_Large have used the same economic
model with more conservative assumptions and
industry standard methods of calculation
resulting in an NPV of -0.54bn
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

• SEES financial calculations, modelling
  assumptions and cost omissions have caused the
  Channel Deepening Projects (CDP) NPV to be
  overstated

12

Economists_at_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
SourceExtrapolated from data from SEES and
analysis by EcoLarge
13
Economists_at_Large have used the same economic
model with more conservative assumptions and
industry standard methods of calculation
resulting in an NPV of -0.54bn
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

• SEES financial calculations, modelling
  assumptions and cost omissions have caused the
  Channel Deepening Projects (CDP) NPV to be
  overstated

14
The method of calculating of Net Present Value
(NPV) is not to accepted industry standards
SEES financial calculations, modelling
assumptions and cost omissions have caused the
CDPs NPV to be overstated

• Assumptions within the economic model are
  non-conservative

• Significant costs that should be in the economic
  model have been omitted or under-estimated

15
The method of calculating of Net Present Value
(NPV) is not to accepted industry standards
SEES financial calculations, modelling
assumptions and cost omissions have caused the
CDPs NPV to be overstated

• Assumptions within the economic model are
  non-conservative

• Significant costs that should be in the economic
  model have been omitted or under-estimated

16
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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 (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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

18
Use of an inappropriately low discount rate, 6,
overstates the net present value of the project.
NPV (m)
NPV decreases as Discount Rate increases 1
Discount Rate
Notes1. Source Extrapolated from data from
SEES2. 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)
NPV decreases as Discount Rate increases 1
Discount Rate
Notes1. Source Extrapolated from data from
SEES2. Source Beli, et al, 1997. Handbook on
economic analysis of investment operations, World
Bank
20
Use of an inappropriately low discount rate, 6,
overstates the net present value of the project.
NPV (m)
NPV decreases as Discount Rate increases 1
Economists_at_Large
Discount Rate
Notes1. Source Extrapolated from data from
SEES2. Source Beli, et al, 1997. Handbook on
economic analysis of investment operations, World
Bank
21
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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

23
In the valuation of any project, the WACC is the
appropriate discount rate to use1, which is
approximately 12 for PoMs case
WACC Weighted Average Cost of Capital
discount rate




Equity (E)
E
WACC
X

X
Cost of Equity
Cost of D X (1 - tax rate)
D E
Debt (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 64 13.5




758m 2
78m 2
WACC
X

X
13.5
6.342 X (1 30)
837m 2
837m 2
12.6 gt discount rate 12
Notes1. FINSIA, Financial Analysis and Valuation
Handbook 20072. 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 Targets Statement (p6) p153
24
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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

26
If we use a 12 discount rate, NPV reduces to
0.25bn
Channel Deepening Project Benefits Costs (6
discount rate)
NPV (m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES
27
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
2,000
1,500
1,000
500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES
28
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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

30
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 companys free cash flow over a
  determined period,often 10 years1
• Grant Samuel has prepared a high level
  discounted cash flow analysis of Qantas based on
  a 10 year forecast model2

Notes1. FINSIA, Financial Analysis and Valuation
Handbook 2007 2. Grant Samuel, Qantas Targets
Statement
31
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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

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 (25 yr
benefits, 6 discount rate)
NPV (m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Notes1. Source Extrapolated from data from
SEES2.
SourceExtrapolated from data from SEES
34
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
1,500
1,000
500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
Notes1. Source Extrapolated from data from
SEES2.
SourceExtrapolated from data from SEES
35
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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
Use of an inappropriately low discount rate, 6,
overstates the net present value (NPV) of the
project
The method of calculating of NPV is not to
accepted industry standards

• In the valuation of any project, the WACC is the
  appropriate discount rate to use, which is
  approximately 12 for PoMs 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

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 (25 yr
benefits, 6 discount rate)
NPV (m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES
38
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
1,500
1,000
500
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES and
EcoLarge analysis
39
The method of calculating of Net Present Value
(NPV) is not to accepted industry standards
Non-conservative assumptions and omissions have
led to overstating the economic case for the CDP

• Assumptions within the economic model are
  non-conservative

• Significant costs that should be in the economic
  model have been omitted or under-estimated

40
The method of calculating of Net Present Value
(NPV) is not to accepted industry standards
Non-conservative assumptions and omissions have
led to overstating the economic case for the CDP

• Assumptions within the economic model are
  non-conservative

• Significant costs that should be in the economic
  model have been omitted or under-estimated

41
Assumptions within the economic model are
non-conservative

• 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_at_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
Assumptions within the economic model are
non-conservative

• 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_at_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

43
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

44
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)
45
Shipping industry forecasts based on world
economic growth over 30 years must be conservative
Increase in average container vessel size over
time1
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p7
46
Shipping industry forecasts based on world
economic growth over 30 years must be conservative
Container Vessel Operating Cost Savings Due to
Channel Deepening1
(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
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p49 2. Drewry Shipping consultants, Port of
Melbourne Channel Deepening Study, 2001, p69
47
Assumptions within the economic model are
non-conservative

• 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_at_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 within the economic model are
non-conservative

• 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_at_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

49
Assumptions in forecasts of fleet composition
have not been conservative
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
50
Assumptions in forecasts of fleet composition
have not been conservative
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
51
Fleet composition, 2005
Assumptions in forecasts of fleet composition
have not been conservative
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
52
Forecast fleet composition with CDP, 2020
Assumptions in forecasts of fleet composition
have not been conservative
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
53
Forecast fleet composition with CDP, 2020
Assumptions in forecasts of fleet composition
have not been conservative

• Drewry (2001) - 11 container vessels servicing
  Melbourne were launched in 2000, with an average
  capacity of 1760 TEU.
• Deloittes (2005) note that The market for
  smaller vessels remains buoyant and offer detail
  on orders for vessels as small as 850TEU

Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
54
Forecasts fleet composition, with CDP 2035
Assumptions in forecasts of fleet composition
have not been conservative
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
55
Forecasts of fleet composition, with CDP 2035
Assumptions in forecasts of fleet composition
have not been conservative
MeyrickAssociates forecast that no ships under
3000 TEU will be involved in servicing Melbourne
is not conservative.
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
56
Forecasts of fleet composition, without CDP
Assumptions in forecasts of fleet composition
have not been conservative
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
57
Assumptions in forecasts of fleet composition
have not been conservative
Forecasts of fleet composition, without CDP
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
58
Assumptions in forecasts of fleet composition
have not been conservative
Forecasts of fleet composition, without CDP
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
59
Assumptions in forecasts of fleet composition
have not been conservative
Forecasts of fleet composition, without CDP
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
60
Assumptions in forecasts of fleet composition
have not been conservative
Forecasts of fleet composition, without CDP
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
61
Assumptions in forecasts of fleet composition
have not been conservative
Forecasts of fleet composition, without CDP
We estimate this limit will lie at or below 4500
TEU. (Meyrick Assoc, p10) There is no
explanation of this assumption. Drewry (2001)
assume that ships of over 7000 TEU will use the
port, although experiencing restrictions of draft
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
62
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.

Sources 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p49 2. Drewry Shipping consultants, Port of
Melbourne Channel Deepening Study, 2001, p75
63
Assumptions in forecasts of fleet composition
have not been conservative
Forecasts of fleet composition, without CDP
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
64
Assumptions in forecasts of fleet composition
have not been conservative
Forecasts of fleet composition, without CDP
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
65
Assumptions in forecasts of fleet composition
have not been conservative
Forecasts of fleet composition, without CDP
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
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
66
Assumptions in forecasts of fleet composition
have not been conservative
Forecasts of fleet composition, without CDP
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) Meyrickassoc
p10.
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
67
Assumptions within the economic model are
non-conservative

• 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_at_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
Assumptions within the economic model are
non-conservative

• 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_at_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

69
Fleet composition, 2005
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
70
Fleet composition, 2010
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
71
Fleet composition, 2015
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
72
Fleet composition, 2020
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
73
Fleet composition, 2025
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
74
Fleet composition, 2030
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
75
Fleet composition, 2035
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
76
Fleet composition, 2005
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
77
Fleet composition with CDP, 2010
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
78
Fleet composition with CDP, 2015
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
79
Fleet composition with CDP, 2020
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
80
Fleet composition with CDP, 2025
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
81
Fleet composition with CDP, 2030
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
82
Fleet composition with CDP, 2035
Economists_at_Large have forecast a more
conservative estimate of fleet composition
Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
83
Economists_at_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.

Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p10
84
Assumptions within the economic model are
non-conservative

• 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_at_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
Assumptions within the economic model are
non-conservative

• 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_at_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

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 (SEES)
NPV (m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES
87
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
1,500
1,000
500
0
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES and
EcoLarge analysis
88
Assumptions within the economic model are
non-conservative

• 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_at_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
Assumptions within the economic model are
non-conservative

• 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_at_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

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 (SEES)
NPV (m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES
91
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
SourceExtrapolated from data from SEES and
EcoLarge analysis
92
The method of calculating of Net Present Value
(NPV) is not to accepted industry standards
Non-conservative assumptions and omissions have
led to overstating the economic case for the CDP

• Assumptions within the economic model are
  non-conservative

• Significant costs that should be in the economic
  model have been omitted or under-estimated

93
The method of calculating of Net Present Value
(NPV) is not to accepted industry standards
Non-conservative assumptions and omissions have
led to overstating the economic case for the CDP

• Assumptions within the economic model are
  non-conservative

• Significant costs that should be in the economic
  model have been omitted or under-estimated

94
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 well1
• 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

Source 1. Lucas, Clay, Digging in
Deep, in The Age 22/3 2007
95
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_at_Large believe a present value of costs
  figure of 1 billion dollars is a more
  conservative estimate.

Source 1. Meyricks Associates,
Channel deepening Benefit-Cost analysis, 2007,
p46-48
96
Significant costs that should be in the economic
model have been omitted or under-estimated
Channel Deepening Project Benefits Costs (SEES)
SourceExtrapolated from data from SEES
97
Significant costs that should be in the economic
model have been omitted or under-estimated
Channel Deepening Project Benefits Costs
(Conservative Cost Estimate)
NPV (m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES
98
Economists_at_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
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

• These calculations yield an NPV of -0.54bn.

99
Appropriate assumptions results in the CDP having
a negative NPV, a clear sign not to implement the
project
Channel Deepening Project Benefits Costs (SEES)
NPV (m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES
100
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
2,000
1,500
1,000
500
0
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES and
analysis by Economists_at_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 (10
yr benefits TV, 12 discount rate)
NPV (m)
Project Benefits
Project Costs
Net Project Benefits
2,000
1,500
1,000
500
0
Dry Bulk Vessels
Liquid Bulk Vessels
Container Vessels
SourceExtrapolated from data from SEES and
analysis by Economists_at_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 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
SourceExtrapolated from data from SEES and
analysis by Economists_at_Large
103

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
SourceExtrapolated from data from SEES and
analysis by Economists_at_Large
104
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.
105
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.
106
SEES analysis has provided an objective -
positive NPV
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 CBA says benefitsgtcosts
• Ecolarge says there are highly plausible low or
  negative value scenarios - case not proven.

Good economic analysis should leave no doubts
about the projects contribution to the countrys
welfare. WB, 2001, pg 3.
107
SEES analysis - environmental impacts difficult
to quantify
Cost Benefit Analysis - checklist

• What are the constraints? That is what issues
  affect the ability to deliver a useful CBA?

• 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.
108
SEES analysis - with and without alternatives
Cost Benefit Analysis - checklist

• What are the 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.
109
SEES analysis - has done a adequate job of
identifying costs benefits
Cost Benefit Analysis - checklist

• Identify 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.
110
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.
111
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.
112
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.
113
Rate of Return
Rate of Return(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
70
50
30
10
2010
2025
2020
2030
2034
2015
Notes1. Source Extrapolated from data from SEES
114
Rate of Return
Rate of Return (conservative ship size
composition, costs 1bn)

90
70
50
30
10
2010
2025
2020
2030
2034
2015
Notes1. Source Extrapolated from data from SEES
and EcoLarge analysis
115
Channel Deepening Supplementary Environmental
Effects StatementExpert Witness Presentation
17 July, 2007
Francis Grey Principal Simon OConnor Senior
Consultant Craig Robertson Associate
Consultant Roderick Campbell Associate
Consultant PO Box 256 Noble Park VIC
3174 info_at_ecolarge.com Tel [phone] Fax 03
9562 4118 www.ecolarge.com