A business case is typically used to promote or justify a particular project, such as Canberra's light rail.
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Unfortunately, politicians, and even the media, often use the term interchangeably with cost benefit analysis, resulting in confusion about the economic value of government policies or projects.
A genuine cost benefit analysis starts with the principal policy issue. In the case of light rail, it would be to ask if public transport between Civic and the Woden valley can be improved.
The analysis also needs to specify the counterfactual case of what would occur if the current system continued unaltered into the future.
The costs and benefits of each of the possible alternative public transit alternatives, for example underground metro, light rail, an O-Bahn or minibuses, can then be compared to the current ACT bus network.
The ACT Auditor-General's report number 8/2021 on light rail stage 2A from Civic to Commonwealth Park should be applauded for its thorough critique of the 2019 business case.
It identifies the omission of the cost of retrofitting the existing light rail vehicles with wire-free technology (an extra 17 per cent of capital costs), and the omission of disruption costs to traffic and businesses during construction.
Interestingly, however, the audit did not query the presentation of positive transport benefits, which would be negative if travel time on the light rail is greater than existing bus transport, an important issue for the Civic to Woden link.
On estimated benefits, the audit report noted that expected passenger patronage was modelled on data from south-east Queensland, Sydney, and Melbourne - but not Canberra - resulting in likely overestimation.
It also notes that so-called "city-shaping benefits" and "wider economic benefits" account for more than 60 per cent of the estimated benefits, but the business case fails to provide "any narrative that describes, explains or supports the estimates of wider economic benefits".
A 19th century economist, Alfred Marshall, posited that a denser urban population would generate wider economic benefits because people would interact in coffee shops, learn from each other and develop new ideas.
Proximity would also mean workers could find and specialise in jobs better suited to their talents, and employers could more easily recruit available skilled workers, thus increasing productivity.
But Marshall cautioned that negative externalities such as the "want of light and air" would reduce the benefits of agglomeration.
The wider economic benefits concept can be extended to "effective urban density" if a major transport project (think high speed rail in China) brings in workers from regional locations or dormitory suburbs to the city centre, so that urban density is temporarily increased during the working day.
Higher metropolitan productivity, reflected in higher wage levels, can be correlated statistically with changes in worker density levels.
However, many consultants rely on off-the-shelf parameter estimates obtained from studies in large cities like London.
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Application of those estimates derived from studies of large cities to stage 2A, or even to a tram from Civic to Woden, would be unlikely to pass the pub test.
Wider economic benefits estimates are often used to bolster infrastructure business cases, although review of such estimates after project completion is rare.
But a 2004 study of the Channel Tunnel found that it did not appear to have produced significant wider economic benefits.
And a 2007 study of the French Train a Grande Vitesse found that traffic levels increased in both directions, but there was no overall impact on the cities linked by the train.
The ACT government has been presented with a providential opportunity to test the credibility of wider economic benefits values assumed for the extension of the light rail line southwards.
The 2014 Capital Metro business case for stage 1 (Gungahlin to Civic) included "wider economic impacts" (i.e. wider economic benefits) in its estimate of benefits.
Verification of the actual extent and distribution within Canberra of those benefits supposedly produced by stage 1 would undoubtedly be welcomed by the punters who will incur higher housing rates in years to come.
Business cases may well be a useful way to lubricate the machinery of government, but they are a slippery slope to bad governance, if not worse.
- Leo Dobes is an honorary associate professor at the ANU Crawford School of Public Policy, where he taught a Masters course in cost-benefit analysis.
