12

12. Major investment decisions with respect to the road network (and the passenger rail network) are taken by State and Territory governments. In so far as those decisions rely on Commonwealth funding, they are subject to processes operated by Infrastructure Australia. Weaknesses in these decisions include:

· These mega- projects are especially vulnerable to unduly optimistic cost and demand estimates.

· It also undermines the integrated planning of the road network, notably in urban areas, by encouraging a focus on major projects rather than on the network as a whole.

· The resulting inefficiencies are aggravated by the poor quality of project evaluation:

o There are many technical deficiencies in project evaluation, including sloppy use of ‘wider economic benefits’ to get questionable projects over the line, and incorrect setting of discount rates.

o Additionally, the discount rates used do not properly incorporate a mark-up for optimism bias and other distortions in public sector decision-making. The extent of that mark-up should reflect the option value of deferring investment, which in turn depends on the extent to which updated cost and demand information could lead to a reconsideration of the timing and extent of investment.

o There is little quality control of project evaluations, and Infrastructure Australia has had only a modest impact in this regard.

o Too few evaluations are made fully public, and even when they are, they are not released in a form that would facilitate third party analysis.

o Evaluations are rarely updated in the course of the project’s progress, meaning too little attention is paid to the desirability of terminating or postponing projects should costs rise or expected demand fall.

o No Australian government has in place adequate processes for ex post review of cost-benefit studies, with the result that the scope to learn from experience is forgone.

· As well as major projects going ahead when they should not, the result of poor quality project evaluation is that planners rarely take proper account of uncertainty.