Burnaby Mountain Gondola Business Case: The 12 Million Dollar Problem

Post by Steven Dale

Last week Translink finally released the Business Case for the Burnaby Mountain Gondola Transit proposal. There were two main findings in the study:

Firstly, that the construction of the system would provide enormous benefits to transit riders, Translink and Simon Fraser University. After attaching a dollar figure to those benefits, the benefits could be valued at roughly half a billion dollars (all figures NPV 2011, CAD) over 25 years. (For a quick rundown of this aspect of the project, check out Stephen Rees blog post about it.)

Secondly, that to proceed with the construction of the Gondola would cost $12m more than the “Business As Usual” scenario of continuing to use diesel-fuelled buses well into the foreseeable future. Again, that $12m is over a 25 year period.

Which of these two findings do you think received the most press and attention?

The $12m, but of course. That number pretty much became the de facto argument against the project in most of the popular press the Business Case received (see The Atlantic Cities article titled Vancouver’s Gondola Dreams May Be Too Expensive To Come True for commentary typical of what’s out there).

In an economy like this, if you want to break the case for the gondola, all one really has to say is “it’s $12m more than what we’re doing now. Forget about it.”

There’s two problems with this argument, however:

Firstly, the $12m value is so relatively minuscule and so subject to error, it’s hard to take it seriously. This is a really important point but one that requires more time and space, so I’ll save it for another discussion next week.

Secondly – and notwithstanding the previous point – when viewed through a different lens, the $12m problem evaporates. In fact, when viewed through a different lens, the gondola doesn’t cost more than the “Business As Usual” scenario, it costs less.

Let me explain:

According to the Business Case, over a 25 year period, the gondola will cost $12m more than the BAU situation. But a sensitivity test conducted within the Business Case demonstrates “the project would break even relative to business as usual at year 28 (italics mine).” This makes logical sense as the longer the system is in operation, the less it costs over the amortization period of its useful life.

Continuing with that logic, one can reasonably assume that as of year 29 or 30 the system would likely cost less than the BAU scenario – presuming of course there are no major upgrades or replacements necessary – which the Business Case said would not be required. The Business Case explicitly states that “the expected life of the track ropes and the cabins is in the range of 20-40 years and 30 years has been assumed as the mid-point. All other components are assumed to require rehabilitation during the 25-year term of the Project.”

Which means the actual lifecycle of the system is closer to 30 years, rather than 25.

In other words, the conclusion about whether or not this system is deemed more or less expensive than the BAU scenario is highly dependant upon how one chooses to define the lifecycle of the system. No reason is given for why 25 years was chosen instead of 30 – or 28 for that matter.

Please understand that this isn’t me trying to manipulate numbers in such a way to demonstrate why this system should be built. I’m not calling shenanigans on anyone or suggesting any nefarious doings to bias the study against the gondola. Instead, I want to demonstrate how analyses such as these are far more subjective than we choose to recognize and decisions made about minor things like lifecycle costs can have dramatic impacts on the debates that surround infrastructure and policy decisions.

A quick Thought Experiment:

Imagine the study chose a lifespan of 29 or 30 years instead of 25. What happens then?

Well for starters The Atlantic Cities would be proclaiming that Vancouver’s Gondola Dreams May Save Taxpayers Millions. Suddenly the conclusion being bandied about by a dangerously non-inquisitive press is that the system will ultimately save taxpayers money, rather than cost them.

But that conclusion would be no more right or wrong than saying over 25 years the system will cost too much.

Or imagine that the study never once stated whether it would cost more or less and instead simply concluded that the system would break even with the BAU scenario at Year 28 of its lifespan. What does that do to the debate?

It changes things from a black-or-white, zero-sum game of ‘yes’ or ‘no’ to a more nuanced situation where decision-makers are forced to question if 28 years is an acceptable period of time for the system to pay for itself. That’s probably a better, more mature situation.

But that, of course, can be spun both by the press and the partisans such that it reflects whatever pre-conceived positions they already have.

Is 25 a better number than 28? One’s rounder than the other, but the other’s even instead of odd. Neither is objectively better or worse, but each have a dramatic and deeply subjective impact on our perceptions of a project.

And is 25 a better number than 30? For some people, maybe. For others, not so much. One can divide 30 evenly by the number 10; one cannot with 25. Such an argument in favour of 30 over 25 is meaningless, of course, but whatever argument one can muster in favour of 25 over 30 is equally as feckless.

Remember that when you hear things like Vancouver’s Gondola Dreams May Be Too Expensive To Come True.

Chances are, it’s a whole lot more complex – and deeply, deeply irrational – than that.

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  1. A classical problem. The benefits go to another pocket than the cost. If the operator of the buses/ potential builder of the gondola doesn't see any single cent of the 500MCAD benefits, there is no benefit to spent even 12M for it. Especially when they already struggle with financial problems. Look at airports or leisure parks whats happens when the benefits go to the same pocket like the expenditures. They happily build whatever kind of people mover and provide free transit within their premises. Not because they are so nice but because instead people spending time walking around they will take a short ride and then spend their time and money inside some shops or restaurants. Also the University cannot make more money if they have a better and faster transit Link. A shopping mall might be interested in a faster link because it will have an advantage over competing malls. But for an university. I don't think students choose their University on behalf the transportation they provide. It is also known that North Americans do not like long term investments. See all the infrastructure decaying in the USA. There is little motivation to even maintain the currents infrastructure let alone build new one. In Canada the tendency is the same although not that strong. So whether there are 10 or 30 years doesn't matter much. And nobody knows what happens even in next year. 25 years ago Europe was divided by the iron curtain and very few people thought it will fall any time soon.
  2. I totally agree with you, Matthias - and the points you bring up are issues I want to discuss more next week. I mostly found it interesting how such minor changes in a study's parameters can have such a dramatic effect on the public debate surrounding a project.
  3. I'm really astounded - Maybe I've wrong read some parts , but how is possible to calculate the "Business as Usual" using current bus network cost since the Business Case envision an 80%/100% increase in traffic already in the next five to ten years? Have they calculated a doubling of the Busses with all the associated personnel , fuel and maintenance costs? - Have they planned the fuel and maintenance costs increases? If not , the headlines should be "the BAU choice will cost hundreds of millions of CAD$ for an insufficient and degrading service".
  4. Matt the Engineer
    One fair way to interpret the $10M number is that this project will only cost the the government $10M over 25 years. And will provide a benefit to citizens of $500M over that same time frame. I imagine there's very little the government can do that's this effective - getting $50 of benefit for every $1 spent. It's likely the government gave the engineers the 25 year number before the study was done. That said, it would have been perfectly valid to come back with a simple payback period as well (28 years). But it's far from a requirement that a project like this pays back at all - it's done for the good of the people (that $500M number), not to save money. It's purely a bonus that over 29 years the project saves money compared to buses. This is a project that should happen. If the politicians involved let simple-minded news stories make their decisions for them, no good projects would ever happen anyway.

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