Posts Tagged: Business Case



Burnaby Mountain Gondola Business Case: The 12 Million Dollar Problem

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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