The CLARA high-speed rail plan is a forlorn hope

After teasing us for months with a mysteriously sparse yet epic-sounding webpage, Consolidated Land And Rail Australia have finally revealed their much-anticipated high-speed rail plans for regional Australia. Er, sort of.

We first heard of CLARA back in March, when the group met with Prime Minister Malcolm Turnbull to discuss the possibility of a high-speed rail service funded by value-capture. Despite a short-lived flurry of press enthusiasm, few details emerged then or in the intervening months. Finally, at a press conference at RMIT in Melbourne, the organisation launched their incredibly ambitious proposal:

  • A 917km fast railway between Sydney and Melbourne, reducing the travel time between CBDs to 1 hour 50 minutes,
  • Utilising Japanese magnetic levitation technology to travel at speeds of up to 600km/h. Or maybe 430km/h. Or maybe 300km/h French technology…
  • Eight newly-constructed “Smart Cities” in regional Australia
  • To be financed by the development and sale of residential properties in these new cities
  • The total cost to be a mammoth $200 billion

In the days following the announcement, it received mixed reactions. The creduous media predictably went for clickbaity headlines that make it sound as if the bulldozers are going to start running tomorrow, while the AFR was skeptical of the proposal’s economic soundness (“High speed rail to phantom destinations“, “Potential trainwreck“), rail experts warned that the proposal would likely depend on public subsidiesthe Greens seemed put-out that big-business was muscling in on what they consider their turf, and incredibly, even the local rag in Albury-Wodonga called it “an unwanted distraction“.

This should be prime Hot Rails material. CLARA’s proposal has a lot of the features we have been advocating – regional development, a focus on expanding the 1-hour commute envelope around the major cities – and yet a lot of questions and concerns remain. Few details have been released, with the business plan and feasibility studies “commercial in confidence”. However over the past week, different bits of information have come out in various interviews with news outlets all across the country, allowing us to piece together the real agenda. Unfortunately, the closer you look at the CLARA plan, the less it seems like it could ever succeed as described.

Who is CLARA?

Consolidated Land And Rail Australia lists its principals on its website as:

  • Nick Cleary – Co-founder and chairman, with a background in agri-business, finance, real-estate and politics. He was vice chairman of the NSW Nationals until this year, and was previously a Nationals candidate for the seat of Throsby in the Southern Highlands.
  • Jay Grant – Co-founder and managing director, with a background in private equity, property development, policy, consulting and NGOs.
  • Clayton Davis – Director and legal counsel, with a background in law in both Australia and the UK

Additionally, there’s an “Advisory Board” consisting of former NSW premiers Steve Bracks and Barry O’Farrell, Philip Kenny of Kenny Construction (USA), Ray Leahood (US Senator from 1995 to 2009 and Department of Transportation Secretary), and Neils Marquardt (CEO of the American Chamber of Commerce in Australia). An article in The Australian also names Andrew Robb (former federal trade minister), Lois Scott (City of Chicago chief ­financial officer), David Wilhelm (former campaign manager for Bill Clinton, now renewable energy developer) and Mark Doyle (also a Clinton advisor, subsequently a financial advisor and veterans’ advocate).

There’s also a “Working Group” with a further dozen or so names. They include representatives from AECOM (engineering design, consulting and project management, USA-based), GE Australia (huge global company with multiple arms), DLA Piper Australia (law, global), RMIT University, SGS (planning and economics, Australia-based), CSIRO, and Willis Towers Watson (risk management and insurance, UK-based).

The team is pretty heavy on finance, property and legal experience, yet rather light on construction and engineering. Even the people from the engineering firms are more property guys than actual engineers. Joe Langley (AECOM) has a background in property development and urban planning, with particular experience in value-capture financing (he was also involved in the 2013 High Speed Rail study commissioned by the Rudd government). Suzana Ristevski (GE Australia’s CMO) is a marketing heavyweight. Philip Kenny (Kenny Construction Company) was a project manager at his family-owned construction company, with a business background.

That’s not to say it’s not an impressive team; many of them are global leaders in their fields. Finance, business and legal smarts are all critical for such an ambitious proposal to succeed (not to mention political connections at the highest level). But the principals strike me as arguably the weakest links in the team, and I am particularly surprised there’s not a single engineer among the 24 people so-far announced as having involvement in the project. For a group proposing by far the largest engineering project in the history of Australia, and among the largest in the history of planet Earth, that seems a rather conspicuous omission.

The CLARA Plan

CLARA's proposed route, along with eight potential new cities. Image from CLARA website.

CLARA’s proposed route, along with eight potential new cities and incorrectly rendered scale (did I mention there’s no engineer on their team?) – Image from CLARA website.

CLARA claim the project will cost $200 billion. More expensive than the space shuttle. Even though CLARA have said this includes the cost of land development (whatever that means) it’s still twice as much money as AECOM’s estimate for Melbourne-Brisbane, but for a railway half the length. According to CLARA, farebox revenue will pay for operating costs, and the enormous construction costs will be covered via value capture – utilising the uplift in land values due to improved infrastructure to pay for said infrastructure. Could their plan really be profitable?

For all the fanfare, the announcement hasn’t directly told us very much. CLARA’s website doesn’t go into any more detail than I did at the start of this article. A video on their website doesn’t do much other than propose a utopian dream of modern, green communities (or possibly going to the moon, I can’t be sure). It’s all very long on marketing, short on detail. Let’s piece together the puzzle.

The Cities

Sarah Martin in the Australian identified the proposed locations of the new “smart cities” (using the same numbering as on the CLARA image above) as being located in the following regions:

  1. Wingecarribee Shire (encompassing the Southern Highlands)
  2. Goulburn-Mulwaree Council
  3. Yass Valley Council
  4. Gundagai Shire
  5. Greater Hume Shire (between Wagga Wagga and Albury)
  6. Berrigan Shire (in the southern Riverina near Deniliquin)
  7. City of Greater Shepparton
  8. Shire of Strathbogie (Central Victoria near Nagambie)

This, along with the 917km length of the proposed track, tells us that CLARA are not merely rehashing the 2013 AECOM study. That study proposed an 824km track, passing through (or at least near) both Wagga Wagga and Albury, and not going anywhere near Berrigan Shire. This looks to be a newly designed route, not proposed in any previous study, adopting a longer route in order to take advantage of flatter country further out in the Riverina, with lower land acquisition costs. It makes sense given the plan to build large, new cities.

Additionally, CLARA claim to have already “secured” 16,000ha of land at all eight proposed city sites, having signed purchase options with over 70 landholders (this also tells us they do not yet have much of the land for the rail corridor itself, as this would require agreements with far more than just 70 landowners). Apparently this represents 40% of the total land required, therefore their eventual goal must be 40,000ha, making it 5,000ha for each of the proposed eight cities.

Let the sheer scale of that sink in for a moment. 5,000 hectares is not a small area; it’s a square almost 8 kilometres to a side. To put that in perspective, that’s about the same area as central Melbourne from Flemington Raceway to St Kilda, or the Eastern Suburbs from Maroubra to Vaucluse. Or the whole of Albury-Wodonga.

CLARA have suggested their goal is to achieve a population density in these new cities similar to London or Paris (6,000 people per square kilometre). That would imply a population in each city of 300,000 people (triple the population of Albury-Wodonga). CLARA later confirmed this, suggesting to the Goulburn Post that 400,000 people could be added to the region (Goulburn’s current population is 22,000).

It’s actually quite an interesting concept – dense, multi-story living of the kind we associate with trendy capital city centres, but out in the country. Urban convenience, with rural amenity. I can see the appeal, especially if there were a cheap, fast link to the metropolises of Melbourne and Sydney and the immense job markets they represent. But it’s an almost unimaginably mammoth project – it’d be a bit like China’s epic construction boom of the last decade or two. It’s not impossible, but it’s just so, so big.

Buying the land (from farmers)

Cleary is quoted in The Australian and elsewhere saying that the plan is to acquire and subdivide rural land for about “$1000 per lot”, which could then be on-sold for $150,000 per lot. On its own, this doesn’t tell us much. But the AFR has more pieces of the puzzle, saying the cost of acquiring all the rural land is expected to be $1.2 billion ($30,000/ha), which would then be developed into residential lots worth $180 billion. Combine this with their expected lot price of $150,000 and presto – they are expecting to build 1.2 million properties – 150,000 per city (again tying into our earlier estimate of the cities’ sizes).

Let’s assume that half the area of these cities are taken up by roads, public parks and other open space. Those 1.2 million lots need to fit into 20,000 hectares, which means each lot takes up just 160 square metres. Allowing for the areas taken up by parking lots, private yards and the like, not to mention non-residential buildings like retail, schools, fire, police and hospitals, this probably means the developments would have to be, on-average, 2-3 floors in height. This makes sense; we earlier estimated that the cities would be approximately the spatial size of Albury-Wodonga but with triple the population.

In an article for ArchitectureAU, CLARA explained that the plan is to build the railway into some empty farmland, have it rezoned, and then sell the land to someone else who actually develops the land and builds the apartment blocks. This makes intuitive sense; no finished property costs as little as $150,000 these days, certainly not in a trendy brand-spanks community with a half-hour commute to Sydney. And anyway, CLARA needs a hefty profit margin in order to pay for the railway. In the end, that’s the all-important factor. Will they sell enough properties, at enough of a profit, to pay for it all?

Selling the land (to developers)

Also in the ArchitectureAU article, CLARA stated that they expect the eight new cities to capture a surprisingly precise 22% of Australia’s expected population increase over the next 40 years. That’s 22% of 14 million people over 40 years, which makes 77,000 people per year. Assuming an average occupancy of 2 people per household (below the Australian average of 2.6), that means CLARA expect to sell an average of 38,500 blocks per year (which, neatly, is almost exactly 22% of the expected 172,000 houses per year that Australia will need over the coming decades).

The new cities will need water supply, sewage treatment, power stations (or grid connection), roads, internet hubs, gas mains and lots more before they will become sellable… sure, the sub-developer would be responsible for site-level services, but there has to be something to connect to in the first place. For each city, this would be a multi-billion dollar proposition, adding up to several tens of thousands of dollars per dwelling, before you even look at other overheads like admin, marketing and legal costs. If CLARA achieve their assumed prices, the business model might work. But if they achieve much less, development costs and interest repayments will very quickly eat away any margin.

So how much would developers pay for empty blocks, in empty farmland, with nothing but a fast-rail link to the capitals? A good way to look at it is to compare with what development blocks sell for elsewhere. The sale price of development sites varies significantly according to any number of factors (density of allowed development, proximity to waterfront, etc). Here are a few notable recent examples:

That last one in King St is illustrative. The site was bought for $12 million in 2013, just before height restrictions came in that made the approval for 431 apartments far more valuable. This year the developer refused an offer of $25 million, reportedly because he is hanging out for over $40 million (which would be $92,800 per apartment). But if the approval falls through, he might barely be able to recover costs. Such is the high-risk nature of large-scale property development.

Consider those numbers. There are sites that sell for well over $150,000 per dwelling, but they’re in prime inner-city locations. The variability is also striking; some sites attract far lower prices, even in actual CBD locations. All these sites have existing infrastructure and services (or could easily be connected), and huge benefits from existing city amenities and social life. None of this would apply to CLARA’s proposal, certainly initially. And of course, they have to build the railway first.

Building the railway

Transrapid Maglev

Transrapid maglev, one of the technologies reportedly under consideration by CLARA.

The 2013 AECOM study predicted the Melbourne-Sydney leg of an east-coast HSR to cost $50 billion. That was for conventional steel-wheel, steel-rail technology, which tops out at about 350km/h for regular service. However the CLARA plan is based upon residents in new regional townships commuting to jobs in the capital cities by high speed rail. These locations are hundreds of kilometres apart; that means average speeds of at least 400km/h are going to be necessary to keep commute times to competitive levels (say, 30-60 minutes). While CLARA suggests they may be considering conventional rail technology, in reality their proposed business model requires superfast magnetic levitation technology.

For all their whizbangery, maglev systems remain uncommon. Their vast cost, coupled with the disadvantage of being incompatible with existing railways, has so far hamstrung their widespread deployment. Interoperability is essential if HSR is to deliver wider benefits to the regions it passes through. The CLARA plan would bypass them all – they would see further decline as regional population and services relocate to the new cities and capitals.

There are only two major high-speed maglev services in the world: the 38km Shanghai Transrapid (built essentially as a vanity project for a newly-powerful China), and the 286km Chūō Shinkansen between Tokyo and Nagoya, currently under construction. Even this would be eclipsed by the scale of the CLARA project, at well over 3 times the distance. The Chūō Shinkansen is expected to cost ¥9 trillion (A$111 billion) when completed in the later half of next decade, which comes to A$388 million per kilometre. Even allowing for the less challenging terrain along much of the Australian route, maglev is still likely to be far more expensive than conventional rail.

But let’s assume the railway will cost $50 billion. Just the interest costs on that would be over $2 billion per year; total repayments could be double that, depending on terms. Even allowing for staged construction, it doesn’t get much better. The first leg of the railway to Shepparton will supposedly cost $13 billion and be operational in 10 years, but with only two cities a far smaller amount of land will be available to sell. And with the concept as-yet unproven, developers will be unlikely to pay high prices. The repayments on $13 billion would be about $750 million per year at a very low interest rate of 4%, with no income at all for the first few years.

Therein lies the killer. The land will remain nearly worthless until the railway is built, or at least reasonably certain to be built. That makes it a huge, multi-billion-dollar up-front investment, with eventual returns that are uncertain, at best. And while the expenditure on the railway is rapid, the income from real-estate development comes gradually over 40 years, with the crucial early land sales certain to bring lower prices than later sales when the cities are more mature. With interest rates presently at historic lows, while real estate is at an all-time high, it means there is substantial downside risk to such a long-term investment, without much upside.

Living in CLARA’s utopia

CLARA concept city

CLARA concept city. Not sure which of the inland cities has the sapphire-watered harbour. Also probably the first utopian vision I’ve seen that actually includes smog. Image: @theCLARAplan

Assuming developers do buy the blocks (at whatever price), what then? How much will these houses eventually cost?

Even the cheapest quality single-level detached home typically costs over $1000 per square metre to build in Australia; low-rise apartments are more like $1500/m2 while high-rises start from $2000. Construction costs for a typical 50m2 one-bedroom apartment would be at least $75,000 even if built to minimum standards; a 2- or 3-bedroom (often exceeding 100m2 in size) would be substantially higher.

In any scenario, average direct construction costs would very likely exceed $100,000 per property. Add in the costs of subdivision ($30,000 per lot is typical), services connections (easily $20,000, probably far more for major infrastructure upgrades), local roads (say, $10,000), not to mention parks, amenities and landscaping for the wider city environment (say $10,000 averaged over each property), and we’re already well over $150,000 per lot, maybe far more.

Add to that whatever the developer paid for the land, and you’re anywhere from $200,000 to $300,000. Contrary to popular belief, property developers have to eat too, and more to the point won’t be buying into this risky venture without hefty profits, so let’s add, say, another third on top for profit. $400,000, minimum, for a one bedroom apartment in Berrigan shire. Probably over half a million for something bigger.

That isn’t too different to the existing cost of housing in mid-tier suburbs in Sydney or Melbourne. CLARA’s whole business plan is based on the idea that people will use the railway to commute into the capital cities daily. That’s ten trips a week, or 480 over the working year. The railway will have to be pretty damn affordable to make that work, especially when it’s competing with metro networks that sell tickets for as little as $3 one-way. It really is hard to see an exodus to the new cities on the scale CLARA requires to make their business plan work.

A forlorn hope

In a nutshell, CLARA’s proposal depends on two things – having an area of farmland half the size of Melbourne rezoned as medium-density residential, and having both developers and homeowners treat that rezoned land as essentially indistinguishable from prime inner-capital residential precincts… if CLARA can sell 38,000 blocks per year, and if they can sell them at $150,000 each, and if the railway costs $50 billion, and if interest rates stay low while property prices stay high…. then the CLARA plan might work. If any one of those assumptions fails, then so does the proposal.

The danger in this is that CLARA necessarily requires the land rezoning to occur well in advance of the completion of the railway, in order for them to quickly begin to pay down the enormous costs of the railway construction. As the railway is by far the single biggest expense, CLARA could easily go bankrupt if early land sales did not meet expectations, and the railway would fail. Come to think of it, this outcome might actually be beneficial to the proponents – without the enormous cost of the railway to cover, the development would become profitable at a far lower sale price. In a suspicious irony, early failure of the railway proposal might end up making the venture more profitable, if the land had already been rezoned prior.

I started this article honestly wanting to give CLARA’s proposal a fair go, and it gives me no pleasure to declare the plan a forlorn hope. I worry that it may cause Australians to associate future high-speed rail proposals and even the very concept of value-capture with land-crankery and property development proposals of dubious merit. The best way to achieve high-speed rail in Australia is through incremental but substantial improvements to existing lines, rather than hoping for a singular transformative megaproject that may never eventuate.

 

2 Comments

  1. David Glynne Jones

    You don’t need to be a Rhodes Scholar to work out that CLARA is essentially a land & money scam that does nothing to improve the quality of existing population centres.
    In addition to there being no engineers on the board, executive group or working group, there is only one woman. This is unbelievable for a project that aims to be the single biggest population and infrastructure project in Australia’s history.
    Zero credibility.
    One of the big questions is what did the major political parties know about this proposal before the federal election, and what in-principle agreements or encouragements have been given to the CLARA group?

    • I seriously think that you don’t want this to happen because you hate the concept of change and progress and would rather see Australia fall behind the rest of the world in terms of technological advancement. In other words you want to see us fail

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