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Exploring the web of “wider economic benefits”

Steven Joyce’s main response to the release of the CBD Rail Tunnel business case seems to have been to immediately question the accuracy of the study. In particular, he has questioned the validity of including broad urban regeneration – or employment based – wider economic benefits of the project. This is taking a very big swipe at the business case, because it is these particular benefits that make the CBD Rail Tunnel stand head and shoulder above other large transport projects.

Here’s a good summary of what he’s said (from here):

Joyce said the report talked about congestion but didn’t get into the detail of how that would be addressed in terms of actual numbers.

He took issue with the report’s statement that the standard benefit-cost ratio (BCR) for the project was equal to or higher than that of two of the Government’s Roads of National Significance.

“They have released a BCR with Webs (wider economic benefits) and they’ve been a bit naughty because they’ve called it a BCR,” he said.

“Then they’ve gone out beyond the NZTA evaluation manual and said `by the way, we’ve got a new way of calculating it which improves it even more’.

“What they’ve tried to do is compare the BCRs, including Webs, on the tunnel project with the plain BCRs of the two other projects.”

Joyce said the actual comparisons, at the level of BCRs including Webs, were identical.

But how right is that? Is it actually true that NZTA haven’t looked at these wider economic benefits? Is it really true that Puhoi-Wellsford has exactly the same BCR as the CBD Rail Tunnel when you exclude any sort of wider economic benefit? What is the difference between the wider economic benefits in the NZTA economic evaluation manual and the employment benefits (we could call them the wider-wider economic benefits perhaps?) Have these ‘wider-wider’ economic benefits been used in cost-benefit analyses overseas?

So many questions, so I thought I would need to do a bit of research to try and find some answers. A useful start is to look at the graph I put together yesterday – which effectively “added in” the CBD Rail Tunnel to a graph that formed part of SAHA International’s economic analysis of the seven Roads of National Significance. As you can see, each project has three bars. The green bar is for plain old transport benefits (known as ‘conventional benefits’ in SAHA’s report). The purple bar is what we might call “conventional wider economic benefits” – those that are in NZTA’s economic evaluation manual. The blue bar is effectively the purple bar plus what are called ‘employment benefits’. Obviously the blue bar is always bigger than the purple bar, because agglomeration benefits simply form ‘part of’ the true wider economic benefits of a transport project.

So let’s be fully fair and outline the level of each of the different types of benefits for the CBD Rail Tunnel and the Puhoi-Wellsford Road. For the CBD Tunnel this can most easily be found in the Executive Summary on page 5 – in two different tables: So for the CBD Rail Tunnel we have conventional transport benefits of $1.319 billion, we have traditional agglomeration wider economic benefits of $185 million and we have these broader productivity/employment benefits of $3.333 billion (which include the agglomeration benefits). These are the totals that I used to create the three bars in the graph earlier in this post.

For the Puhoi-Wellsford road, for some reason even though SAHA International’s assessment – with appendices – runs to 166 pages, there’s no similar table, just the graph I’ve included above. That would indicate around $500 million in conventional benefits and say around $100 million in wider economic (including employment) benefits. Even taking into account the lower cost of Puhoi-Wellsford, it seems clear that if we do our best to compare ‘apples with apples’, the benefits of the CBD Rail Tunnel are vastly superior in every way: $1.3 billion to $500 million in transport benefits, $184 million to pretty much nothing in agglomeration benefits and $3.33 billion to around $100 million in agglomeration plus employment benefits.

There is no comparison.

Funnily enough, with Steven Joyce accusing the CBD Rail Tunnel’s business case of ‘creative economics’, it interesting to note that the SAHA International Assessment includes another proposed way of measuring wider economic benefits (shall we call it the ‘wider-wider-wider approach?’). This approach seeks to measure National Economic Benefits from these projects – benefits to productivity, benefits to higher wages and their flow on effects, and so forth. It is all fairly complex but overall it would seem as though these ‘wider-wider-wider economic benefits’ cover at least as much as what is measured in the CBD Rail Tunnel business case – if not more. Yet when they’re graphed, the results don’t look particularly spectacular: If there’s one question I would like to ask any economist out there, it would be whether the ‘productivity benefits’ used in the CBD Rail Link’s business case are more like the “agglomeration + employment” benefits shown in blue above, or whether they’re more like the “CGE benefits” shown in purple above. But for our purposes here it doesn’t really matter – because the CBD Rail Tunnel’s $3.33 billion of productivity benefits are vastly more than just about any other RoNS project out there (potentially with the Wellington Northern Corridor as the exception – which is a slightly odd result given Wellington’s lack of population growth) no matter how you measure them.

My reading of the CBD Business Case tends to suggest that the $3.33 billion of productivity benefits largely arise from what might be called an “employment premium” – in that workers in Auckland’s CBD are more productive, higher earning and contribute more in a GDP per capita sense than workers anywhere else in the city, or even the country. This is shown in the graph below (from page 80 of the business case): Workers in the CBD clearly have a higher productivity than those elsewhere – as the work is more specialised, travel is reduced, particular industries are attracted to a CBD location and so forth. This is all extensively explained through the CBD Rail Tunnel’s Business Case. This is where the $3.33 billion in productivity benefits come from, this is what makes the CBD Rail Tunnel’s cost-benefit ratio a spectacular 3.5.

So is Steven Joyce right in saying that this type of approach constitute “WEBs on steriods”? Or are they simply employment benefits that have also been measured for just about all the Roads of National Significance (except Victoria Park Tunnel because that’s already under construction). I tend to think the latter.

Looking at one last unanswered question, are these productivity benefits something that seem to have been simply invented to help justify the CBD Rail Tunnel – as Joyce seems to be intimating? It would seem not – as a report attached to SAHA International’s assessment shows that increased labour-force productivity (through people working in central areas rather than in distributed areas) contributes vastly to the cost-benefit analysis of London’s CrossRail project: I still don’t think that I fully understand the various ways to measure wider economic benefits of transport projects – and in fact it would seem that there’s quite a lot of debate amongst the real experts on these matters too. But what is clear to me is that the CBD Rail Tunnel’s business case was undertaken in a very similar way to how all the Roads of National Significance have been analysed. The big difference between it and all the other projects is simply the massive amount of ‘employment/productivity benefit’ that the CBD Rail Tunnel creates. But this should come as absolutely no surprise – it enables and encourages more jobs to be located in the CBD of the country’s biggest city where there is already a concentration of high productivity jobs. In fact, if ever a project was going to benefit from employment/productivity benefits then the CBD Rail Tunnel is that project.

Quite simply, the reason the CBD Rail Tunnel’s benefits stand head and shoulder above most of the other RoNS projects is because it is a better project. It delivers better value for money, it delivers real economic productivity and employment benefits. It delivers significant transport benefits (over twice those of Puhoi-Wellsford), half of which are to road users. There’s a reason why I’m a huge supporter of the CBD Rail Tunnel project – and the business case clearly illustrates that. It can transform Auckland like no other project around.

4 comments to Exploring the web of “wider economic benefits”

  • Sam

    I read in a comment on one of these transport blogs on Thursday that Joyce would try to find something wrong with the case to put it off (or make something up if hes struggling…hes good at that).

    He is obviously a man of strong views, firmly grounded in his imagination…in a “No-one else has a clue how the world works” sort of way. Quite distressing- hopefully John Key comes to understand what we need and moves him out of the position at the election.

  • Sam

    And this is an excellent analysis…very informative and thoroughly grounded in fact and reality- unlike Stevens which is neither

  • Matt L

    Sam – I think that it was me who made the prediction that he would attack the business case saying the did something wrong.

    One thing I have noticed is listed benefits of increased property values in the CBD but I can’t find anything about what it would do to house prices in the suburbs. Specifically out west there is likely to be an increase as having a reduced commute time would make houses in the area more attractive. Whether people use the rail line or not telling them that their house will increase in value by this being built might be a good way to get more public support behind the project.

    • I think he wants to deflect criticism of how poor many of the businesses cases are for the RoNS. I have the SAHA report that Rod Oram’s article referred to last week on its way to me at the moment – will be interesting to see what that says.

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