Many of the debates on this blog and within in the wider community about the merits of projects, or lack of them, end up coming down to down to questions of economics. But as Peter Nunns pointed out a few weeks ago in his excellent guest post, most people aren’t aware of the specific aspects that go into the economic assessment
Readers of this blog will be familiar with the notion of the benefit cost ratio (BCR), a figure that compares the forecasted benefits of a project with the financial cost of building it. It’s often used as a shorthand for the quality of a project: If the BCR is high (i.e. substantially above 1) it is seen as a good use of public money; if not, it can be criticised as a boondoggle.
Everyone plays this game. Opposition politicians often criticise motorway projects such as Puhoi-Wellsford and the Kapiti Expressway on the basis of BCRs that fall below 1, while the Minister of Transport has in the past expressed scepticism about the City Rail Link on the same grounds.
However, there is relatively little public discussion of the hows and whys of these seemingly consequential numbers. How, exactly, does one calculate a BCR?
The procedures for conducting an economic evaluation of a transport project are set out in excruciating detail in the Economic Evaluation Manual (EEM) published by the New Zealand Transport Agency. This manual defines the exact procedures that need to be followed when evaluating any transport project and specifies the values that should be used in the evaluation.
He then went on explain one of the biggest issues that exists within the EEM being the value of time figures used for travel time saving calculations and how it differed depending on the region, type of road or what mode you are using.
Well last year we learned that the NZTA were in the process of reviewing the EEM and now they have released what those changes will be. The good news is they are positive and appear to address the issues raised by Peter in his post as well as many other issues. The changes are:
- A revised discount rate of 6%, along with an extended evaluation period of 40 years.
- The addition of wider economic benefits relating to imperfect competition and increased labour supply.
- Greater emphasis on a multi-modal approach to evaluation, including:
- public transport evaluation periods made consistent with other modes, and
- equal values of travel time across modes for monetising the total value of travel time benefits.
- Discontinuing the use of default traffic growth rates. Evidence will be required to support any traffic growth assumptions.
As mentioned some of these are quite positive so let’s look at them a little closer.
Lower discount rate and longer evaluation period
These two changes primarily will benefit larger and longer term projects like the Roads of National Significance and the City Rail Link where the benefits accrue over a long period of time. This isn’t actually as low or as long as what was proposed in April last year (4% and 60 years) but is at least an improvement on what exists now (8% and 30 years). The effects of the lower discount rate and a longer time period are excellently shown in the graph below which compares the original business case of the CRL from 2011 using the NZ methodogy with that used in the UK which has a 3.5% discount rate and a 60 year evaluation period. The differences are staggering with in the UK model suggesting the total benefits would be 6 time higher than how we assessed them.
Interestingly in their FAQs about the changes the NZTA say that 6% is in line with other nations yet this chart from a few years ago shows that 6% is still at the upper end compared to many countries.
The addition of wider economic benefits relating to imperfect competition and increased labour supply.
I’m not an expert so hopefully some of you economists can explain exactly the impact that this will have.
Greater emphasis on a multi-modal approach to evaluation:
Both of the changes suggested make absolute sense and should mean that public transport projects are assessed equally rather than PT having one hand tied behind its back. The issue of value of time was covered really well by Peter and I’m not going to try and rehash it.
Discontinuing the use of default traffic growth rates
For roading projects this is a significant change as it means business cases won’t be able to just assume traffic will always grow. Constant traffic growth was a feature seen in NZ and overseas but then over the last decade or so things have changed with fewer people driving and those that do driving less. It should hopefully mean that projects like the Additional Waitemata Harbour Crossing won’t be able to just predict growth even when the numbers already show that growth hasn’t been happening.
Along with the changes to the EEM, the NZTA will also be taking changing their strategic fit assessments to ensure that crash prediction is consistently taken into account.
While they came into effect on July 1, we are unlikely to see a lot of change as a result of them in the short term. The NZTA say that all proposals in the 2015-2018 National Land Transport Programme will be subject to these changes while existing projects and even new ones that enter the 2012-2015 NLTP may still use the older methodology depending on certain criteria.
All up these changes seem fairly positive so it’s pleasing to see the NZTA improving how things are done. The next stage in the EEM update process will look at the procedures within the assessment framework and importantly the particular values used in the calculations e.g. the actual value of time, vehicle operating costs and crash costs used in the assessments.