MoT’s review of capital spending on roads, part 2

This is the second post in a series on the Ministry of Transport’s working paper on New Zealand’s capital spending on roads, which was prepared as an input to the 2015/16 Government Policy Statement (GPS) on Land Transport Funding. It was released to Matt under the Official Information Act just before Christmas. Previous posts:

As I said last week, MoT’s paper suggests that there are big issues with the land transport budget. Current road spending does not seem to represent good value for money. To their credit, MoT appear to be acknowledging this. However, it doesn’t seem to have percolated up into the investment decisions being made by the Government.

This week, I want to look at what NZTA’s money (the National Land Transport Fund, or NLTF) is being spent on, and how economically efficient that expenditure has been.

Section 4 of the MoT report contains a lot of useful data on past and future spending on roads. Here’s what’s happened to the roads budget over the last 15 years, and what’s expected to happen over the next decade:

MoT spending on new roads 1997-2022 chart

Basically, about a decade ago we started spending a lot more on new or improved roads. A lion’s share of new spending went to state highways, in spite of the fact that local roads carry more traffic. As we have previously discussed at length, this spend-up coincided with a flattening of growth in vehicle kilometres travelled. (It also coincided with an acceleration in price inflation for civil construction.)

In other words, we’ve spent a decade spending increasing amounts of money on roads for which demand is not increasing. And the last three Government Policy Statements plan for state highway spending to increase further.

In order to pay for state highway spending, it’s been necessary to divert money from other activities – local roads, maintenance, PT, and walking and cycling have all taken a hit. The Government has also raised petrol taxes several times. The MoT report offers some analysis of how spending priorities changed between the 2008 GPS and the 2012 GPS.

The following chart compares projected spending ranges for new and improved state highways (the darker uppermost bands) and new and improved local roads (the thinner, lower bands). It shows that funding for state highways – the Roads of National Significance – was raised by around half a billion dollars a year, while local road funding was cut back.

MoT GPS 08 12 road spending comparison

One would hope that the Government’s decision to allocate vast amounts of funds to state highway projects was based on a sound economic rationale. Unfortunately, there is no hard evidence of this in the MoT paper. Section 5 of the MoT paper analyses benefit-cost ratios (BCRs) for road spending. It notes some caveats with the data – BCRs for some projects had to be inferred from “efficiency scores” – but there is enough data to paint a picture.

Here is MoT’s picture. It is not a pretty one:

MoT state highway BCRs 2005-2012

Essentially, MoT finds that average benefit cost ratios for state highway projects declined significantly in 2008/09 and have stayed low ever since. An eyeballing of the graph suggests that BCRs prior to 2008 averaged a bit over 3.5 – meaning that state highway projects were expected to return $3.5 in social benefits for every dollar invested. Since 2008, they have averaged a bit over 2 – meaning that state highway projects now only return $2 in social benefits for every dollar invested.

MoT’s analysis of this graph is entirely blacked out in the released document. Nonetheless, the implications are simple: we have almost doubled our spending on state highways without achieving any more benefits from that spending. BCRs aren’t everything, but it’s really, really hard to understand why the Government would want to spend money so ineffectively.

The answer is that they feel that the Roads of National Significance offer a better “strategic fit” with their overall objectives for the land transport budget. I’m not necessarily opposed to this evaluation approach. In my experience, cost-benefit analysis invariably has some blind spots. Using qualitative “strategic fit” criteria can allow policymakers to take account of broader goals that aren’t well covered in NZTA’s Economic Evaluation Manual.

However, I don’t think that strategic fit should override all other analysis. If you think that a project is important for supporting a productive economy, that’s fair enough. But if an evaluation of the project’s impact on freight costs and agglomeration effects in urban areas results in a low BCR, you should question your prior assumptions about its economic benefits. It’s foolish to think that four-lane divided highways are magical devices for creating economic growth. Economics simply doesn’t work that way.

Next week: Do we have better options for spending the transport budget?

6 comments to MoT’s review of capital spending on roads, part 2

  • Dave B (Wellington)

    And the same government ministers who are driving along this massive exercise in Tax / Sell off / Borrow and Spend for their pet roading projects, are the very ones who are always so ready to chime in and attack the Opposition for their far more modest rail and public transport spending proposals.

    This is a “strategic fit” with an ideological view only. It is not supported by evidence and the MOT’s own data shows it to be flawed. Thanks Peter for spelling this out.

  • JimboJones

    I think it is good that the government is spending money on the Waikato expressway regardless of BCR, a two lane goat track is neither adequate nor safe. Also pleased to see a decent Hamilton bypass for traffic heading south instead of having to use the ridiculous 1B or 27.
    Waterview should be completed (I guess this would be a fair amount of that extra highway spending?).
    Other than that most of the other spending planned or in progress seems unnecessary and very low value (e.g. Kirkbride Road, 2nd harbour crossing, holiday highway).

  • Greg N

    We could have built a bloody ginormous conference centre in prime land, in Auckland CBD, and prepaid its OPEX for 20 years – and still be better off afterwards than putting money into most of the recent RoNS that were started by the current Gov’t.
    The road projects that started under Labour i.e. started/funded before end of 2008 – which National claimed to all be RoNS – but weren’t – had invariably higher BCRs than anything done since and have been used to “drag up”/increase the average BCR’s for everything they’ve built since then. So that 2.0 BCR is very suspect as well, as a lot of the BCR’s must be pretty poor to end up with a BCR of only 2 on average given all the stuff they’ve built/funded in the last 6 years.

  • Previous posts showed some of the Roads of Notional Significance have BCRs less than 1 – including Transmission Gully, the Waikato expressway and the Puhoi holiday highway.

    Meanwhile, who hasn’t noticed potholes in local streets as councils struggle to make up for the reduction on govt’s share of maintenance funding? Never mind all the other modes shafted by these ideological dunces.

    • Greg N

      So the fact that the average BCR over the life of the current Gov’t is 2.0 when most RoNS built over this time are actually 1 or less, means that the Gov’t has been using those earlier Labour Gov’t initiated projects (Like Newmarket Viaduct, and Victoria Park Tunnel) to “top up” the average BCR numbers to 2.0.

      Without that top up, then without a doubt the average BCR for projects over the last 6 years in the above graph would be well under 1.0.

  • Simple answer of what benefits four lane highways achieve: greater profits from road haulage of freight through reduced waiting times, and that’s the kind of “economic benefit” National stands for these days, big business profits..

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