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Stuart’s 100 #4: Aotea Arts District

Stuart’s 100 continues:

4: Aotea Arts District

Day_4_Aotea_Arts_District

What if Aotea felt like an Arts District?

The area around Aotea Square is home to a surprising number of performing arts venues. I say surprising because it’s not often that you feel you are in an arts or theatre district walking around the square or that stretch of Queen Street between The Civic Theatre and Town Hall.

Welcome-to-Theatreland-Main-Image-663x389

Wouldn’t it be good if future changes to the area brought this arts focus to the fore? For starters, how about a ticket kiosk near the Queen Street edge of the square selling tickets for all the nearby venues? More prominent digital arts media and promotion?

ST JAMES

Restoring the St James, while big a big ticket item, also ultimately seems a no-brainer. Imagine if you had landmark restored heritage theatres on both sides of Queen Street, with future changes to provide more room for outdoor dining, gelato, and more leisurely strolling under atmospheric lighting strung across the street. Then it could really start to hum.

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Boston image: Khoury Levit Fong Architects (http://www.khourylevitfong.com/ )

Guide to economic evaluation part 3: What is agglomeration?

Debates over major transport investments often get caught up in arguments over benefit-cost ratios, or BCRs. In recent years, projects such as the Transmission Gully and Puhoi to Warkworth motorways and the City Rail Link have been criticised for their low BCRs. These debates have often raised more questions than they resolve. So it’s necessary to ask: What is a BCR, how is it calculated, and what does it mean?

The good news is that there is a manual that explains it – New Zealand Transport Agency’s Economic Evaluation Manual (EEM). The bad news is that it’s tediously long and not written for a general audience. This series of posts aims to provide a guide for the perplexed:

In part three of this series we take a look at agglomeration, which is a potential benefit of transport projects that isn’t captured in traditional evaluation procedures.

So we’ve gotten through the most boring part of this series – the previous post on conventional transport benefits. To briefly recap:

  • Conventional transport appraisal focuses on monetary and non-monetary benefits for users – i.e. travel time savings and vehicle operating cost savings
  • However, there are also externalities associated with transport behaviours
  • Some of these externalities, such as health benefits and environmental externalities, are pretty simple to describe and analyse
  • However, other externalities which have an effect on economic activity – the so-called “wider economic impacts”, or WEIs – are a little bit more complicated.

As I said last time, NZTA has sought to incorporate transport-related externalities into their evaluation framework. As part of this work, in 2011 they commissioned a report to identify and quantify the WEIs. The report (pdf), which was written by economists Duncan Kernohan and Lars Rognlien, found evidence for three main types of WEIs: agglomeration externalities, imperfect competition benefits, and labour supply benefits. Each externality arises as a result of changes to transport costs, as follows:

Transport user benefit Externality Economic outcome
General transport time/cost reductions Agglomeration Effective density of employment increases; firms become more productive
Business travel time/cost savings Imperfect competition Firms pass on savings to customers, plus an additional amount to reflect price-cost margins
Commute time/cost savings Labour supply effects Easier commutes encourage some people to enter the labour force; they pay more income taxes as a result

If you want to understand the WEIs in more detail, I suggest you take a look at their paper, which is technical but not totally inaccessible. Here, I’d like to focus solely on agglomeration externalities – what they are, how they happen, and why we might want to include them in transport evaluation.

Agglomeration has been a hot topic in urban economics in recent years – although, technically speaking, the theory of agglomeration goes back to British economist Alfred Marshall, who identified the phenomenon in the late 1800s. Agglomeration refers to the idea that larger and/or denser places are more productive. In other words, businesses operating in large cities tend to produce more output per worker than similar businesses operating in small towns. This isn’t just a theoretical argument – it’s an observed fact.

Conceptually speaking, agglomeration externalities arise due to the existence of increasing returns to scale in an economy. Essentially, the more people work in an area, the higher the potential for knowledge spillovers between them, the lower the cost to buy and sell goods and services, and the better the matching of workers to jobs. There’s a deep economic literature describing how this process occurs and developing theories of agglomeration, but if you’re interested in a non-technical introduction to the topic, I highly recommend Edward Glaeser’s book The Triumph of the City.

As a result of these processes, larger cities and denser, more accessible places tend to be more productive. There’s a lot of empirical evidence demonstrating this relationship. In New Zealand, papers by Dave Maré (2008) and Daniel Graham and Maré (2009) found that:

  • In 2006, the Auckland urban area was 36% more productive than the rest of the country, after adjusting for industry composition. In other words, an Auckland business would be expected to produce much more output per worker than a similar business elsewhere.
  • In 2006, the Auckland city centre was one of the most productive places in the country. After adjusting for industry composition, the city centre was 72% more productive than the rest of the country.
  • There is a substantial positive relationship between density and firm productivity – firms located in areas that are twice as dense are 3.2-8.7% more productive on average, depending upon industry.

What does this “productivity premium” look like? My colleague Kent Lundberg came up with one way of visualising agglomeration by looking at land values in and around the city centre. His map shows a sharp differences between the value of city centre land and land in surrounding, less intensive environments, with a lower peak out in Newmarket. Essentially, firms see the benefit of locating in dense places, and they’re willing to pay more to do so:

A

Firms are willing to pay for proximity.

Graham and Maré’s 2009 paper was used to establish NZTA’s parameters for evaluating the agglomeration effects of transport projects. These parameters, or agglomeration elasticities, estimate the relationship between increases to the accessibility of jobs in an area and the productivity of that area. Agglomeration elasticities are highest in knowledge-intensive industries such as finance and business services, and lowest (or nonexistent) in resource-based industries like agriculture and forestry.

However, NZTA took Graham and Maré’s analysis of agglomeration one step further, arguing that what matters for firm productivity is not just physical proximity, but accessibility of jobs via transport. In other words, business productivity could potentially increase as a result of improvements to transport as well as increases in job density. There’s some empirical support for this idea –economists have tested a range of measures (pdf, technical) and found that both physical density and transport-weighted measures of density are associated with higher productivity.

That’s why agglomeration benefits are typically calculated for both public transport projects, which are expected to enable more intensive land use, and road projects, which tend to disperse economic activity throughout a greater area.

Is this what agglomeration looks like? (Source)

Is this what agglomeration looks like? (Source)

Is this a reasonable approach to project evaluation? I suppose my view would be: possibly. There are two reasons to be cautious about calculating agglomeration benefits for transport projects.

The first is that it’s conceptually difficult to define “density” really is. The economic literature presents a range of views about what measures matter most. Is it transport accessibility, even in relatively dispersed environments, as NZTA argues? Or is physical density, such as the number of jobs you can reach in a one-kilometre walk, as enthusiasts for urbanism suggest? Or is it something else entirely, such as the overall economic mass of an entire urban area regardless of whether it is compact or sprawling. Economists have studied this question from a number of angles, finding that various different measures of density and distance can predict productivity. (It’s also likely that agglomeration is nonlinear (pdf, technical), but let’s not get into that.)

The second and more serious reason for caution is that NZTA has assumed a causal relationship between effective density and productivity that might not exist in practice. Essentially, it’s not at all clear whether you can make a firm more productive by increasing the density or accessibility of the area where it operates. Do firms become more productive when they move into relatively dense areas, or do productive firms move into dense areas for other reasons?

The most likely answer is a bit of both. Research done in the UK by economists Patricia Melo, Daniel Graham and several co-authors (ungated pdf version) suggests that the causality between productivity and density runs in both directions. In other words, density breeds productivity, but productivity also breeds density. This makes logical sense, if you think about it. On the one hand, firms may be able to access knowledge spillovers and deeper labour markets in denser areas, which is likely to make them more productive. But on the other hand, more productive firms are also more likely to be successful firms. If you put a lot of successful firms in one place, that area will probably become denser as those firms hire more workers.

The upshot of this is that while there’s a good case to include agglomeration effects in transport evaluation, NZTA is using a method that probably overstates the benefits.

Next time: The dark art of demand forecasting.

$212 million in spending on roads with few benefits

A couple of days ago I received a bunch of documents from an OIA request to the NZTA on the $212 million in regional road spending announced recently. I haven’t been able to look at them yet seeing as I’m away however it looks like I’m not going to have to go through them immediately as Rob Salmond is already on the case following a similar (but not exactly the same) request to the Ministers office.

Salmond devotes a bit too much time to partisan point-scoring, as he’s an advisor to the Labour Party, but his analysis unearths some worrying facts about the economic analysis of the projects. His analysis is definitely worth reading.

As a reminder, the majority of the $212 million in new road spending was to come from the Future Investment Fund – i.e. the proceeds from recent asset sales. According to the press release, five of the fourteen “critically important regional projects” are going to be progressed immediately at a cost of $80m, they are:

  • Kawarau Falls Bridge, in Otago
  • Mingha Bluff to Rough Creek realignment, in Canterbury
  • Akerama Curves Realignment and Passing Lane, in Northland
  • State Highway 35 Slow Vehicle Bays, in Gisborne
  • Normanby Overbridge Realignment, in Taranaki.

In spite of their critical importance, Salmond finds that the projects almost all performed badly on NZTA’s cost-benefit analysis:

Five of the roading projects receive the worst kind of assessment from the officials at NZTA, an estimated benefit cost ratio of “0 to 2.” (see page 32) This means the officials cannot discount the possibility of these roads having no benefits at all, despite costing the taxpayer millions. More on this later. All the projects have a benefit cost ratio quoted as a range, partly to fudge against the public knowing the exact numbers.

Why would they want to do that? More on that later, too.

Officials estimate that up to $130 million of the highways money mooted in these projects and investigations would be wasted on roads with likely no net benefit. If some of those roads are not ultimately funded, that will represent less money wasted on roads, but more money wasted on unnecessary investigations to tell us what we already know – these projects are dogs.

NZTA considers a benefit cost ratio of 1 as an absolute minimum, as anything below that involves the country actually losing money by doing the project. Usually, of course, benefit cost ratios have to be much higher than that to attract funding, because there are so many possible good things a government can do with its limited money.

Salmond goes on to take a closer look at the analysis of one particular project, the widening of the Kawerau Falls bridge:

…the official cost / benefit ratio for the Kawerau Falls bridge was 1.1 (page 10). Officials said they have tried to recalculate this a number of times, and always come out around 1.1. So what range of benefit cost ratio appearedin the final package for Ministers to consider and promote. It looks like an obvious candidate for a “0 to 2” classification, right? 1.1 is pretty much rightin the middle of that range, yes?

No, no. Officials have instead been pressured into calling this a “1 to 3” benefit project in the summary documents (page 32). That is risible.

If a robust 1.1 becomes “1 to 3” in the sales pitch document, just imagine how dreadful the benefit cost ratios on the “0 to 2” projects really are.

There’s much more in the OIA documents that deserves careful examination and I’m keen to see what I’ve got from my requests, but it certainly looks as though many of the projects don’t add up. From the response I received it does highlight that some of the projects including the Normanby Rd Overbridge Realignment have had and Motu Bridge replacement have had no reports on them in the last 5 years.

It’s interesting to contrast this approach to roads spending with the Government’s decision to axe an extension of the highly successful Northern Busway that would have cost about the same amount.

“Hideously inefficient” road spending in Australia

For an interesting Friday afternoon read, here‘s an article from Australia which may ring true for New Zealand as well – especially given the possibility that National is considering an absolutely daft idea, creating a second road-only Waitemata Harbour crossing. From The Age:

More than $20 billion a year of national road funding is being spent in a “hideously inefficient” manner, according to a leaked assessment by Australia’s independent infrastructure umpire.

The Infrastructure Australia report, obtained by Fairfax Media, has also delivered a scathing critique of “monopoly” state-run road entities such as VicRoads, claiming a culture of resisting reform has led to a situation  in which political leaders are held “captive” to demands for more funding.

I don’t know about New Zealand’s current political leaders being held captive… unless perhaps it’s a case of Stockholm Syndrome?
The report was titled “Spend more, waste more, Australia’s roads in 2014: moving beyond gambling”, which seems like a fairly provocative title for a report. It seems fairly likely that someone will get a clip round the ear and a more mundane title (and report) released later this year. Reading on:

“The unhealthy focus of road agencies appears set on ‘getting, controlling and spending’ more taxpayer money, rather than questioning efficiency or value to the motorist and governments,” the report says.

The report, which claimed Australia has a “gambler’s addiction to roads”, said national road spending is now outstripping revenue raised through road-related taxes and charges, warning “Australia’s thirst for roads” would come at the expense of other services as the gap continues to widen. In the four years to June 30, 2012, road spending outstripped road revenue by $4.5 billion.

Of course, we’re in a similar position in New Zealand, with National now reaching beyond the NLTF to pay for its spending on roads.

It suggested there was little consideration of whether Australia’s demands for new roads should be satisfied, and argued that rail funding had missed out as a result.

“The current Australian system assumes that roads are an answer to most transport problems and seeks more and more funding to that end, with little consideration of alternatives that most other developed parts of the world enjoy, such as significant heavy intercontinental rail networks and dominant heavy mass transit systems.”

“[Road proposals seen by Infrastructure Australia] were almost universally poor, in that they lacked any cost-benefit rigour whatsoever,” it said. “The real problem is that road agencies and other road project proponents in industry and the community spend next to no effort examining what problems their projects and plans are trying to solve, other than the perceived problem that they do not have enough road funding.”

Overall, a fairly damning indictment of Australian transportation policy, and we’ll be eagerly waiting for the final (or at least, public) version of the report.

Location affordability in New Zealand cities – is greenfield growth really affordable?

Several weeks ago I attended the annual New Zealand Association of Economists conference in Auckland. Geoff Cooper, Auckland Council’s Chief Economist, had organised several sessions on urban issues, and as a result there was a lot of excellent discussion of urban issues and Auckland’s housing market. You can see the full conference programme and some papers here.

At the conference, I presented some new research on housing and transport costs in New Zealand’s main urban areas. My working paper, enticingly entitled Location Affordability in New Zealand Cities: An Intra-Urban and Comparative Perspective, can be read in full here (pdf). Before I discuss the results, I’d like to thank my employer, MRCagney, for giving me the time and the data to write the paper, along with several of my colleagues for help with the analysis, and Geoff Cooper for suggesting the topic and providing helpful feedback along the way.

The aim of the paper was to provide broader and more meaningful estimates of location affordability that take into account all costs faced by households. In my view, widely-reported sources such as Massey University’s Home Affordability Report have too narrow a focus, looking only at house prices. However, a range of research has found that transport costs vary between different locations depending upon a range of factors such as urban form, availability of transport, and accessibility to jobs and services. And transport costs are pretty large for many households!

I used two methods to provide a more comprehensive estimate of location affordability in Auckland, Wellington, and Canterbury. First, I used Census 2013 data to estimate household housing, car ownership, and commute spending at a detailed area level within each of the three regions. This allowed me to estimate variations in affordability between areas within individual regions. Second, I used household budget survey data to get a sense of how New Zealand cities stack up against other New World cities.

My main findings were as follows:

  • First, rents (a proxy measure for housing costs) tended to fall with distance from the city centre. However, commute costs tended to rise with distance – meaning that outlying areas were less affordable for residents once all costs are included. This was consistent with previous work on location affordability in New Zealand and the United States.
  • Second, international comparisons suggest that Auckland and Wellington have relatively high housing costs and that this may be driving some of the affordability findings. While this finding lines up with previous research that’s focused on house prices alone, it’s important to note that the location affordability estimates suggest that a focus on greenfields growth alone may not save households money.
  • Third, while I didn’t identify any specific policy recommendations, I’d recommend that (a) policymakers should consider all location-related costs when attempting to address affordability for households and that (b) further research should focus on removing barriers to increasing the supply of dwellings in relatively accessible areas.

And now for some pictures.

These maps show two measures of location affordability within Auckland. The left-hand map shows estimated housing costs (i.e. rents) as a share of median household incomes at a detailed area level. Broadly speaking, this map shows that expected housing costs fall between 20% and 30% of household income in most of the city, although some areas are relatively less affordable.

The right-hand map, on the other hand, incorporates expected car ownership and commute costs. Overall location affordability is lower throughout the city. Expected housing and transport costs rise to 40-50% in areas of west and south Auckland, as well as the entire Whangaparoa Peninsula. The most affordable areas for their residents tend to be in Auckland’s inner isthmus suburbs.

Auckland map 1 Rent share Auckland map 2 HT share

(Click to enlarge)

I’ve also combined this data into a graph that presents location affordability by distance from Auckland’s city centre. The bottom (blue) line shows housing costs as a share of median household income, weighted across all area units within each 2-kilometre concentric circle radiating outwards from the city centre. It shows that, on average, households spend a similar share of their overall income on housing costs in both close-in and outlying suburbs.

The top (red) line shows that combined housing, car ownership, and commute costs increase as a share of household incomes with increasing distance from the city centre. On average, households that live further out of Auckland spend more on location-related costs, as lower lower rents are offset by added commute costs.

Auckland H_T distance chart

The results for Wellington and Christchurch were broadly similar – although with a few interesting differences related to their urban form and transport choices. However, as this is the Auckland Transport Blog, I’m going to suggest that you read the paper to see those results. It’s long, but it also presents a lot of new data on housing and transport costs in New Zealand.

Roading in Northland

There’s been quite a bit of discussion in the last week about roads in Northland following storm damage that saw part of State Highway 1 closed due to large washout. The severity of the slip saw traffic diverted on lengthy detours on roads clearly not designed to handle more than a handful of cars per day. Another series of slips have happened in the last few days, this time closing SH1 over the Brynderwyn Hills.

Understandably it’s led to people in Northland saying that their roads simply aren’t up to the same quality as roads in other regions. Oddly though it also led to Labour’s Kelvin Davis saying he supported the the Puhoi to Wellsford Road of National Significance.

“They want a safe and solid highway that’s going to get our people and goods in and out and that’s not at the whim of Mother Nature.

“This weather event has shown how vulnerable and susceptible the North is and it’s really important that we have a road where emergency services and whatever can get through, but also we’ve got to have a road that’s going to be able to export our produce outside of Northland and one that’s not going to be washed away in the next storm or flood.”

If the statement above was to be a blanket statement and not referring to P2W then I would be in complete agreement however I say it’s odd for him to bring up P2W as doesn’t even leave Auckland and would not have done anything to help with the slips that have occurred. In fact in many ways P2W is actually likely to be working against Northland as it will suck up funding that could be being used for widespread upgrades to address issues that exist in the roading network.

All up P2W is said to cost ~$1.6 billion with the first section to Warkworth estimated at $760 million. If the goal is truly about helping the Northland economy as the government love to claim then we need to be asking what else we could do with the money. What if we spent ~$300m on operation lifesaver to address the key issues with the existing road. We could then spend about $500 million on actual roads in Northland while still leaving up to $800 million which could be used for other projects – like part of the governments share of the City Rail Link.

But how would $500 million compare to what’s currently spent in the region and is it a significant enough amount of money?

Data from the NZTA can help to answer that question. Unfortunately the 2013/14 data isn’t available yet but this is for the 10 years to 30 June 2013.

Transport Spending in Northland 2003/04 to 2012/13 NZTA Local Authorities Total
State Highways – New and Improved $163,617,783 $163,617,783
State Highways – Maintenance, Operations & Renewals $249,305,778 $249,305,778
Local Roads – New and Improved $174,917,159 $56,850,123 $231,767,282
Local Roads – Maintenance, Operations & Renewals $312,908,053 $226,434,207 $539,342,260
Public Transport $9,481,230 $8,440,738 $17,921,968
Walking & cycling $342,494 $90,300 $432,794
Other $24,816,399 $2,661,551 $27,477,950
Total $935,388,896 $294,476,919 $1,229,865,815

And here’s the new and improved road spending over that 10 year periodNorthland New and Improved Roads Spending

So spending $500 million (on top of what would normally be spent) would be more than all the money that was spent on new and improved state highways and local roads for over a decade.

That seems like it could deliver more game changing outcomes for transport in Northland than a motorway to Warkworth/Wellsford ever would. As an example of what might be able to be delivered, the governments Accelerated Regional Roading Package named two projects that would see road realignments happen. One was on State Highway 73 near Arthurs Pass and the other was just south where the large slip occurred the other week with the project known as the Akerama Curves Realignment and Passing Lane. The latter is a 3km section of road that will be upgraded and have an additional passing lane added for a cost of $10-13.5 million. Comparing the costs for each project it suggests that for $500 million we could probably get 100-150km of upgraded state highway which is a substantial amount.

I guess the big problem with this suggestion is that small scale projects like road realignment and passing lanes aren’t the types of projects that get politicians in the national media cutting turning a first sod or cutting a ribbon.

Poll shows people want more spent on PT

Stuff have released the results of a poll they’ve conducted asking about transport funding.

Auckland has sent a clear message to the Government over its transport priorities: Give us better public transport rather than better roads.

The latest Stuff.co.nz-Ipsos poll found that nationally people wanted a government focus on better public transport over roads by a margin of 30 per cent to 24 per cent.

Another 40 per cent wanted a focus on both.

In Auckland there was much stronger backing for public transport spending, which got the nod by a four to one margin over roads among those who had a preference.

Almost 43 per cent said the focus should be on both.

For Auckland in particular the results suggest a strong support for more being spent on PT with some quick calculations suggesting 46% of respondents wanted more PT spending, followed by 43% who wanted both with just 11% wanting more spent on roads alone. Understandably the support for PT isn’t quite as strong outside of Auckland but still saw a significant number of people supporting the call for more spending on PT. I’ve put together these graphs based on the results highlight the result

Stuff Poll - Govt Focus

Additionally when asked if the government was doing enough to address congestion once again Aucklanders voted differently to the rest of the country with the majority saying no – although to be fair I’m not sure if Aucklanders will ever think enough is being done.

There was a similar, but less pronounced, division between Auckland and the rest of the country when it came to traffic congestion.

Across the nation 57 per cent felt the Government was doing enough to ease traffic jams in their region.

Even in urban areas there was still a majority at 51 per cent backing the Government’s efforts with 42 per cent saying it was not doing enough.

But in Auckland a clear majority – 54 per cent – said the Government was falling short against 43 per cent who thought it was doing enough.

Perhaps unsurprisingly Brownlee has shrugged off the results suggesting that respondents are confused

But Transport Minister Gerry Brownlee called the result a “confused” message, saying Aucklanders did not use public transport to an extent that made it truly economic.

His response shows two things:

  • That he fails to grasp the difference between peoples aspirations and the reality they live in – we know that many people will only catch PT if it is rational for them to do. You could have a bus stop outside your front door but it isn’t likely to used if the buses that stop there take long convoluted and slow routes. My guess is most people probably want more investment in PT so that it becomes viable for them to use rather than the only realistic option being to drive.
  • That he is confused about the economic and financial viability of transport systems. Both roads and PT provide economic benefits to the country by allowing for the movement of people and goods. Neither roads nor PT are currently financially viable and both require subsidies. PT subsidies are well known and often pointed out by those opposing investing in it however roads also require subsidies. About $1 billion a year is invested in them by local councils – which comes primarily from property rates – and the government themselves are spending additional money from outside of the transport budget on many of their flagship roading projects like the recently announced Accelerated Regional Roads Package.

As the Stuff article says

The poll will be a blow to the Government’s transport policy which has emphasised road building, and in particular its flagship Roads of National Significance, and has rebuffed calls from Auckland Mayor Len Brown for an early start to the city rail link.

National also made its roading policy the centrepiece of Prime Minister John Key’s speech to National’s annual conference, with a promise to spend $212 million from the sale of state-owned assets to upgrade 14 roads across the country.

“Team Key has always been very focused on roads,” Key said at the time.

Cut projects or Increase Funding

The issue of how we fund transport projects has been in the news a lot recently with discussions of the council’s Long Term Plan (LTP). The Herald have been running a campaign basically suggesting the council finances are perilous and almost saying are bankrupt and trying to shift a lot of the blame on to the City Rail Link. The part about the council’s finances being in trouble was well debunked the other day by David Shand who was a member of the Royal Commission on Auckland Governance and chaired the 2007 Independent Commission of Inquiry into Local Government Rates.

Aucklanders should have an informed debate about the state of the city finances, given the $1.4 billion of rates collected annually and the total assets of some $40 billion managed by the council. However, the debate has not been well served by Herald articles which blithely use terms such as “spending spree”, “spending beyond its means” and “crisis point”.

This has led to the usual spate of letters from aggrieved ratepayers who are only too willing to believe that the council’s finances are in a “mess” and that we may be facing “bankruptcy”. There is no “crisis” in the city’s finances at the moment but there are major issues to be addressed.

He goes on to discuss 6 key points about the council’s finances and the heralds coverage and afterwards he notes:

While there has been no spending spree, the city’s finances are not in a mess and we are not presently at risk of bankruptcy, there are some big financial issues to be addressed.

The Herald has referred in the past to the “infrastructure deficit” Auckland faces over the next 30 years based both on coping with future expansion and addressing the past neglect of infrastructure expenditure.

 

The real problem is the sheer amount of projects the council has on the books from legacy councils. Many of the projects are good and critically needed – like the City Rail Link – while others like Penlink are at the other end of the spectrum. As a result there are two separate but combined issues at play when it comes to the next LTP. We need to:

  1. Make sure we’re building the right stuff – that means we need to review every project to see if it’s actually worthwhile building as what we don’t build can be just as important as what we do.
  2. If there is an funding deficit we need to work out how we address that which will likely mean new funding sources need to be found.

Ultimately the solution is likely to be a bit of a combination of the two however unfortunately in ways similar to the density debate with the Unitary Plan talk only seems to coalesce around one option. Len Brown falls in to the second camp of wanting to find new funding sources but not wanting to make some hard decisions about what should be funded and he reiterated that again yesterday when speaking at the annual conference of the Road Transport Forum.

Auckland needs to work “shoulder-to-shoulder” with the Government if it’s to find a way out of a massive budget deficit and fund its much needed transport plans, Mayor Len Brown says.

The city was gearing up for “one of the most important funding debates Auckland has ever seen, and maybe even the nation”, he said today.

It needed to find $300 million-$400 million a year to fill a $12 billion funding gap, which would mean the difference “between steady-as-you-go typical Auckland or whether or not we’re going to seriously invest in infrastructure to deal with the shortfall and to deal with the growth coming at us to build this city as a real economic powerhouse”.

And

“Bluntly, we need to decide do we want a transport package based on current funding sources, which is not at all appealing and won’t deliver the city that we’re aspiring to and we know we need. Or do we find new sources of funding and deliver the transport programme Aucklanders asked for through the Auckland plan and in successive elections.

“Current funding sources would deliver us a transport system that’s half-way there. We need to be bold, innovative.”

funding-gap-analysis

Funding Gap from Keep Auckland Moving

A similar story was told by the Head of the New Zealand Council for Infrastructure Development (NZCID) which is a lobby group for the construction and infrastructure financing industry’s.

Note: we’ve also pointed out in the past the odd situation where the Council are a paid up member of a group who exists to lobby the council to spend more. Also the councils outgoing CFO happens to be on the board.

Head of the New Zealand Council for Infrastructure Development, Stephen Selwood, said the investment plans for Auckland’s public transport and roads are not great and the city must move quickly to avoid massive congestion within 30 years.

He believes a motorway charging regime is the best option for raising money to cover the $300-400 million annual cost of developing Auckland’s roads and public transport. He said users should pay about $3 a trip.

Mr Selwood told the Road Transport Forum’s annual conference on Thursday that he favours motorway tolls rather than the ring road option used in London.

He said a toll would also help clear congested roads by encouraging some commuters onto public transport while others would car pool.

But Mr Sellwood warned that authorities need to move in the next two to three years or Auckland will face much bigger congestion problems by 2040.

Stephen Selwood has been pushing this idea for some time now. Personally I’m  not opposed to using road pricing, in fact quite the opposite in that if done right it could be quite useful for managing demand however there are a number of problems with what Selwood keeps pushing.

  • Tolling only the motorways is likely to push a lot of trips that currently use the motorway on to local roads which aren’t tolled likely putting a lot more pressure on them. It’s also those local roads that carry the bulk of our bus services so there could be quite a substantial impact to PT reliability.
  • Would our PT system be able to cope with such an increase in demand. Even with the new network and new electric trains there isn’t likely to be enough spare capacity to be able to cope if significant numbers of people suddenly change modes. If we decide to go down the path of road pricing then we really need a concerted effort to get our PT improvements rolled through faster to help in giving us that capacity.
  • Perhaps most importantly is impact road pricing might have on travel demand. The likely result is that traffic volumes (on motorways at least) are likely to fall as people shift to PT or reducing the amount of travel they do. This could be significant as reducing traffic also reduces/removes the justification for many of the roading projects currently on the plans. With those roading upgrades no longer needed it reduces the overall amount we have to spend upgrading our roads and there reduces the funding deficit. There’s a bit of an irony about an infrastructure lobby group pushing a solution that will end up reducing the amount of infrastructure we need – not that they’re probably thinking that far ahead.

I think all three problems have solutions or provide us with good opportunities. Rolling out the new bus network supported by a large network of bus lanes could keep local roads flowing and as well as providing more attractive services.  Before introducing such a charging scheme effort can be made to increase the size of the bus fleet and get started on projects like the City Rail Link while the changes in travel behaviour as a result of tolls can help us work out exactly what projects are needed.

Guide to economic evaluation, part 2: What are the benefits of transport projects?

Debates over major transport investments often get caught up in arguments over benefit-cost ratios, or BCRs. In recent years, projects such as the Transmission Gully and Puhoi to Warkworth motorways and the City Rail Link have been criticised for their low BCRs. These debates have often raised more questions than they resolve. So it’s necessary to ask: What is a BCR, how is it calculated, and what does it mean?

The good news is that there is a manual that explains it – New Zealand Transport Agency’s Economic Evaluation Manual (EEM). The bad news is that it’s tediously long and not written for a general audience. This series of posts aims to provide a guide for the perplexed:

In part two of this series we examine a tricky topic – the benefits of transport projects. As in the first post, I’m going to focus on explaining the conventional evaluation procedures, rather than presenting challenges to said procedures.

Transport infrastructure projects are often expensive. The Waterview Connection will cost an estimated $1.4 billion; the proposed Puhoi to Warkworth motorway an additional $800m or so; the City Rail Link an estimated $2.8 billion, although this figure includes inflation and costs to buy and run new trains over a 30-year period; and so on and so forth. For these costly projects to be worthwhile, the benefits of these projects – the “B” side of a BCR – need to be of a similar magnitude.

What does that mean in practice? If we say that the CRL will have several billion dollars in benefits for Auckland, what sort of benefits are we talking about? There are three key things to understand about the economic benefits estimated in transport evaluation.

First, the benefits of transport projects do not translate directly into increases in GDP. Benefits of transport projects are estimated by assigning monetary values to a range of outcomes. But just because the EEM assigns monetary values to benefits does not mean the benefits actually manifest as more “money”. For example, a project that saves people a small amount of time on their morning commute might mean that those people work longer hours. But it’s more likely that they will sleep in a bit longer or read the morning TransportBlog post instead. Naturally, this makes people better off – and hence is ascribed a value – but it doesn’t increase GDP.

Second, there are a number of different categories of benefits, and it’s a bit misleading to combine them all into a single measure. Broadly speaking, there are three main categories of benefits that are quantified in transport evaluations:

  • Transport user cost/time savings tend to be quantified for all transport projects and make up the central component of most transport evaluations
  • Health and environmental externalities are often included to some degree; however, some types of benefits that are harder to quantify tend to be excluded from many evaluations
  • Wider economic impacts such as agglomeration and increased labour supply are typically only calculated for major projects.

This post will cover the first two categories of benefits and, returning to our Ruritanian case study, present a worked example of how one might go about calculating these categories of benefits. I’ll leave the wider economic impacts to the next post, as they require a fuller explanation.

The third important fact about transport benefits is that travel time savings make up the majority of measured benefits. Under conventional evaluation procedures, the main benefit of new transport projects is almost always that they save time for travellers. Other benefits, including vehicle operating cost savings and emissions reductions, are minor by comparison. Moreover, as alluded to above, travel time savings cannot be equated to increased economic activity.

I’ll illustrate this using the Ruritanian case study, which shows that the principal benefit of introducing a new bus lane is likely to be travel time savings for users. But before doing so, I’ll briefly run through several categories of benefits.

Transport user benefits

The central component of most evaluations is an estimate of the effect that new transport infrastructure or services will have on the time and monetary cost of travelling. Over in boffin-land, all of these factors are combined together into a figure called “generalised cost” (GC).

GC is a composite measure that covers all of the monetary and non-monetary costs of travel. It can be thought of as the “utility cost” associated with a trip:

GC = Travel time + Vehicle operating costs + Tolls + Parking Costs + PT fares + user amenity.

This measure is that it allows monetary and non-monetary costs to be converted to equivalent measures and compared. So, for example, the EEM provides conversion factors that allow you to place a dollar figure on an hour spent travelling. These values are in the range of $15-25 per hour for most trip purposes. While the EEM used to ascribe a higher value of time for car users than PT users, NZTA decided to equalise the value of time for different modes.

“User amenity” is a quite broad category that attempts to cover all of the subjective factors that people take into account when using transport. So, for example, the EEM provides values that allow you to estimate the value that people place on (say) each minute spent contributing to a traffic jam, or having a real-time board at a bus stop, etc.

Panmure Station 1

Panmure Station was built to provide a better transport experience for passengers

With that in mind, the following table summarises the components of GC and describes whether or not they are monetary costs. It distinguishes between household travel and business travel, as workers’ time does have a monetary cost when they’re travelling on employer business. However, business travel only accounts for a small share of overall trips.

Generalised cost component Household travel (e.g. commutes, retail trips) Business travel (e.g. freight)
Travel time Non-monetary Monetary
Vehicle operating cost Monetary Monetary
Tolls, PT fares, and parking costs Monetary Monetary
Trip amenity Non-monetary Non-monetary

Health and environmental externalities

Contrary to popular belief, NZTA doesn’t simply ignore environmental and health outcomes in its evaluation procedures. Indeed, the agency has progressively been attempting to build additional health/environmental elements into its evaluation.

As a result of their work in this area, which has included the development of new modelling approaches and commissioning of reports on the benefits of walking and cycling activity, the EEM now contains recommendations on how to value:

  • The benefits of reduced CO2 emissions from transport behaviours
  • The benefits of reduced emissions, and reduced road noise, which have an effect on amenity and health within affected areas
  • The health benefits of walking and cycling travel.

In practice, it’s not yet standard to value all of these benefits for all projects. Conventional evaluations usually include benefits from reduced CO2 emissions, as they tend to be closely related to vehicle operating costs. NZTA recommends valuing carbon emissions at $40/tonne – a value that seems high relative to current Emissions Trading Scheme prices, but which is low relative to other transport benefits.

Other emissions and noise impacts do not tend to be valued for many road and PT projects, as they’re hard to robustly estimate. Their effects depend upon a whole range of factors, such as population density around roads, topography, weather patterns, and so on and so forth.

Most people aren't that keen on vehicle emissions. Emphasis on "most".

Most people aren’t that keen on vehicle emissions. Emphasis on “most”.

Likewise, health benefits of active transport only tend to be considered for walking and cycling projects. These benefits aren’t necessarily small in value – the EEM states that each kilometre spent walking generates $2.70 in social benefits, which can add up quite quickly. This is potentially a problematic exclusion for evaluation of public transport, as people tend to walk to access bus and train routes. For example, given the size of the average walk-up catchment, each bus user could be walking an additional kilometre or more each day.

Back to Ruritania: Calculating the benefits of a new bus route

In order to give a sense of how these values come together in an evaluation, we return to our Ruritanian example. If you recall, transport planners in Streslau, the capital city, are trying to evaluate a new bus line between two suburbs (A and B). The road between the suburbs is getting increasingly congested, as it’s limited in size and lacking in public transport alternatives. At this point, they’re seeking to determine whether putting in a dedicated bus lane would be a good idea.

While this is a hypothetical exercise, I’ve tried to make it as consistent as possible with New Zealand evaluation practices to give a sense of what an evaluation might look like.

The first step for Streslau’s transport planners is to determine which categories of benefits to measure. After a bit of discussion, they’ve decided to hew to the conventional evaluation procedures, and focus on quantifying reductions in generalised costs of travel and carbon emission reductions. They’re also going to consider whether there are likely to be any health benefits associated with walking to bus stops.

The table below summarises the values that Streslau’s transport planners are planning on using. As Ruritania’s also a developed country, its valuation parameters are pretty similar to those in the EEM.

Valuation parameters Value ($)
Value of time ($/hr) $15
Vehicle operating cost ($/km) $0.40
Greenhouse gas emissions ($/km) $0.02
Health benefits of walking ($/km) $3

The next step in the evaluation is to determine the level of demand for the new PT service. There are a number of approaches to doing so, including integrated transport modelling, surveys of potential users, or desktop analysis based on known factors and historical growth rates. I’m not going to cover demand forecasting right now – that’s a knotty topic for a future post!

For now, all you need to know is that Streslau’s transport planners have reached into their black box and estimated that roughly one-tenth of the existing trips between the two suburbs will switch modes after the introduction of a new bus line. Changes between the Do-Minimum (the current state) and the Option (the new bus line) are summarised in the following table.

Daily travel demand between A and B (in Y1) Do-Minimum Option
Car trips 50,000 45,000
PT trips N/A 5,000
Average walking distance to PT stop (m) N/A 500

Likewise, it’s necessary to forecast the effects of the change on transport speeds. The road between the two suburbs is roughly 5 kilometres long. At present (under the Do-Minimum) it’s quite congested – traffic flows at an average rate of 25 km/hr.

After further rummaging around in the black box, Streslau’s transport planners have determined that the introduction of the new bus line will result in travel time savings for all users. Drivers will have a bit less road space, but congestion will drop due to reduced vehicle traffic. The net effect is that car speeds are forecast to increase to 30 km/hr after the introduction of the new bus line – saving the average driver roughly two minutes per trip.

Buses will also be faster, but some of the effects will be offset by the need to stop and pick up passengers. As a result, average speeds for buses will increase to 27 km/hr, saving the average PT user almost one minute per trip. (In this simple analysis, I have ignored PT fares and PT user amenities such as real-time message boards, assuming that they approximately offset each other.)

Estimated travel distance and time Do-Minimum Option
Distance (km) 5 5
Average car speed (km/hr) 25 30
Average bus speed (km/hr) N/A 27
Change in TT for car users (min/trip) 2.0
Change in TT for new PT users (min/trip) 0.9

In short, the new bus line is expected to remove 5,000 cars from the road every day, while improving travel times for remaining users. This is expected to result in:

  • Cumulative daily travel time savings of roughly 1,500 driver hours and almost 100 bus user hours (remember, these travel time savings are valued at $15/hr)
  • A cumulative daily reduction of 25,000 vehicle kilometres, which is expected to reduce vehicle operating costs by $10,000 every day and reduce the social costs of carbon emissions by $500 each day

The total estimated benefits of the project are reported in the following table. For the sake of simplicity, we have assumed that benefits are experienced only during working days. As there are approximately 250 working days in a year, the total annual benefits of the new bus line are expected to be approximately $8.5 million.

Almost two-thirds of these benefits actually arise from travel time savings for car users. This is actually fairly common for public transport projects, as the removal of some cars from the road gives everyone else a much easier ride. For example, some of the biggest beneficiaries of the City Rail Link will be people commuting by car to the city centre or through Spaghetti Junction.

Estimated benefits from a new bus line Daily benefits ($) Annual benefits ($m)
Time savings for car users $22,500 $5.6
Time savings for new PT users $1,111 $0.3
Reduction in VOC $10,000 $2.5
Reduction in greenhouse gas emissions $500 $0.1
Total $34,111 $8.5

Finally, Streslau’s transport planners want to understand whether there are likely to be any significant health benefits. We’ve assumed that bus users walk an average of 500 metres to their stop. As we are expecting an estimated 5,000 bus trips per day, this means that bus users are walking a cumulative 2,500 kilometres every day.

Walking catchments to stations. (Source: Human Transit)

Walking catchments are larger when street grids are well-connected (Source: Human Transit)

That’s a surprisingly large number! At a value of $3 in health benefits per kilometre, it adds up to an additional $1.9 million in annual benefits. In other words, including these benefits raises our estimate of the benefits of Streslau’s newest bus line by 20%. That’s potentially a big category of benefits that’s being ignored in many PT evaluations.

Next time: But wait! What about these “agglomeration benefits” I keep hearing about?

House prices vs rents: the effects of inflation

As we all know, house prices have gone up massively over the last couple of decades, and much faster than inflation. On the other hand, rents haven’t gone up so quickly – lucky for the 35% of Kiwis (or 38% of Aucklanders) who don’t own the home they live in.

As someone with more than a passing interest in inflation, rents, yields and prices, I’ve thought for a long time that the growing gap between rents and house prices must have a lot to do with the switch from a high inflation environment to a low inflation one. It’s exactly what economic theory would predict. And luckily, another economist, Rodney Dickens, has come along and taken a look at it (hat tip to Bob Dey for the link).

First, some background. Up until the 80s, New Zealand often had very high inflation, as per the chart below:

Inflation

Inflation was particularly high through the 1970s (oil prices sustained at much higher levels than ever before, plus the switch to a floating exchange rate, and various other factors besides) and the 1980s, except for a brief period in the 1980s where Muldoon thought price freezes were a good idea. The 1989 Reserve Bank of New Zealand Act put a new focus on inflation targeting, and it wasn’t long before inflation rates dropped to well below 5% a year, where we’ve been more or less ever since.

Unsurprisingly, mortgage rates tended to follow a similar pattern to inflation, although they didn’t fluctuate as much:

Inflation and mortgage rates

Floating mortgage rates topped out at more than 20% in the late 80s, and fell dramatically through the early 90s. They’ve stayed below 10% for most of the time since.

So, if you’re an investor in the 1970s, and inflation is at 15%, and you can borrow money at around 15% (or put it in the bank and earn at least 10%), what kind of return do you expect on your rental property? You might expect a yield, or return, of 20%, say. Flipping that around, the property value is five times the net rent you receive.

OK, so now it’s the 2000s. Let’s put aside thoughts of capital gain for now – assume you just want a fair return on your money. You can borrow it at 8%, and put it in the bank at maybe 5% or so. Property seems like a fairly safe investment, so perhaps you’d be happy with 6% return. That means your property value is now nearly 17 times the net rent.

Of course, we wouldn’t expect the runup in asset values to happen just for property. We’d expect it for all types of income-producing asset – shares, capital goods, human capital. You’ll see it as a drop in yields for these assets, as for Rodney’s graph below, which shows yields both for residential property and for government bonds:

Rodney graph 1

As Rodney says:

“CPI inflation has been consistently lower since the early-1990s. In the first house price boom after 1990 – between 1994 and 1996 – rental price inflation increased much as had been the case earlier. But it would seem that by the time of the 2002 pickup in house price inflation the low inflation environment had taken over. It would appear that landlords began to struggle to justify or achieve higher rental inflation in an environment of sustained low general inflation.

This new, inflation-constrained behaviour is reflected in CPI and rental inflation living in similar ballparks since after the government interventions resulted in rental inflation turning temporarily negative in 2001. The result was that the relationship between house price and rental inflation largely broke down”.

He goes one step further, and looks at an issue closely related to housing affordability, as Stu has written before. Here’s Rodney on the issue:

This can also be viewed from the perspective of rents compared to incomes. This is another means by which lower general inflation, including lower income growth, will put a ceiling on rental inflation. The [chart below] compares the ratio of the national average house price to the average annual gross income (black line) with the ratio of the average national annual gross rent to the average annual gross income (blue line).
Prior to 2000 the two ratios largely moved in synchrony while since then the rent/income ratio has fallen and the house price/income ratio has skyrocketed.

Rodney graph 2

I quite like the way Stu puts it: housing is a commodity like anything else, and “you don’t measure the  affordability of cookies based on the cost of buying the cookie factory”.