Should we relocate the Ports of Auckland?

Disclaimer: in professional life I have done some work on ports, including co-authoring the 2012 PwC report on future scenarios for Upper North Island ports. This post doesn’t reflect the views of my present or past employers or clients. It’s just a quick thought experiment, based on some data and a few assumptions.

The Ports of Auckland (POA) are back in the news due to their new reclamation plans. As usual, this has attracted both critics and proponents. POA’s plans have been criticised for their negative environmental impacts on the Waitemata Harbour, the loss of views of the Hauraki Gulf, and the fact that they will limit our ability to re-use port land for other purposes. On the other hand, they’ve been defended due to the economic role that POA plays in Auckland – it’s New Zealand’s largest port of import and also a significant port of export.

Ports of Auckland

As this suggests, there are both pros and cons to having a port located right on Auckland’s front door. How should we weigh them up?

Here’s one way of thinking about the question of whether we should prefer having POA in Auckland, or whether we would rather close it down and move our freight elsewhere:

  • The costs of moving the port would primarily relate to the added freight cost for Auckland’s imports and exports
  • The main benefit would be that we could repurpose POA’s land for alternative uses, such as housing, offices and retail, or public spaces.

How large are these costs and benefits?

The costs of relocating the port

One realistic way to look at the cost of port relocation is to ask: How much more would we have to spend to get the same outcomes?

If we closed down POA and shipped Auckland’s imports and exports through the Port of Tauranga (POT) instead, we would have to pay more to move those goods by land between the two cities. This would represent a net cost to New Zealand’s economy.

We can get a rough sense of these added costs by looking at current land transport costs and port volumes. According to an NZIER report published last month, in the year ended June 2014 POA handled:

  • around 968,000 twenty-foot-equivalent containers per year, 203,000 of which were trans-shipped to other ports in NZ;
  • around 207,000 cars; and
  • some other random stuff, like bulk cement.

Now, based on figures published in the 2012 PwC report (see Table 4 on page 76), the cheapest way to move goods between Tauranga and Auckland is by rail. It costs approximately $600 to move a single container by rail between the two cities. (Or around $750 to move a container by road.) While KiwiRail doesn’t currently ship cars by rail, rail operators in other countries do. Let’s assume, therefore, that it costs around the same amount ($600) to ship a single car.

Based on these land transport costs, we’re looking at an added annual cost of around $580 million. Yikes. A quite large sum. In reality, this is probably a bit on the high side, given that some of these goods will not originate from or be destined for Auckland.

In addition, we would forego the $66 million in annual dividends that POA pays to Auckland Council. So the total annual cost of relocating the port would be around $650 million.

The benefits of port relocation

Although the costs of moving POA entirely out of Auckland are high, we might be willing to bear them if the profits from land development were sufficiently high. So: How much would the land have to be worth to justify relocating POA?

Well, we know that, in order for it to be worth doing, repurposing the port land for residential and commercial uses, or public space, would have to yield at least $650 million per annum. That figure represents the minimum annual return that we would require from POA’s land.

Let’s assume, for a moment, that Auckland Council could get an average rate of return of 8% on its port land if it were put to other uses. This suggests that in order to obtain an annual return of $650 million, POA’s land would have to be worth a total of around $8.1 billion. (Calculated as follows: $650 million in annual profits / 8% rate of return = $8.1 billion.)

According to Wikipedia, POA has a total of 55 hectares of wharves and storage areas. If that were worth $8.1 billion in total, it would mean that the land would be worth around $15,000 per square metre. That’s roughly what it would take for moving the port to be a net benefit for the economy – city centre land values above $15,000 per square metre.

Now, this is in the range of current land values in the city centre – albeit on the high side. So redeveloping the port could, in principle, provide net benefits for Auckland. The case might get stronger if land values continue increasing and if the downtown revival continues at pace.

However, I don’t think this quick, back-of-the-envelope analysis proves much. For one thing, the benefits of port relocation are probably overstated due to the fact that it would be quite difficult to redevelop 55 hectares of downtown land quickly. It might take decades to realise the value of port land for alternative uses.

For another, it would be quite difficult to compensate the “losers” from the process – the firms and workers who would be worse off as a result of higher transport costs to their location in Auckland.

So, what should we do with the port?

As this analysis has (hopefully) shown, there are both costs and benefits to moving POA. And, for that matter, to leaving it in place or expanding it.

Moreover, the costs of moving POA are not infinite, which means that the benefits of doing so may at some point be large enough to justify the move. But they are very large, which means that we would have to be confident that we could actually redevelop port land in a reasonable timeframe.

It’s also important to recognise that there are other risks in moving the port, as well as uncertainty about some of the costs that I’ve cited. In my view, there are three main limitations to this analysis:

  • First, I’ve assumed that there are no technical constraints to doubling freight volumes at POT. This is probably not realistic – expanding that port would be costly both financially and environmentally.
  • Second, I’ve assumed that shipping lots more goods by rail between Tauranga and Auckland won’t drive up the price of rail freight. In reality, KiwiRail (or the government) would have to pay for quite a few track upgrades and purchases of rolling stock, which may drive up the costs of rail freight.
  • Third, I’ve assumed that it would actually be feasible to redevelop POA’s land, and that redevelopment of port land would create added value rather than simply diverting growth from elsewhere in Auckland. This is not unreasonable, but it won’t be a rapid process. As the Wynyard Quarter shows, it can take over a decade to active and develop a substantial chunk of new land.

Lastly, there are likely to be problems with the timing of funds. In principle, land development profits could be used to pay for infrastructure upgrades. In practice, it won’t work so neatly, as infrastructure requirements will be front-loaded while development profits trickle in over a period of years or decades.

In other words, actually moving the port is likely to be a costly and risky enterprise. It will be difficult to overcome the risks and up-front costs associated with doing so – meaning that we should expect the port to stay in downtown Auckland.

Port location: What do you think?

MoT’s review of capital spending on roads, part 3

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:

In the previous post, I took a look at the MoT paper’s findings on the economic efficiency of state highway spending. MoT showed that since 2008 spending on the Roads of National Significance (RoNS) has gone up, while benefit-cost ratios have gone down. As a result, we have almost doubled our spending on state highways without achieving any more economic or social benefits from that spending.

This week, I’ll take a look at a different question: Is it possible to spend our road budget more efficiently? If we chose to build other roads instead, would we get more benefits from them?

The MoT paper examines this issue quite comprehensively, and comes up with an unambiguous “yes”. But before I get into it, it’s worth reviewing the system that the Government is currently using to assess transport investments. Projects are ranked on three criteria:

  • Strategic fit [i.e. is this project trying to do something that the Government cares about?]
  • Effectiveness [i.e. will this project actually do what it’s intended to do?]
  • Benefit and cost appraisal [i.e. will this project deliver more benefits than costs?]

In short, the BCR is only part of the picture. In practice, it’s less important than strategic fit. However, it’s still an important criteria for determining whether we are getting good value out of our transport investments, especially as many of the strategic outcomes that the Government wants are accounted for in a transport cost-benefit analysis.

With that in mind, Section 5.4 of the MoT paper compares BCRs for local road and state highway projects which have committed funding versus those that will probably receive funding or which will remain unfunded.

This analysis, summarised in the chart below, shows that BCRs for state highway projects tend to be lower than BCRs for local road projects whether or not they have committed funding or not. This might be an indication that too much money has been allocated to new state highways – effectively, there are worthy local roads that are going unfunded.

Another worrisome finding is that BCRs for “committed and approved” state highway projects are considerably lower than projects that are merely “probable” or which have not been given funding. This suggests that even within the state highway budget, funding isn’t going to the projects that offer the best returns.

MoT BCR by funding priority chart 1

However, the MoT paper notes that these figures include “significant spending on large strategic projects” – the Auckland Manukau Eastern Transport Initiative (AMETI) in  local roads and the RoNS in state highways. Is it simply the case that a few big funding calls are skewing the results?

Here’s what the chart looks like with those projects removed. As you can see, “committed and approved” state highway projects other than the RoNS also offer a lower return than the “probable and reserve” projects that may or may not get funding. What the hell is going on here?

MoT BCR by funding priority chart 2

Elsewhere in the paper, MoT sums up the situation as follows, with a nod to the idea that traffic forecasts are over-predicting growth:

MoT state highway benefits

It also compares these figures with BCRs for other transport spending, including NZTA-funded PT infrastructure and services and walking and cycling projects, and concludes that:

MoT BCR by activity class summary

In other words, the focus on big state highway projects means that the Government is passing up higher-value spending that serves other modes. Unfortunately, the paper doesn’t offer a lot of additional analysis. But it would be interesting to know how much analysis NZTA or MoT has done on the bus infrastructure projects that are needed to get good transport outcomes in Auckland, such as the Northern Busway extension, the Northwest Busway, extensions of the AMETI busway, and bus interchanges to support Auckland’s New Network.

With all that in mind, how would we be spending money if cost-benefit analysis was the key criteria?

Section 6.2 of the MoT report contains a number of colourful charts to illustrate how we could be doing things differently. Here’s the bit that stuck out for me. It classifies new state highway projects, excluding RoNS, according to their BCR (vertical axis), funding priority (horizontal axis), and total cost (size of bubble).

If BCRs were the key criteria for project funding, the black-coloured bubbles would be de-funded and the red-coloured bubbles funded in their place:

MoT de-prioritised projects 1

MoT de-prioritised projects 2

As you can see, if the Government were focused on getting the highest benefits out of its transport budget, it would have to de-fund most large state highway projects that are currently underway. Yikes.

It’s not clear what conclusions MoT’s drawing from this analysis, as the final paragraphs are entirely blacked out. However, I’d be surprised if they weren’t a bit skeptical of the way that public money is being spent…

Next week: MoT’s analysis of roads spending by region. Preview: Canterbury’s getting a raw deal.

Upcoming seminar: New ideas in economic evaluation

Next Tuesday, the Government Economics Network and Auckland Council are hosting a seminar entitled “Economic evaluation in Auckland – new ideas and challenges“. It’s on a topic that I personally find very interesting – some readers may also be keen:

Estimating the economic impact of transport interventions using the Gross Value Added approach.

Current transport appraisal methods, with their focus on the economic welfare benefits and costs of transport investment, are well grounded in theory and widely used. However, these methods do not provide estimates of extra Gross Domestic Product and extra jobs, nor the spatial distribution of any economic gains and losses. Gross Value Added (GVA) models, have recently applied in the United Kingdom and the United States to account for some of these effects.

In this presentation, Anthony Byett, outlines the results of NZTA-commissioned research on the development of a GVA model for New Zealand. The research uses 2001 and 2006 census data from the 72 sub-national territories, and applies the model to a proposed additional Waitematā Harbour crossing. Promisingly, the model reveals productivity gains from local agglomeration and points to some productivity gains from wider connectivity as well. However, the building and use of the model also reveals shortcomings with the measurement of effective densities and the ability to reach inferences about regional distribution. Nonetheless, the model did prove insightful in highlighting where the benefits of another harbour crossing will likely lie.

Economic evaluation and Cost Benefit Analysis: Implications for practitioners, government agencies and Auckland Council.

Chris Parker, Auckland Council’s recently appointed Chief Economist, will reflect on recent developments in economic evaluation, including the NZTA research using the Gross Value added approach, and discuss some of the implications for practitioners, government agencies and Auckland Council.

The two speakers promise to be pretty interesting. Anthony Byett has led some pretty interesting work into the productivity of road networks. Chris Parker has just been appointed as the Council’s new Chief Economist following on quite a bit of work in transport appraisal at consultancy NZIER.

The seminar is being held at the Council Chambers in the Auckland Town Hall from 1pm to 2:30pm on Tuesday 17 February. You can RSVP at the GEN website.

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?

Is road funding a case of “survival of the un-fittest”?

In several recent posts I’ve taken a look at people’s revealed preferences for roads (nobody’s willing to pay directly for them) and public transport, walking, and cycling (people are queuing up to get on the train). In those posts, I’ve argued that observing how people vote with their feet (or their wallets) can teach us a lot about demand for different travel modes.

BRITOMART_4116

Rail is now growing too fast to be un-fit for survival.

But as any economist knows, markets have two sides to them: demand and supply. As transport infrastructure has a lot of “public good” characteristics, it tends to be provided by government agencies such as Auckland Transport and the New Zealand Transport Agency. (These agencies wouldn’t say no if a private company turned up and offered to build a new motorway at no cost to them… but that’s not going to happen any time soon due to the fact that most recent private toll roads have failed financially.)

As a result, we have to consider how transport agencies make decisions about what to supply to the market. I’ve written a few posts on the basics of cost-benefit analysis, which is one of the tools that they use to decide which projects to build.

But is cost-benefit analysis robust, or are the results systematically biased in a certain direction? Thinking about this question led me to re-read one of my favourite papers on infrastructure costings (don’t laugh!): Bent Flyvbjerg’s “Survival of the Un-fittest: Why the Worst Infrastructure Gets Built – and What We Can do About It” (fulltext pdf). Flyvbjerg takes an empirical look at hundreds of major infrastructure projects around the world, finding that cost overruns are all-pervasive:

  • 9 out of 10 projects have cost overrun.
  • Overrun is found across the 20 nations and 5 continents covered by the study.
  • Overrun is constant for the 70-year period covered by the study, cost estimates have not improved over time.

In addition, benefits are systematically overestimated in ex-ante evaluations. The result is that a number of bad projects get built on the back of over-optimistic business cases. Flyvbjerg attributes this to “cognitive and political biases such as optimism bias and strategic misrepresentation”. (This is a polite way of saying “lying about the project to ensure that it gets built.”)

So how do New Zealand’s transport agencies stack up against Flyvbjerg’s analysis? Fortunately, we’ve got some empirical data to investigate this question with. Between 2009 and 2012, NZTA conducted and published a number of post-implementation reviews of (mainly) road projects that it funded in part or fully. Matt did an excellent job summarising the data in a post last year.

While the projects aren’t necessarily representative of all road projects, they do run the gamut from small pavement upgrades to multimillion state highway expansions. NZTA provided data comparing ex-ante and ex-post evaluations of costs and benefits for 69 projects in total. I subjected the data to some basic statistical analysis, finding that:

  • The average project had a cost overrun of 34% – a difference that was found to be highly statistically significant, meaning that there is a less than 1% probability that the observed difference happened by chance.
  • The average project had actual benefits that were 28% lower than expected – although as this difference was not statistically significant we can’t determine whether it simply reflects random chance.

In other words, NZTA and regional transport agencies seem to have had some issues accurately costing road projects. And the errors they are making are not random – they have systematically underestimated costs. This can be seen really clearly if we graph the data in histogram format.

Here’s the data on construction cost overruns, in percentage terms. The size of the bars represents the number of projects. Bars to the right of the black line indicate projects where costs were higher than expected. As you can see, costs were higher than expected for the vast majority of projects – sometimes to a quite significant degree (i.e. over 100% more expensive than planned).

Road cost overrun chart

And here’s a similar chart for benefit overruns/underruns. This shows that although estimates of benefits have in some cases been wrong by a quite large amount, most of the errors are clustered closer to the zero line. This shows that while NZTA or transport agencies often miss the mark on their estimates of benefits, the errors are sometimes positive and sometimes negative. In other words, optimism bias seems to be less pervasive when estimating benefits than when estimating costs.

Road benefit overruns chart

This data has (or should have) important implications for the way we plan and fund transport projects. It suggests that it’s necessary to be much more conservative when estimating the costs and benefits of road projects. This is especially important in light of the fact that NZTA’s funding is being devoted in large part to major motorway projects – the kind of “megaprojects” that Flybjerg identifies as posing the greatest risks for good project evaluation.

Unfortunately, NZTA stopped publishing post-implementation reviews in 2012, so it’s impossible to say whether agencies have used this data to refine their cost estimates. I hope they have, but there are indications that optimism bias is still running rampant. Take, for example, NZTA’s long-term forecasts of road traffic and public transport patronage, which blithely disregard the market realities. Or, more concretely, there’s the strange case of the Additional Waitemata Harbour Crossing traffic forecasts, which Matt picked up on a few years ago.

A 2010 business case for the AWHC, which would be New Zealand’s most expensive infrastructure project of all time, found that the project’s benefit-cost ratio was a mere 0.4 to 0.6. (Indicating that it costs about twice as much as it returns in benefits.) But, as it turns out, this figure was based on traffic modelling that overestimated actual traffic across the bridge in 2008 by almost 10% – in spite of the fact that the actual data was available at that point. That’s some serious optimism bias right there…

Ak Harbour Bridge Traffic volumes

Auckland Harbour Bridge Traffic volumes (actual and forecast)

Finally, it’s also worth noting that Flyvbjerg finds that cost overruns (and benefit underruns) tend to be a more serious issue for rail projects than for road projects, especially in the United States. Unfortunately, we simply haven’t completed enough rail projects to robustly evaluate whether the same holds true in New Zealand. However, there are some signs that recent public transport infrastructure projects have outperformed their business cases – as seen in NZTA’s post-implementation review of the Northern Busway and booming ridership at Britomart.

How much of a “cost” is congestion really?

Like all things in life, when it comes to transport there are always more projects being dreamed up than there is money available. So to determine just what should be built and when there needs to be some sort of prioritisation process. On the blog we try to sit between the two different aspects that make up this prioritisation process: the technical side and the political side.

The technical prioritisation process is typically done through a ‘cost benefit analysis‘, which I’m sure anyone who has read this blog for a while will have heard mentioned on many many occasions. There are clearly two sides of any such analysis: firstly the cost, which is the ‘easy’ part of the equation: what will it cost, what negative impact might it have? The benefit side is much trickier – clearly some transport projects, policies, services or whatever generate a benefit, but how to measure that benefit, put a dollar value on it and then be certain that dollar value benefit is greater than the amount we’re spending?

At this point transport experts make a number of subjective decisions, which are often passed off as objective facts. How much value to put on a minute of saved time? How much to put on a saved life? How to even work out how much time (or lives) will be saved? Will time even be saved in the longer run?

Typically most transport projects generate the vast majority of their measured “benefits” from travel time savings – the difference in some future year between the time it would have taken everyone to travel in a hypothetical “without the project” scenario and another hypothetical “with the project” scenario. Each saved minute by every person using the route adds up to saved hours, then a value is put on each hour and a whopping big number gets generated over the many decades long measured lifespan of the project.

This process has been the stock-standard approach for many decades in New Zealand and in many countries overseas – a supposedly objective way of making transport prioritisation decisions. Yet it is becoming questioned on an increasingly frequent basis. The latest critique is by transport expert Todd Littman, whose specific critique is of something called the “Urban Mobility Report” – a report prepared by the Texas Transport Institute which attempts to quantify the cost of congestion across all different parts of America.

Todd Littman’s critique is based around the idea that current cost-benefit analyses value of time ‘lost’ to congestion (and therefore the benefit of projects that may reduce congestion) far too high:

My analysis indicates that the UMR tends to exaggerate congestion costs and roadway expansion benefits, and undervalues alternative congestion reduction strategies. It uses higher baseline travel speeds and travel time values than most experts recommend (in fact, its baseline speeds often exceed legal speed limits on the roads evaluated), ignores the increased fuel consumption, pollution emissions and crash severity caused by high traffic speeds, ignores the increased external costs of induced vehicle travel, and ignores many co-benefits provided by alternative mode improvements, pricing reforms and smart growth policies. As a result, the UMR’s congestion cost estimates should be considered upper-bound values – when using such estimates analysts should apply sensitivity analysis that also include middle and lower-bound estimates.

These might be familiar critiques for blog readers. For example, we’ve noted that the supposed time savings from the Puhoi-Warkworth road would require someone to travel in excess of the speed limit to achieve. It was only earlier this year actually that NZTA released a report which highlighted that if you measure congestion costs properly, they might actually be ‘only’ around $145 million per year for travel time delay and a further $105 million for something called “schedule delay cost” (people travelling at times other than what would be ideal for them). This compared to an estimated cost of $1.25 billion using an unrealistic comparison with ‘free flow’ traffic.

Obviously the key next question is “well so what?” As explained below, the implications of over-valuing the cost of congestion are pretty vast in terms of how it skews the way we assess and prioritise transport projects:

Why does this matter? What problems will result if urban transport planning incorporates exaggerated congestion cost values?

Comprehensive and accurate valuation of congestion costs is important because urban planning often involves trade-offs between conflicting objectives such as between traffic speed and safety, and between automobiles and other forms of access. For example, expanding urban roadways may reduce congestion but tends to create barriers to active modes (walking and cycling), and since most public transit trips involve walking links, it also reduces public transit access. Exaggerating congestion costs undervalues other impacts and modes, leading to economically excessive roadway expansion and under investment in alternatives, resulting in a transport system which is less efficient, diverse, affordable, safe, healthy and equitable than optimal…

…Exaggerating congestion costs and undervaluing other congestion reduction strategies tends to result in economically excessive roadway expansion, and under investment in alternative modes, such as grade-separated public transit, and demand management strategies, such as more efficient road and parking pricing. This mattered less during the twentieth century when VMT was growing rapidly, so there was little risk of overbuilding roadways – any excess capacity would eventually be used, it was simply a question of when. However, now that automobile travel has peaked in most developed countries, and society is increasingly concerned about the external costs of excessive automobile dependency, overbuilding has become as economically harmful as under building roadway capacity.

So if we are over-valuing congestion costs, then what are better ways of measuring the impact of transport investment and prioritising projects? Well a good place to start would be by analysing the different factors which contribute to the “cost” that transport imposes on our lives – which interestingly highlights even the upper end of congestion costs as being fairly minimal in the scheme of things:

UMR_02

And here’s where we get to the key point:

…a congestion reduction strategy may be worth far less overall if it increases other costs, and worth far more if it provides other benefits. For example, a roadway expansion may seem cost effective considering congestion impacts alone, but not if it induces additional vehicle travel which increases parking congestion, accidents and pollution emissions. Conversely, alternative mode improvements may not seem inefficient considering congestion reductions alone, but are cost effective overall when co-benefits (parking cost savings, traffic safety, and improved mobility for non-drivers, etc.) are also considered. 

Until we fix the way we prioritise projects we’re going to keep making really stupid transport prioritisation decisions.

Should impact on land value be part of the cost-benefit analysis?

Submissions to the Board of Inquiry hearing of the Kapiti Expressway project have highlighted what seems to be a pretty critical hole in the cost-benefit analysis process: that the impact on land values of transport projects is simply ignored when it comes to assessing whether they stack up or not – that is whether they lead to an economic gain or not. This is pointed out by a Wellington Scoop article which quotes an opponent to the project Dr Christopher Dearden.

Dr Dearden says the following:

“Our objective has been to stop the implementation of a hugely wrong solution to a relatively minor traffic problem for which there has already been an agreed, locally supported and considerably cheaper answer – the Western Link Road. A road which would have added to the country’s assets rather than depleting them…

“We have been caught in a situation which is not of our making. It’s a situation where argument is difficult because the proposed expressway has no economic rationale, no practicality in traffic numbers or need, is not geographically or sustainably justified, and flouts all cultural sensibility. It relies on pure political whim and it’s difficult to mount rational arguments against that.

“We ask you to reject this application, return the Western Link Road to us, and recommend enhancement of the existing State Highway 1. If you do allow this white elephant expressway to go ahead, then … the rest of our lives will be a time of suffering noise, light and pollution damage as well as vibration. So will all the 1400 households which live within 200 metres of the expressway, and there will be enhanced pain from all those factors relentlessly during the next five years while this monster is built. As many have pointed out, all our properties will lose their value and be unsaleable. Ironically, we will make the biggest contribution to the cost of this road that destroys our lives.

I have put the really interesting bit in bold – the likely impact of the project on the value of nearby properties. The great irony of motorway projects is that if it runs through your house then you’re the lucky one as you’ll be bought out – the really bad situation to end up in is if the project runs just over your fence. That way you get no compensation but the value of your property property is likely to decline.

Of course all transport projects have positive and negative impacts, with the positive and negative effects felt by different people in different locations. However I think it’s really problematic that the cost-benefit process ignores a potentially significant impact of transport investment, the impact on land values both in a positive and negative sense, because these impacts may end up being potentially some of the most significant effects of the transport investment. A good cost-benefit analysis should attempt to quantify all likely impacts of an intervention so it just seems weird (or mightily convenient for the motorway builders?) to ignore effects on land values.

The irony of government’s dismissal of CRL

The government’s rather odd dismissal of the findings of the City Centre Future Access Study (CCFAS) leave them in a relatively strange position of effectively endorsing a ‘do nothing’ scenario. There are a lot of posts to be written on the CCFAS and its supporting documentation over the next days and weeks and I won’t try to get through everything in a single post, or even 2-3 of them. For this post I’m going to look at the impact of the different options, including what’s referred to as the ‘balanced reference case’ (the “don’t do CRL or any of its assessed alternatives) from the perspective of the impacts on car drivers.

As most readers will know, generally the bloggers on this site aren’t too concerned about congestion levels for car drivers heading into the city centre. If you’re going to do something as stupid as drive your car into the city centre during peak times, as far as I’m concerned you can suffer the consequences. However, congestion levels for private vehicles is something this government is supposedly very concerned about. Remember their recent comments on the Auckland Plan not sufficiently addressing traffic congestion beyond 2020?traffic-speeds-cbdThat’s a pretty concerning table if you’re worried about traffic congestion for private vehicle users. It’s interesting that the government has effectively written this outcome off as being OK. I suppose their legitimate response might be that CRL doesn’t really solve too much of this problem either – looking at the table below:traffic-speeds-optionsHowever, what the focus on CBD speeds somewhat misses is that with CRL in place a far larger proportion of trips are able to avoid the horrors of what’s going on above ground, because they’re on the rail tunnel. In any case, the CCFAS was designed to simply compare the alternatives and on this measure the CRL clearly performs the best. By 2041 CRL’s superior performance to the other options becomes even clearer.

Some of the more interesting outcomes of the surface bus options include, unsurprisingly, significant negative impacts on general congestion levels. This is pretty clear in the section of the CCFAS which runs through the different economic evaluations of the options: options-evaluationNote the numbers that I have put a red box around all include negative signs in front of them. So if, for example, we were to do Surface Bus Option 1 that would generate additional congestion of $270 million over the evaluation period. Even the benefits for public transport users of this option aren’t large enough to outweigh the additional congestion and as a result the option actually has a negative BCR (not just below 1, but actually below 0). The additional congestion arising from all the bus options are a bit factor in them not performing as well as the CRL. And this is not surprising really. One of the CRL’s biggest benefits, from a private vehicle driver’s point of view, is that it gets some of those bloody buses off the road and means we don’t end up having to have a whole pile of streets closed off to general traffic.

The other interesting thing in the table above is seeing what an impact changing the discount rate and evaluation period has on the project’s BCR. This is a useful answer to the question of “how can the best solution to a problem that needs to be solved actually not be worth doing?” which is certainly somewhat perplexing when you put it like that. What is highlighted in using a lower discount rate and longer evaluation period is that CRL’s benefits increase significantly – because it is a long-lasting solution – whereas the other options don’t seem to get quite as much of a boost, because they’re only ever going to add value up to a certain point in time before you probably need CRL anyway.

Overall, the irony of course is that CRL is most definitely the “pick of the bunch” when it comes to private vehicles because it actually makes things better, not worse. While the government hasn’t come out and said “we prefer the surface bus option”, all the alternative options as well as the “do nothing” situation really do have terrible impacts on private vehicle congestion -something I thought the government was concerned about.

In my next post I’ll look at what happens to public transport if we don’t build CRL. Just think lots and lots and lots of buses.

What does the CCFAS document tell us?

Whoever leaked the draft City Centre Future Access study (CCFAS) is, as Mr Anderson said in a comment the other day, a complete and utter idiot (assuming that it’s someone from Auckland Transport rather than Central Government). After working so hard over the past year to get beyond the differences in opinion between the two parties which plagued last year’s review of the CRL’s original business case, it’s really dumb to spoil this goodwill by jumping the gun. But I guess what’s done is done. Let’s just hope it doesn’t have a long-lasting impact on the project.

From Brian Rudman’s two articles on Friday we know some really interesting details have emerged from this important study into future access to and from Auckland’s city centre (which isn’t what the CRL is solely about of course, a fact that seems to escape many from time to time).

  • We know that without CRL, even by 2021 (a mere nine years away) the CBD is projected to be one heck of a congested place, with most bus networks at capacity and general traffic speeds having slowed down tremendously from their current levels. Remember that the CRL isn’t due to open until around 2021/2022 and also that the bus network will be revised significantly by 2016 to improve the efficiency of the PT network tremendously. In short, it seems that we simply can’t delay CRL’s opening date beyond 2022 without utter chaos resulting.
  • We know that other options to “solve” this problem, including surface buses and an underground bus tunnel, perform significantly worse than the CRL in terms of a benefit-cost analysis. I suspect that this is because they rely upon significant existing roadspace being taken away from general traffic and given to the exclusive use of buses – whereas CRL uses a completely different transport network. This highlights an amusing irony: that the CRL is likely to clearly be the best option for car users. I wonder if the AA will start changing its tune from supporting “buses instead of trains” now?
  • We know that there’s something strange going on in terms of accurately capturing the benefits of the CRL project, if it’s clearly the best option for improving access to the city centre, the implications of “do nothing” are horrific, but it still doesn’t have a cost benefit ratio of greater than 1. There is something of a logical fallacy there: the best solution to a problem that needs to be fixed almost by definition must be worth doing.

On this last point, Rudman’s opinion piece highlights the connection between this clear logical fallacy and the often vexed issue of discount rates, which lower the benefits of a project by a certain percentage each year to take into account net present value and the opportunity cost of spending money now. New Zealand uses an 8% discount rate and assesses projects over 30 years – which is pretty high compared to most international countries and means that in year 30 after a project’s completion we’re only saying the benefits are worth 11% of the benefits in “year one”, while we don’t bother counting the benefits in year 31. For some projects, like an intersection upgrade or widening a road, the benefits get “eaten up” pretty quickly and a shorter assessment period and a high discount rate make sense. But for projects with very long-lasting benefits – the CRL being perhaps the most prime example of that – the high discount rate and relatively short assessment period are illogical.

This is perhaps best illustrated in a graph comparing the benefits of CRL under New Zealand’s system and the UK system:

 

Of course lowering the discount rate and lengthening the period we count the benefits will improve all projects and doesn’t magically mean we can now afford a whole pile of stuff we couldn’t afford before. But it highlights that BCRs are perhaps not the objective tool for measuring whether or not we should do something they’re often made out to be (and of course this rings true for motorway projects as well), but rather an excellent tool for comparing apples with apples – like has been done in CCFAS. Likewise using a BCR to compare the Puhoi-Wellsford project with possible alternatives such as bypassing Warkworth or the more extensive Operation Lifesaver would tell us a lot about which option makes the most sense

Judging by what we do know, and assuming that there’s no massive change between the draft report and it being finalised, it will certainly be interesting to see what Central Government’s eventual response is. They may rely on the BCR number (which could still go up in the final version) to say there’s no proof the project is worth doing, but now that the consequences of a “do nothing” seem to have been explored in more detail – and are pretty horrific – that approach seems unlikely. What’s perhaps the most interesting conundrum for the government is that it sounds like CRL is clearly the best option for those people government really cares about: the car drivers. Will the government help out the poor car drivers by helping fund a project which means hundreds of extra buses on downtown streets are no longer necessary and avoids the need for whole major roads to be completely closed off to general traffic and given up to buses only?

I guess we will see.

Sideswipe Covers Travel Time Savings

In recent days the Herald “Sideswipe” column has helpfully illustrated some of the core issues around urban sprawl and using travel time savings as a measure of the worth of a transport project. It started with this on Monday:

 Good life in the country costs less

OK, so you move out to, say, Whangaparaoa from the North Shore to get a more affordable mortgage. The estimated extra petrol costs ($55 a week) aren’t going to make it more expensive than the difference in mortgage payments. Mike Dennehy explains:

“1. You live close to town and have a $500,000 mortgage. Using Westpac’s online mortgage calculator, repaying a $500,000 mortgage over 20 years at the current rate of 5.6 per cent p.a., your monthly payments are $3468.

“2. You move out of town and get an affordable house at, let’s say, a $300,000 mortgage. Using the same calculator, the monthly repayments are only $2081. The difference looks like this – you will save $320 a week on your mortgage, and pay an extra $55 a week for transport. You’re $265 a week better off, and you’re on the housing ladder. It gets better: the annual difference is $16,640, but you only have to come into work for a maximum of 48 weeks, so the extra travel works out at $2640 a year. You’re better off by a whopping $14,000 a year!”

A reader responded to this on Tuesday with:

“If you live in Whangaparaoa instead of, say, Takapuna, you will spend around 30 minutes extra each way in your car at rush hour. Since in each eight-hour work day most people spend at least a couple of hours doing pretty much nothing (coffee, gossip etc), commuters work an extra day a week, equal to 20 per cent of their salary in lost time/money.”

I do wonder if this particular reader is a transport economist for the NZTA, as this evaluation seems to be straight out of the Economic Evaluation manual. Finally today there are some more responses in today’s Sideswipe, including one from yours truly:

Commuting isn’t equal to cash

“A commuter in Whangaparaoa might spend a lot of time commuting by car, but this isn’t ‘equal’ to 20 per cent of their salary,” says Cam Pitches. “People choose to commute in their own time, not their employers’. A recent NZ Transport Agency survey found that 40 per cent of people actually enjoyed their commute. Common responses identified any time savings would be spent on non-work/non-study activities such as sleeping, more time getting ready for work, eating breakfast, family time, household chores and reading.”

Cheaper doesn’t mean better value

A reader says Mike is right that buying a cheaper house further out will cost you less to pay off, but he is forgetting that at the end of paying off the mortgage, you have a house worth $300,000, not $500,000.

 West is best for the commute

Gary lived in Cockle Bay, Howick, for 27 years, but this year he moved west, to Riverhead. “I work in Newmarket and it was 24km to work from Howick. Now I travel 28km to work, but the trip is 20 to 30 minutes quicker because I don’t have to battle traffic on the Pakuranga Highway anymore. I now enjoy the wide open spaces for the same sort of money as a house in Howick. Because of the position of Riverhead and new motorway links, I can head north or south out of Auckland, or go anywhere within Auckland and not have to use the harbour bridge. That alone made the move worthwhile.”

These are quite useful illustrations of how human behaviour contradicts the official way benefits are calculated, as covered in this post.  The last is a good example of how increasing capacity of a transport corridor encourages longer distances to be travelled.  It is also backs up David Metz’s research which concluded that in spite of billions of pounds being invested in transport in the UK, average commute times have remained largely unchanged for decades. Perhaps it is time we focussed more on the absolute peak carrying capacity of the transport corridors we build too?  And favouring transport projects which reduce our reliance on fossil fuels.

Of course the other important issue is how much more productive/relaxed a commuter would be on the 897X from Whangaparaoa, over a commuter in their their car – again a point ignored when travel times are considered to be an economic “bad”.

Hopefully NZTA takes note of their own survey and revisits some of their economic assumptions.