Supply and demand and regional airfares

Back in June, Stuff published a report on regional airfares, focusing on the way that prices are affected by major events such as concerts and sports competitions. Now, I’m no airline economist, but I’ve got a general interest in transport pricing so I figured that it would be worth taking a look at the topic.

The point of the article seems to be that airplane tickets are higher during periods of high demand. That doesn’t seem too weird, but this guy in Nelson is absolutely ropeable at the thought:

Nelson man Steffan Eden is furious about Air NZ’s fares from Nelson to Auckland and return for the weekend of March  5 and 6 when Madonna will give her first New Zealand concert at the Vector Arena.

Fares that the previous weekend cost $79 are twice that at $159 on the weekend of the concert, an $89 fare rises to $169; and a $129 fare becomes $209…

“Look at the fares the weekends before and after the concert, they’re normal fares. Then on the concert weekend they’re virtually double.  It’s quite blatant.”

Eden said the same thing happened when he wanted to go to the Cricket World Cup match between New Zealand and England on February 20.  “I wanted to take my kids but didn’t in the end because of the cost,” he said.

The man quoted in the article seems to argue that these jumps up in fares are due to uncompetitive or discriminatory practices by Air NZ. By contrast, the airline says that the price increases are just due to cheaper tickets selling out faster:

An Air New Zealand statement said it has been experiencing high demand for flights into and out of Nelson that weekend due to both the New Zealand Masters Hockey Tournament which is being held in Nelson from February 28 to March 5 and the Madonna concert in Auckland.

“As you will appreciate, where there are major events on flights tend to sell out well in advance, with the cheaper fares selling out the fastest, so booking as early as possible is recommended.”

Now, as an economist I’m always wary of the potential for companies with few immediate competitors to exercise market power over their customers. But in this particular case, I don’t think that’s happening. What we are seeing is the normal, and in fact beneficial, working of supply and demand.

Let’s start with the supply side. Air NZ doesn’t have an infinite budget for airplanes and staff. It faces constraints. If it wanted to run more services between Nelson and Auckland on particular weekends of high demand, it would have to either:

  • Pull airplanes off other regional routes, which would potentially satisfy Nelson’s demand but would in turn lead to similar stories about how unfair Air NZ was being to Napier or Timaru or what-have-you, or
  • Buy extra airplanes and hire extra staff that would sit idle most of the time and fly only during a few periods of exceptionally high demand. This is superficially appealing, but it would mean an across-the-board increase in fares to pay for a bunch of empty planes.
mojave desert boneyard1

This isn’t really related, but it’s an interesting picture (Source)

So that’s the supply side. What about demand?

Air NZ has observed, correctly, that demand for flights is not constant over time. Simply put, more people want to fly at some time periods than during others. Airlines can respond to this in a few different ways. The first would be to keep prices constant, regardless of demand. This would turn air travel into a first-come-first served game, which is great if you always buy tickets months in advance but terrible if you have to take a last-minute trip for work or a medical emergency.

The second approach, which Air NZ may be using, is to charge higher prices during periods of higher demand. This may seem less fair, but it’s actually better for (almost) everyone. It means that airlines aren’t constantly booking out flights well in advance or misallocating resources in a futile attempt to give everyone a cheap flight. Travellers also benefit – they get a choice between paying more to travel at their preferred time or finding a cheaper fare at an off-peak time.

I fly for work on a semi-regular basis so I’ve noticed some of the patterns over time. Between 4-6pm, departure gates fill up with suit-wearing men and women headed home from their meetings in time for dinner. Not surprisingly, prices are highest at this time. Later on, prices drop, planes get a bit emptier, and the suits get replaced with casual clothes. By the end of the night, most of the people who want to get home have gotten there, and for a price that they’re willing to pay.

Occasionally, this means that somebody decides not to go to a Madonna concert. But that’s not a flaw with supply and demand – that’s how it’s supposed to work! If the man quoted in the Stuff article didn’t go, it’s only because someone who valued being there more bought the ticket instead.

Finally, I have to ask: Why are people outraged when the principles of supply and demand are applied to airfares? Perhaps it’s because we routinely ignore those principles everywhere else in our transport system.

As numerous economists have observed, we manage our roads like a Soviet supermarket. The price to use roads is set at a single, low value – i.e. NZ’s comparatively low petrol taxes – and thus people queue up for ages to drive on them every morning and evening. The same thing happens with parking, where we have regulated to make it abundant and free and ended up in a situation where people can never get enough parking.

In economic terms, there is no difference between this:

SH16 traffic

And this:


They are both situations in which scarce resources, including people’s time, are misallocated due to poorly-functioning price signals. So rather than asking “why don’t we price air travel as inefficiently as roads?”, we should ask “why don’t we price roads as efficiently as we price airfares?”

A failure to price roads efficiently badly distorts our supply decisions. We are forever pouring more asphalt and concrete that accommodates a few more slowly-moving cars at peak times and sits idle much of the rest of the time. By contrast, congestion pricing would allow us to avoid many of these expenditures by giving people an incentive to travel differently.

What do you think about airfares – and transport pricing in general?

If congestion is so bad, we should price it

Last Thursday, the Government shut the door on the idea of road pricing for Auckland, saying that it would prefer to undertake “a year-long negotiation with the council on an agreed 30-year programme focusing on reducing congestion, and boosting public transport where that reduces congestion.”

The following day, the road/infrastructure lobby undertook a bit of a media blitz pushing for more construction. As part of that, we got sent this press release from the Auckland Chamber of Commerce:

Media Release

12 June 2015

Auckland – defined by congestion

The Auckland Chamber of Commerce strongly supports the initiative of Government to seek a negotiation with Auckland Council on an agreed 30-year programme focusing on reducing congestion, and boosting public transport where that reduces congestion.

Michael Barnett, head of the Auckland Chamber was responding to news reports that Transport Minister Simon Bridges and Finance Minister Bill English have sent Auckland Mayor Len Brown a letter proposing a negotiation and ruling out allowing Auckland to bring in motorway charges to help fund transport projects.

“The Auckland business community overwhelmingly agrees that immediate action to address the City’s transport congestion is required,” said Mr Barnett.

In short, congestion is bad. Really bad. It’s a crisis deserving immediate action… in the form of a year-long talk-fest between local and central government.

Of course, it’s difficult to find reliable empirical evidence that Auckland’s congestion levels really are that bad. Average commute times are a cruisy 25 minutes – well below many other cities. NZTA research has found that the actual cost of congestion is neither (a) largely a monetary cost for businesses or (b) anywhere as large as people claim. While people like to claim that congestion costs “billions” annually, a more realistic figure is $250 million. The one source that does claim that Auckland has world-beating congestion, the TomTom index, has serious methodological flaws.

Nevertheless. Even though its empirical basis is shaky, the Auckland Chamber of Commerce’s recommendations for projects are not crazy. In fact, they seem to be on Auckland Transport investment radar already:

A good outcome from Government and Auckland Council working together would be a package of fast-tracked projects aimed at:

  • Improving public transport services’ reliability and frequency
  • Getting as much use as possible out of the transportation system we have
  • Removing parking from major arterial routes to create more usable road space.
  • More high occupancy lanes to encourage a reduction of sole occupancy cars.
  • Strengthened integrated traffic management covering arterials and motorways.
  • Expanding park and ride facilities at main trunk rail and busway stations.

But even if the ideas are sensible, “fast-tracking” them will be expensive. We simply can’t build everything at once. Even if Government was willing to give Auckland Council more tools to raise revenue – which is unlikely given its refusal to consider road tolls – capacity constraints in the civil engineering business would make it hard to do much more.

To its credit, the Chamber seems to recognise this and agree that we need to prioritise use of our scarce resources:

“Good leadership is about partnership,” said Mr Barnett. “It is about understanding that we have limited resources, so we must learn to prioritise correctly,” he concluded.

Which leads me to my point. If congestion is such a big problem, why don’t we use congestion pricing to make sure that we’re prioritising use of our road network efficiently?

I find it very strange that business groups aren’t more enthusiastic about this idea. If congestion is really as bad as they say it is, why aren’t they loudly advocating a policy solution that would actually address it? (Road-building doesn’t work.) Surely freight companies and construction firms would benefit from the resulting reductions in traffic, even if they had to pay a bit for them.

In my experience, congestion pricing is one of those ideas that virtually all economists agree on. It’s like free trade in that regard – there might be some disagreement about the fine details, but most agree that it’s a good idea. But it hasn’t gotten as much attention in other quarters.

So here, for example, is William Vickrey, who won the Nobel Memorial Prize in Economics for his pioneering work on the topic:

Known among economists as “the father of congestion pricing,” Professor Vickrey sees time-of-day pricing as a classic application of market forces to balance supply and demand. Those who are able can shift their schedules to cheaper hours, reducing congestion, air pollution and energy use — and increasing use of roads or other utilities. “You’re not reducing traffic flow, you’re increasing it, because traffic is spread more evenly over time,” he has said. “Even some proponents of congestion pricing don’t understand that.”

He has admitted that his ideas have sometimes not been well received by those who set public policy because, “People see it as a tax increase, which I think is a gut reaction. When motorists’ time is considered, it’s really a savings.”

And here’s urban economist Edward Glaeser commenting that more megaprojects aren’t the best fix for transport issues:

Infrastructure investment only makes sense when there is a clear problem that needs solving and when benefits exceed costs. U.S. transportation does have problems — traffic delays in airports and on city streets, decaying older structures, excessive dependence on imported oil — but none of these challenges requires the heroics of a 21st century Erie Canal. Instead, they need smart, incremental changes that will demonstrate more wisdom than brute strength…

IMPLEMENT CONGESTION PRICING: We should expect drivers to pay for more than just the physical costs of their travel. We should also expect them to pay for the congestion that they impose on other road users. If you have a scarce commodity, whether groceries or roads, and you insist on charging prices below market rates, the result will be long lines and stock outs, like those that bedeviled the Soviet Union decades ago. Yet U.S. roads are still running a Soviet-style transport policy, where we charge too little for valuable city streets. Traffic congestion is the urban equivalent of a stock out.

And here’s economist Matthew Turner, who co-authored one of the most comprehensive studies of “induced traffic”, which I discussed here:

So what can be done about all this? How could we actually reduce traffic congestion? Turner explained that the way we use roads right now is a bit like the Soviet Union’s method of distributing bread. Under the communist government, goods were given equally to all, with a central authority setting the price for each commodity. Because that price was often far less than what people were willing to pay for that good, comrades would rush to purchase it, forming lines around the block.

The U.S. government is also in the business of providing people with a good they really want: roads. And just like the old Soviets, Uncle Sam is giving this commodity away for next to nothing. Is the solution then to privatize all roads? Not unless you’re living in some libertarian fantasyland. What Turner and Duranton (and many others who’d like to see more rational transportation policy) actually advocate is known as congestion pricing.

And here’s the OECD in its latest country report on New Zealand:

A just-released OECD economic survey blames years of under-investment in infrastructure for the city’s roading problems. It calls for a mix of tolls and congestion charges to alleviate peak-hour traffic pressure and help fund new roads and more public transport.

“Placing a cost on travel during peak periods could incentivise drivers to travel at different times (off-peak), if they are not required to be on the roads, or could encourage more carpooling and use of public transportation,” the report says.

In short, if you’re worried about congestion, you need to take congestion pricing seriously. There are undoubtedly reasons why we may not want to implement congestion pricing, ranging from technical feasibility to equity concerns. But in my view it’s ridiculous for business groups and politicians to get all up in arms about the issue – and promptly rule out one of the few realistic solutions.

What do you think about congestion pricing?

Inside the Independent Advisory Body

This is a guest post from Donna Wynd who was part of the Independent Advisory Body tasked with looking into how to raise funding for transport in Auckland.

Myself and a range of others representing organisations from across the Auckland region have been working on a way to find the funds for Auckland’s so-called transport funding gap – in the order of $12 billion over 30 years (about $300 million per annum) – for close to two years now. The organisations represented included my organization, Child Poverty Action Group (representing the region’s ‘poor’, whatever that means), the AA (in the first phase), the business community (in various guises), tangata whenua, unions, and transport nerds Campaign for Better Transport, Cycle Action Auckland and Walk Auckland. I was the only woman on the group (a major blooper) and there was no Pacific representation which was also an oversight. While I held my ground reasonably well (I think), I cannot possibly claim to represent or speak for all the region’s women and low-income households.

Initially called the Consensus Building Group, we changed our title in the second phase that commenced in April this year to ‘Independent Advisory Body’. This was because we felt that when we got to the nuts and bolts of the funding decisions, it was unlikely that we would agree, much less arrive at a consensus.

Before getting to the group’s considerations, it is important to note that we were specifically precluded by our terms of reference from examining the merits or otherwise of the transport projects in the Auckland Plan that the Council is seeking to fund. Given the significant ideological differences within the group, this was probably a good thing. Also important is that the underlying driver of our future congestion is population growth. Two-thirds of that growth is internal (births and internal migration) and one-third is external migration. While we have some control over external migration, there is little we can do about the other two-thirds.

The final report of the group has recommended three possible ways forward for Auckland. The first is the low-cost ‘basic’ option. The other two were a package of either rates and fuel excise duty increases, or a motorway user charge. Unsurprisingly (for the readers of this blog, at least) the projects that would be dropped under the basic option are mostly public transport projects and arterial upgrades.

The decision to put forward the two funding mechanisms outlined in the report was made after a great deal of research into other options, including a cordon charge such as that operating in London. The point was not to maximize revenue, but to find a way to plug the $300 million per annum gap. Under the models used, both options generate the same revenue.

With respect to the rates and fuel tax pathway, it was considered that an additional general rate based on the value of the property was fairer than an annual general charge. Given the general distribution of the benefits of the additional investment in the transport network, it was also felt there was little justification for a geographically targeted rate. Under this option, businesses would pay less but be the major beneficiaries of the investment.

The motorway user charge option includes the option of a flat charge or a variable charge depending on when people travelled. Although our mandate did not include considering demand management, there is little doubt that building in a demand management component through variable pricing would provide the option to implement this at a later stage if desired.

So how much of an improvement to the performance of the network can Aucklanders expect for the additional $300 million per year? Not much, as it transpires. What the additional investment does is arrest the rate of deterioration in the performance of the network. The motorway user charge provides better performance as the charge will change people’s behaviour – there is no reason a rates increase will change anyone’s driving habits.

The graph below shows the percentage of time spent in severe congestion on the Strategic Freight Network (basically the motorway network) at the AM peak. Under all the options drivers are spending more time in traffic by 2036. ‘Flat Rate’ here refers to a flat rate motorway charge and ‘Peak Demand’ refers to the variable charge.

Donna Wynd - Time In Congestion


The flip side to this is passenger transport. We would expect to see PT use increase if a motorway user charge was introduced if it provided a cheaper, viable alternative (see graph below). The main reason PT boardings are lower under the low-cost option is that some PT projects will simply not go ahead. One of the key findings is that PT investment and investment in alternative modes such as the regional cycling network need to be brought forward to ensure that these alternatives are available. As a matter of equity, this is an absolute necessity; as a matter of politics none of this will work if the Auckland public does not see significant upgrades to the PT system.

My concern with much of this is that transport is about access and mobility for all, while most of the focus of the group’s work was on peak traffic congestion. Motorways do not improve travel options for much of the population whereas better PT does.

Donna Wynd - PT Boardings

Back to the revenue: while the two options generate the same revenue, the incidence of the additional charges on households and individuals is very different. The average cost per household is about the same for both options. The key difference is the incidence on vulnerable (ie low-income, approx. $25,000 per year income) households. Strangely, the rates and fuel tax package affects a greater proportion of vulnerable households (12% as opposed to 7%). Equity considerations were given a great deal of deliberation throughout the process, and several options were rejected on equity grounds.

The single biggest problem in trying to think of a way around the uneven impact of the motorway user charge is linking an income with a number plate. While the research used by the group focused on household income, there are plenty of singles for whom this is an inappropriate measure. Given the existing complexity and fragmentation of New Zealand’s system of social assistance, there is no easy solution to this. Indeed some families interviewed as part of the background research commented that they would have to move out of Auckland if a motorway user charge was introduced given their current income.

At this point it seems fair to ask (as the group couldn’t) exactly what Aucklanders will be funding with their increased rates/petrol tax/motorway tolls? The central rail link is in, although the focus remains on roading. Aucklanders have been very clear that they want improved PT and cycling facilities and unfortunately some projects including rail to the airport are not within the ‘basic funding envelope’. With the Long Term Plan and its associated transport plan coming up for public consultation, this is the chance for Aucklanders to scrutinize where their money is going, and tell the Council what they would like it spent on if they are to be whacked with additional costs. And this is the chance to get in and plug the congestion-free network as an alternative model. It costs less and in these tough times that must make it an attractive option.

Lastly, I’d like to take the opportunity to thank all those who participated in the CBG and IAB. I think that for the most part members made a genuine effort to come up with a result most of us could agree on, and that would be of benefit to the region as a whole. This involved many of us putting aside our ideological differences, and I’d like to commend my fellow group members for managing that. I’d also like to thank the Council staff who provided technical and other support, and Peter Winder’s team for their assistance and hard work. Whether or not you agree with our conclusions is up to you, and I would encourage anyone who is interested to make your views known through the LTP process.

Auckland Transport’s 30 Year Project List

As part of the discussion on Alternative Transport Funding, which was launched yesterday, the Council also released a copy of Auckland Transport’s entire 30 year transport programme which includes the cost of projects and seemingly ranked according to some combination of criteria. The programme unfortunately does not include state highway projects, which makes it difficult to fully assess the merits of the overall transport packages outlined in yesterday’s announcements. However, it’s certainly clear what Auckland Transport projects can and cannot be afforded over the next 30 years under the two scenarios.

The document doesn’t explain the list in any detail, but it seems as though there are a number of projects on the first page which have some form of existing commitment or are ongoing requirements and therefore are not really considered “discretionary”. These are shown below:

committed-projectsThe ‘committed’ projects include those that appear to have contracts in place (electric trains, Albany Highway, a few things around Westgate), renewing existing assets and the City Rail Link. I actually wonder if it would be helpful for CRL to be ranked against all the other projects – rather than be included in this “other” list – as almost certainly it would rank either right at the top or very near it.

Anyway, moving on to the top of the list the projects listed below are those that are in both the Basic Network and the Auckland Plan Network – as well as some fairly broad brush allocation of funding to support sprawl in some of the areas identified by the Unitary Plan:


It’s a pretty short list for the 30 year transport programme, as well as being strangely focused on the first decade. The other key thing to notice here is the yellow boxes, which appear to be wrapped up programmes of projects (e.g. walking and cycling) where the amount of funding allocated to the programme varies quite significantly, depending on whether it’s the Auckland Plan Transport Network or the Basic Transport Network.

Even taking a fairly harsh look at the list above, there doesn’t seem to be too many projects that don’t make sense doing at all over the next 30 years. For me the three most glaring ones that need to be questioned are:

  • The Reeves Rd flyover at $141 million
  • The widening of the almost $200 million and soon to be opened Te Horeta Rd for another $74 million
  • Mill Road at $472 million which is something that we’ve highlighted could be looked at for a cheaper option, especially seeing as the government are now widening the southern motorway.

The rest of the projects are those which form part of the Auckland Plan Transport Network only. Essentially, these are the additional projects from Auckland Transport which the additional funding is being asked to pay for:


While there are a few really dumb projects on the list above (Mt Albert Park & Ride, what the heck?) there’s also a lot of pretty good stuff that is missing out under the Basic Transport Network. Furthermore, while there is some, it seems at first glance that there isn’t a huge amount of really expensive dumb stuff in the programme list of Auckland Transport’s projects. That contrasts with the package of state highway projects highlighted yesterday which doesn’t appear to have been questioned at all.

Over the next few days I’ll be starting to look into the detail at the overall balance of the packages, as well as assessing the extent to which they are similar to what we proposed in the Congestion Free Network.

Alternative Transport Funding Report Released

The latest report on alternative transport funding for Auckland, prepared by the Independent Advisory Board (formerly the Consensus Building Group), has just been released. The report will form a critical part of the Council’s public consultation on the next Long Term Plan (the 10 year budget), essentially asking Aucklanders two key questions:

  • Are you willing to pay more for a better transport network?
  • If so, then should that extra money be from existing sources (rates, fuel taxes etc.) or from a “motorway user charge”?

We have been highly skeptical of past proposals that request more money to be spent on transport – in particular the first version of the Integrated Transport Programme as well as the initial report on alternative funding prepared last year by the Consensus Building Group. In fact, the Congestion Free Network came into being as a result of our frustration with the transport programme being a “build everything” and we felt a large part, if not all of the $12 billion funding gap could be resolved through removing poor value projects, rather than by requiring additional funding.

Overall, the new report is a clear step in the right direction and combined with the work being done as part of the next LTP and the next ITP it seems as though quite a lot of effort has gone into removing the more idiotic projects included in the original ITP, although there isn’t a huge amount of detail in the information that has been provided. There are, however, still many unanswered questions that the report doesn’t seem to address – plus its key recommendation of suggesting a “motorway user charge” is fraught with problems. But I’ll get onto that in a moment – first to summarise some key points from the report.

A comparison between what is in the two programmes – known as the “Basic Transport Network” (that which can be afforded under the 2.5-3.5% rates increase proposed in the LTP) and the “Auckland Plan Transport Network” (the preferred network, which requires additional funding) is shown in the series of tables below.

Firstly, for bus and ferry investment:


The main difference between the two networks seems to be in the scale of the bus lane programmes and the provision of additional busways in the second and third decades, supported by service frequency improvements. The proposed Botany to Manukau busway appears to be extended to the airport like we suggested as part of the CFN however more interesting is to see a new proposal for a “cross isthmus” bus RTN between New Lynn, Onehunga and Otahuhu. I wonder what route and form that would take.

Next for rail:

railThe difference between the two networks is fairly stark in the second and third decades, with no investment at all in rail over this period in the Basic Transport Network. I must say the complete lack of rail investment in the Basic Transport Network after 2025 is a bit surprising and raises some questions about the prioritisation process that determines what’s in and what’s out of the Basic Transport Network after 2025. Importantly, CRL is in the Basic Transport Network and therefore does not require alternative funding.

Next, for roads:

roadsLooking at arterial roading projects first, it’s clear that even the Auckland Plan Transport Network is much smaller than what was proposed originally in the first version of the Integrated Transport Programme. In fact it seems like billions upon billions have been shaved off the previous ITP’s numbers, which included crazy things like nearly a billion dollars on upgrading Great South Road. We’ll take a more detailed look at this in a future post, but credit where it’s due to Auckland Transport who have responded to criticisms of the first ITP by ensuring the Auckland Plan Network has been significantly refined to deliver much better value for money.

Unfortunately the same cannot be said about the state highway programme, which doesn’t vary much between the two networks – aside from some rather optimistic “widening to reduce congestion” in the final decade (haven’t they heard of induced demand?) A whole bunch of very dodgy projects (Additional Harbour Crossing, SH16 Port Access, SH1 Warkworth to Wellsford etc.) have been included in the Basic Transport Network for some unknown reason, as well as of course being in the Auckland Plan Transport Network. This is important to keep in mind when considering the resulting “funding gap” – which of course could be a whole heap smaller if we stripped out the $5.5 billion Harbour Crossing and multiple billions on these other unnecessary projects.

Components of the walking, cycling and safety programmes for the two networks are shown in the table below:walking-cyclingIt’s not clear what the cost difference for walking and cycling is between the two networks, but it’s clear that only the Auckland Plan Transport Network goes anywhere close to delivering on the Auckland Plan vision for active transport.

Now for miscellaneous other stuff, like maintenance, renewals and supporting sprawl:

maintenance-renewalsThe shortfall in funding maintenance and renewals under the Basic Transport Network is a real concern, as the last thing we want to do is end up like the USA where infrastructure is falling to bits because politicians want to “cut ribbons” rather than look after what we already have. The lack of funding for developing the greenfield sprawl areas may not be such an issue as this could force the developers themselves to come to the party a bit more.

Overall, as I noted above it’s clear the Auckland Plan Transport Network is vastly improved from what was in the first ITP. A lot of the really poor investment in the arterial network appears to have disappeared, although there are still a few remaining remnants like Penlink and Mill Road, although even with these projects it seems like the bulk of spend has been pushed out into the future. However, the big remaining issue is that a similar exercise doesn’t seem to have occurred with the State Highway network and there are still billions upon billions of dollars in poor value for money projects – most particularly the Additional Harbour Crossing but also other duplicative projects like SH20B, Warkworth-Wellsford and others. NZTA have really dropped the ball on this one and unfortunately I suspect part of this comes about because the under the current situation motorway projects get full government funding while every other transport project has to beg for a slice of the funding pie. More than once I’ve heard council people say we should build certain projects simply because the government are paying for them.

Cut out what I estimate to be around $8 billion in very poor value for money state highway projects and we’re left with a $4 billion funding gap. If we push $8 billion of state highway projects out of both the Basic Transport Network and the Auckland Plan Network, it means we can afford $8 billion more of good projects before we have to turn to Alternative Funding and it means that we only need to find ways of raising an additional $4 billion. Over 30 years, that’s not a particularly huge issue to overcome.

So if we think back to the two questions at the top of the post, it seems as though the answer to the first one is there may well be value from paying a bit more to get a better transport network, but the actual requirement for additional funding might be around a third of what the report highlights. Now let’s turn to the second question of which would be the best way of raising this additional funding.

Essentially the two options proposed are:

  1. Increasing existing funding mechanisms like rates, fuel taxes, development contributions, central government grants etc.
  2. Introducing a charge for entering the motorway network

Some more detail on the “Rates and Fuel Tax” option are shown below:

rates-fuel-taxI must say I was pretty surprised to see how low the additional rates and fuel tax increases would need to be in order to close the funding gap. A rates increase of between 3.4 and 4.4% is actually lower than what was assumed in the 2012 Long Term Plan (that had 4.9%) while a 1.2 cent per litre annual fuel tax hike would probably get lost as a rounding error in typical price fluctuations. It’s a credit to Auckland Transport’s project prioritisation that they’ve managed to develop a network that could be fully funded under the funding assumptions of the 2012 Long Term Plan, and it’s only the political decision to have a much lower rates increase that’s essentially “re-created” the funding gap.

Combine this with the above observation that the “funding gap” could be further reduced to around $4 billion instead of $12 billion and we could see the gap closed by rates increases only 0.3% higher than otherwise or fuel tax increases of a mere 0.4 centre per litre compared to what would otherwise occur. That’s starting to look like a pretty compelling option.

The other funding option is called a “Motorway User Charge” and is summarised below:

motorway-user-chargeThere’s a lot of discussion in the document around the relative costs and benefits of the two approaches – with the report seeming to express something of a preference for the motorway user charge scheme, based on its travel demand management effects of discouraging some trips and encouraging higher levels of public transport use. We’ll look at the details of this analysis in further posts, but note that this option does come with some fairly significant set up and operational costs (~$110 million set up with opex costs of 24c per trip) as well as potentially diverting quite a lot of traffic off the motorway network and onto local roads – which seems quite counter-productive.

To summarise, there’s quite a lot to like in the Independent Advisory Board’s report. It seems like some hard work has gone on by Auckland Transport (although sadly not NZTA) to optimise their desired transport network so it’s far more realistic than what was proposed in the first ITP. Take out a few of the dumber motorway projects and we’re left with a pretty damn good 30 year transport network that can almost be funded from existing sources (just requiring 0.3% higher rates increases and 0.4 cents per litre higher fuel tax increases) or from a very low motorway user charge. Or from other ways we might think up of to find $4 billion over 30 years.


Update: unsurprisingly the government has once again poured cold water on the idea of tolling or fuel taxes.

Why it’s not possible to build our way out of congestion

Wired magazine recently published a good, succinct explanation of induced traffic. It’s worth reading in full as it hits upon an incredibly important, often overlooked fact: it’s not possible to eliminate congestion by building more roads. Here are a few of the more interesting excerpts:

The concept is called induced demand, which is economist-speak for when increasing the supply of something (like roads) makes people want that thing even more. Though some traffic engineers made note of this phenomenon at least as early as the 1960s, it is only in recent years that social scientists have collected enough data to show how this happens pretty much every time we build new roads. These findings imply that the ways we traditionally go about trying to mitigate jams are essentially fruitless, and that we’d all be spending a lot less time in traffic if we could just be a little more rational.

But before we get to the solutions, we have to take a closer look at the problem. In 2009, two economists—Matthew Turner of the University of Toronto and Gilles Duranton of the University of Pennsylvania—decided to compare the amount of new roads and highways built in different U.S. cities between 1980 and 2000, and the total number of miles driven in those cities over the same period.

“We found that there’s this perfect one-to-one relationship,” said Turner.

If a city had increased its road capacity by 10 percent between 1980 and 1990, then the amount of driving in that city went up by 10 percent. If the amount of roads in the same city then went up by 11 percent between 1990 and 2000, the total number of miles driven also went up by 11 percent. It’s like the two figures were moving in perfect lockstep, changing at the same exact rate.

Los Angeles: Sitting in traffic after ignoring supply and demand for over 50 years.

In their excellent paper on the topic, Duranton and Turner describe this as “the fundamental law of road congestion: New roads will create new drivers, resulting in the intensity of traffic staying the same.” Their research also digs into a couple of other related and equally interesting phenomena:

  • Better public transport provision doesn’t actually reduce road congestion – but it does enable more people to move without being affected by congestion
  • Reducing road capacity has no measurable impact on congestion – if less road space is available, people take public transport or active modes instead, or avoid making low-value trips. also has some further discussion of Duranton and Turner’s work. The economists go on to suggest economists’ favourite answer to congestion: road pricing. (If you’re interested in reading more about that topic, Stu Donovan and I have written several posts about the economics of road pricing.)

So what can be done about all this? How could we actually reduce traffic congestion? Turner explained that the way we use roads right now is a bit like the Soviet Union’s method of distributing bread. Under the communist government, goods were given equally to all, with a central authority setting the price for each commodity. Because that price was often far less than what people were willing to pay for that good, comrades would rush to purchase it, forming lines around the block.

The U.S. government is also in the business of providing people with a good they really want: roads. And just like the old Soviets, Uncle Sam is giving this commodity away for next to nothing. Is the solution then to privatize all roads? Not unless you’re living in some libertarian fantasyland. What Turner and Duranton (and many others who’d like to see more rational transportation policy) actually advocate is known as congestion pricing.

Incidentally, I like Turner’s “Soviet Union” metaphor a lot – I’ve said on occasion that we’re running our transport system like a Polish shipyard.

Lastly, it’s incredibly important to consider induced traffic when making policy recommendations. As I wrote in my review of Alain Bertaud’s talks in Auckland, keeping commute times down is an important part of maintaining an efficient urban labour market. Some people seem to have taken Bertaud’s recommendation that policymakers focus on keeping average car commutes under 30 minutes (and PT commutes under 45 minutes) as a call for more roads. This is a superficially appealing but deeply wrongheaded idea.

Induced traffic means that building roads to keep commute times down will not work. And it will be expensive. While there is often a good case for specific road improvements to remove key bottlenecks or improve safety – the Victoria Park Tunnel comes to mind – Duranton and Turner’s work shows that a strategy of building lots of roads will not succeed in minimising commute times. An alternative approach is needed.

A targeted transport rate?

An article in last Friday’s NZ Herald provided an interesting insight into where the investigations into additional transport funding options are at. This is the second phase of the project to close the supposed $12 billion funding gap over the next 30 years. The article highlights that effort has been focusing on analysing different forms of road pricing and is perhaps leaning towards a motorway charging scheme:

Evaluating road tolls and fuel-tax rises and traditional funding methods such as rate rises and targeted rates is the job of the group due to report to the council next month.

The Herald understands that the independent alternative transport funding group is leaning towards motorway tolls. It will also provide options for targeted rates and extra rates rises.

On Wednesday, Transport Minister Gerry Brownlee reiterated the Government’s pre-election position that there would be no regional fuel taxes or tolling of existing state highways in Auckland.

Auckland Council cannot introduce motorway tolls or a regional fuel tax without government approval.

I think tolling motorways could have some benefits but it also could have considerable downsides and we’ve outlined some of these before. The main problem with them is the potential for traffic diversion from motorways onto local roads. What also can’t be ignored is that a fairly high proportion of money raised from schemes like these goes into the administration of the system itself, this means it’s a fund-raising system that’s likely to be quite a lot less efficient than fuel taxes and rates. Some of the strongest proponents of motorway tolling has been the NZ Council for Infrastructure Development (NZCID) and I suspect this is two fold,

  1. their members want to build, maintain and operate any tolling system
  2. their members want the additional funding that flows from the tolls to help build more infrastructure

One of the key problems with the alternative funding exercise right from the start has been the ignorance of whether we actually need to raise the additional funding for transport. The Integrated Transport Programme, which outlined the full transport programme over the next 30 years, included a huge number of incredibly costly and stupid projects included within its project list:

Knocking out $12 billion from the project list above is a pretty simple exercise – as we highlighted in our detailed analysis of the Congestion Free Network‘s financials. Therefore, based on the Integrated Transport Programme’s list of projects outlined above there is a very valid question about whether any form of additional funding is necessary. In addition even if a funding deficit still exists, if it was considerably smaller it might have allowed for some of the earlier dismissed funding options to be viable once again.

Another major flaw in many tolling proponents arguments that could have a significant impact on what projects get built is that any tolling or road pricing schemes are going to change demand substantially and as such it is likely to reduce or remove the need for many roading projects. Conversely it is likely to shift many PT projects up the priority ladder.

I guess the big question that we will all need to grapple with over the next few months, as the alternative funding group makes a recommendation to the Council, who then decides what they want to include in the draft Long Term Plan, is whether anything has changed since the ITP came out last year. It’s possible that two things have changed, which could mean a greater need for extra transport funding than we had previously expected.

  1. We know from the agendas for Auckland Transport closed board meetings that a lot of work has been going on to update the Integrated Transport Programme and the list of projects. Hopefully this means a lot of the crazier projects (like $665m on Albany Highway or around $900m on upgrading Great South Road) have been removed or the figures corrected.
  2. We know from the LTP Mayor’s Proposal that a lower level of rates increase means less money available overall for transport from normal funding sources compared to what’s in the current Long Term Plan. At first glance, it seems like most of the good projects can be funded over the next decade but there’s still no word on how much can be spent on things like walking and cycling, or the timing of various bus lanes and interchanges needed for the new network.

So given we know motorway tolling is an idea with many flaws and that the government isn’t going to approve new funding sources like this anyway, but there might be a need for a bit more money for transport, it seems sensible to be looking at other options. Which, returning to Friday’s Herald article, seems to be what’s happening:

Aucklanders could pay a new charge on top of rates to fund transport projects.

A “targeted rate” is one option being considered by an independent group looking at alternative funding measures to plug a $12 billion-plus transport funding gap over the next 30 years…

…Auckland Council cannot introduce motorway tolls or a regional fuel tax without government approval.

The National-led Government changed the law in 2009. Acting Mayor Penny Hulse said the $2.4 billion city rail link had been included in a new 10-year budget and did not need a targeted rate.

It will certainly be interesting to analyse the details of the transport budget as they emerge in the coming months, to see what can be afforded in the baseline transport programme and whether any additional money is required.

Where to now for transport in Auckland?

In some respects Saturday night’s election result changes nothing from a transport perspective. It seems as though the government that will be formed over the next three years will be remarkably similar to that we’ve had for the past three years and there’s certainly no indication of a change in direction for transport policy from what we’ve had over the past six years. However, this has some important implications:

  • It’s almost certain that Puhoi-Warkworth will be built, with construction likely to start before the 2017 election and the project built/funded as a PPP.
  • There will continue to be a lot of discussion around the timing of City Rail Link and whether the Council or Government budges from their preferred start date.
  • Progress on any alternative funding mechanisms to close the so called “funding gap” for transport seems pretty unlikely. This is despite the fact some government departments have also being doing their own investigations on alternative funding sources due to lower than expected revenues into the National Land Transport Fund.
  • There is likely to be more money for cycling projects thanks to the $100 million for urban cycleways around the country over four years

Cam discussed Puhoi-Warkworth in his post yesterday, so in this post I’m going to focus on the CRL and alternative funding, particularly what the election results means for these two key (although not necessarily connected) issues.

Starting with the CRL, a start on the project as a whole anytime in the next three years now seems fairly unlikely. This means hopes of completing the project by 2021 are probably slim unless the Council can talk government into a very big change of position. The Council is keen to progress talks with government about the timing and funding of CRL, but it seems likely that these talks will focus on funding of the section underneath the downtown shopping centre:

Although the council wants to start CRL by 2016, the previous Government indicated no funding before 2020 unless certain rail patronage and employment targets were met. But [Penny] Hulse remains confident of middle ground.

“We’ve been working well with the Government over the last three years and we don’t expect that to change. The start time and funding are things we need to talk to the Government about,” she said.

This section is particularly important as it is key to delivering not just the redevelopment of the downtown shopping centre site but also a whole raft of projects that are part of the Downtown Framework including making things better for buses on Customs St.

I’m still confident the rail patronage targets set by the government – that patronage will track towards hitting 20 million journeys per year by 2020 – will be met or even exceeded, plus of course there’s still another election in 2017 between now and the government’s current preferred start date. But it seems prudent, for now at least, for the Council to just get on with building the section under the downtown shopping mall – like I said in this previous post. Once CRL is started, it will be much easier to “complete” and the section underneath the downtown shopping centre will make constructing the rest of the project much easier – especially if they can get the bit under Customs Street built as part of this first stage:

So I don’t really think Saturday’s election results change things much for the CRL. I would imagine that the main focus to negotiations over CRL between government and the Council is likely to be around whether the government stumps up with half the cost of the first stage of the project or whether they force Council to fund the whole thing – like has happened so far. I think it would be quite a good look for the government to provide CRL with some financial support for the first stage, to show that it’s serious about believing in the CRL project and to show that it values redevelopment of the city centre.

In relation to alternative transport funding, this might be a bigger hurdle to resolve as the government has been pretty clear on its position previously – no congestion charging and no additional tolls on existing motorways. To some extent this may not be an issue, as I highlighted a few weeks back the “baseline transport programme” (what can be afforded without additional funding with 2.5-3.5% rates increases over the next decade) doesn’t actually look too bad, at least in terms of what big projects are in (CRL, AMETI, new bus network stuff etc.) and out (Penlink). The devil may come in the details of what projects can be afforded when and how much additional walking and cycling funding is available, but at least for now it doesn’t seem like the end of the world if there’s no progress on alternative funding schemes in the next three years. Unless you’re a Penlink supporter, of course!

In saying that it also seems government agencies are becoming increasingly interesting in the issue of alternative funding as a way to provide certainty to the revenues flowing into the National Land Transport Fund (the account that collects all of the transport taxes). It may be a few years away yet but I get the feeling the noise surrounding alternative funding sources is just going to get louder and louder so we’re likely on a course to needing a nationwide discussion about them. When this happens the work put in by the council on the matter is likely to come in quite handy.

The last main issue relates to cycling improvements. From a transport point of view this was one of the highlights of election campaign as every major party (and most of the minor ones) all agreed on the need to spend considerably more on walking and cycling than currently happens. For their part National promised to spend $100 million over four years on urban cycleways. Based on Auckland’s share of the urban population that could see it receiving over $40 million over the four years which would represent an approximate doubling in spending. In saying that a lot will hinge on just how much the council agree to in the Long Term Plan. With the government now seemingly on board with cycling there is a risk the council will try to use the enlarged cycling pot as a chance to cut back on some of the council’s spend. Instead the opposite needs to happen and they need to at least double funding to go on top of whatever the government plan to provide.

So overall, aside from the fact we’re near certain to waste three-quarters of the billion dollars plus whatever the PPP costs on Puhoi to Warkworth, I don’t think the election results is too much of an issue for advancing key transport issues in the next few years. It does mean the slower delivery of CRL, but that’s not unexpected and may help ensure key bus infrastructure for the new network can be completed in time. There’s a certain irony that the government’s dislike for alternative transport funding options probably means a delay to Penlink, a project I understand the local National MP has pushed strongly for, but that project’s a waste of money anyway.

Lastly it was disappointing that despite many requests the first time we got to meet transport minister Gerry Brownlee was at the election debate night. I will also be keeping an eye out to see if we get a new transport minister and whoever it is, I hope they become open to meeting with us this term.

How can we make road pricing fair?

Talk to a transport economist for more than a couple of minutes (seconds?) and the issue of road pricing will come up. “If only we could introduce road pricing, all our problems would go away,” says your transport economist. Congestion – gone. Greenhouse gas emissions – significantly reduced. Public transport efficiency – dramatically increased. And so on..

So why is implementing road pricing so difficult and so rare? The most common answer is “politics”, but essentially that’s just a proxy for the concept being considered unacceptable by most of the population. And one of the main reasons why road pricing is so unpopular is that it’s seen as unfair, particularly for poorer people.

In a recent Planetizen post, Canadian transport academic Todd Litman looks further into this assumption that road tolls and other means of pricing are unfair and harm the poor.

A major obstacle to efficient pricing is the common, but often inaccurate assumption, that such fees harm poor people. This is generally wrong, and reinforces automobile dependency (an automobile-oriented transportation system which offers inadequate alternatives to driving and therefore forces people to drive more than optimal), which tends to harm physically, economically and socially disadvantaged people overall.

While it is true that a given fee is regressive (each dollar represents a greater portion of income for a poor than a wealthy person), tolls are generally less regressive than other roadway expansion funding options because poor people drive relatively little on such highways: many poor people are retired or unemployed, lower-income workers often have local jobs that do not require highway commutes, and if they do commute on major travel corridors they are more likely to use alternative modes, or travel off-peak because they often have off-peak work schedules.

If the money raised from road pricing or tolls is spent on improving public transport or active transport, then the progressive nature of the funding is enhanced further:

As a result, road tolls are generally less regressive than financing urban highway expansion by increasing fuel taxes (which all motorists pay, not just urban commuters) or general taxes (which everybody pays regardless of how much they drive), and can be progressive overall if a portion of revenues are used to improve alternative modes, such as public transit, so lower-income travellers have better alternatives to driving.

Similarly, poor people often benefit from parking unbundling (paying directly for parking, rather than having it automatically included with building rents) and cash out (being able to choose cash instead of subsidized parking) because they tend to own fewer cars and value the opportunity for financial savings.

There are a couple of ares where Litman’s analysis doesn’t necessarily hold true for Auckland, particularly in relation to how the current debate about road pricing is happening – as an additional revenue raiser, rather than as a replacement of existing funding sources.

  1. Tolling or road pricing is probably only fairer if it replaces other, unfair, methods of funding transport – such as petrol taxes (which unfairly charge those travelling off-peak for infrastructure only required at peak times) or rates. If tolling or road pricing is just another tax on people to pay for a bloated transport programme then chances are they will be unfair because it will be the poor who end up suffering the most from the extra charges (as those charges will be the greatest proportion of their income).
  2. Auckland currently has a very different relationship between income and mode choice compared to US cities. In most US cities it seems that the poorest areas have the highest levels of public transport use – therefore improving PT using money raised from tolls or road charges has the potential to play a wealth distribution role. As illustrated by the map below – which shows car modeshare for journey to work trips in the 2013 census – Auckland seems to have the opposite patters, with poorer areas often being highly car dependent.

car-modeshareOverall, it seems as though road pricing could be introduced in a way that’s considered “fair” by Aucklanders – and therefore may be able to overcome political opposition. However, this would require a couple of pretty big changes to how it’s currently being proposed by the Council. Firstly, the money raised would need to be used instead of existing funding sources, rather than just being another tax. Secondly, some dramatic improvements in the attractiveness and affordability of alternatives to driving appear necessary to reduce car dependency in Auckland’s poorer areas.

The new bus network and the City Rail Link (which vastly benefit the south and west respectively) may meet the second hurdle. A whole pile of unnecessary roading projects need to be killed off to pass the first hurdle, reduce some of the regressive existing transport funding tools, and therefore make road pricing and tolling actually fair.

Privatising Roads

The ACT party – or at least its biggest funder – was in the news last weekend for expressing some of his views for the party at their annual conference. Of note was this line

“I’d privatise all the schools, all the hospitals and all the roads,” he told the conference.

Now obviously we’re not in the habit of talking about schools or hospitals (unless it’s about how to get to them) but roads are something on our list. Now in reality I can’t see it happening here – at least any time soon – but it raises the interesting question of what would happen if we were to privatise roads? This post is really just a thought exercise as to some of the impacts of doing so.

I suspect that if we were ever privatise the roads the impact would how we get around and our views on transport would change dramatically. There would be some overall impacts across the entire network but also more local impacts due to there likely needing to be different forms of privatisation.

The key impact would be across the entire network and the true cost of operating, maintaining and building roads would become much clearer regardless of how that’s passed on to the public. A better understanding of just how much roads cost, especially if charged for through forms of road pricing would lead to changes in how people travel. People would likely reduce the amount of driving they do in favour of more walking, cycling and PT use.

Private road owners would also likely seek to reduce their maintenance costs while users of lighter vehicles would likely demand that costs are more fairly distributed to those that do the most damage. That in itself could have large impacts. It would likely see the vehicle fleet get smaller and lighter over time i.e. less people would be driving around in large SUVs unless they absolutely need too (or want too). Truckies would be even harder hit. Due to their weight, trucks cause substantially more damage to road surfaces and so would likely be charged substantially more than other vehicles which in itself would have far reaching impacts by pushing up delivery costs. Those increased costs would of course be passed on to businesses and ultimately consumers.

Perhaps one of the areas most impacted would be in road construction. In short it would kill it dead. Most transport projects simply don’t make sense financially and the toll road troubles in Australia are proof of this. Traffic volumes often don’t stack up and most projects are only able to be justified based on the benefits to the wider economy from improved travel times. Faced with paying for a journey in time through congestion or paying a monetary cost to avoid congestion, many choose the former. What all of this means is that road construction would dry up almost immediately and the costs would shift to making the best use of the infrastructure that exists. That could have some negative consequences as there might be little attention paid to improving roads through projects like this. The flip side of this is that the private road owners would likely become liable for road safety and therefore be a push to improve crash black spots.

Regardless of whether privatising roads is a good or a bad thing, one thing that isn’t so clear is just how it could be done. The real benefit from roads comes from the fact they are an extensive network. Very few trips begin and end on the same road and a trip might commonly involve travelling on quieter residential streets, arterial roads and motorways. Each of those would present vastly different opportunities for privatisation.


Motorways would probably be the easiest roads to privatise due to the fact they have limited access and all journeys that use a motorway begin and end somewhere else. Motorways also carry large amounts of traffic each day. This is also why groups like the NZCID who have been pushing for the council/govt to find additional ways to fund ever more and larger transport projects have suggested charging for access to the motorways. If we were to privatise roads there would likely be a big temptation to do the easiest ones first and so motorways would be at the top of the agenda. The problem with that though is that it would likely have a huge impact on but still publicly owned roads.

Residential streets

The next easiest set of roads to privatise would actually be quiet suburban streets, particularly those post 1950’s suburbs full of cul-de-sacs. There we would probably do something similar to what is likely to happen later this year in the small sprawly village of Long Grove (north of Chicago). They are looking to privatise many of their currently public suburban roads because it simply can’t afford to maintain them due to their pyramid scheme like system of how roads were funded where the money to pay for them was only raised through development contributions which dried up as a result of the GFC. They are simply going to turn over the ownership of the roads to the owners of the houses on the street and leave it up to them to maintain. 


Some typical post 1950’s street patterns

That could put big strains on neighbourly relations in many places as people work out who will pay for what i.e. does everyone on a street pay equally or do those at the end of the street pay more? In some parts of Auckland there could be interesting changes in the stance taking on intensification. More people living on a street means more people to share the cost of a road with and so some of the suburbs that were most opposed to intensification in the Unitary Plan discussions might quickly change their mind. Going further some residential neighbourhoods might start imposing restrictions on vehicle use in their streets – particularly truck movements – in a bid to lessen the damage vehicles do to the roads. Gated communities might also become more common to stop others from passing through.

On the positive side these communities are likely to become much more pedestrian and cycle friendly as those two modes cause much less wear and tear on roads which equates to less maintenance.


Privatising arterial roads are likely to be the hardest to do because not only do they serve a movement function but they serve a place one too, people live, work and play along arterials. To be honest I don’t even know how you could privatise them as due to their function they can’t just be turned over to locals to maintain but their connected nature means they would be prohibitively expensive to charge for. Who would really want the cost and hassle of owning them?

Overall I don’t think the idea of privatising roads is necessarily a bad one from an ideological perspective and doing so would certainly change how we use roads, including what modes we use but overall it simply isn’t practical. Roads are such a key part of our everyday life that changing our relationship with them – however flawed it currently is – would have radical and far reaching consequences for society, probably far more so than the privatising of many other government functions. As such I would suggest the likelihood of it happening is very very low. Far more likely and practical would be the introduction of proper road pricing.