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

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

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

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

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

My main findings were as follows:

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

And now for some pictures.

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

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

Auckland map 1 Rent share Auckland map 2 HT share

(Click to enlarge)

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

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

Auckland H_T distance chart

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

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

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

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

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

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

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

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

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

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

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

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

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

Transport user benefits

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

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

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

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

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

Panmure Station 1

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

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

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

Health and environmental externalities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Walking catchments to stations. (Source: Human Transit)

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

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

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

How should we value the future?

Transport networks and urban planning can have extremely long-lived effects on society, the economy, and the environment. The government’s decision to invest in an electrified commuter rail network for Wellington in the 1930s led to an early form of transit-oriented development in the region. Wellington’s post-war urban growth has been concentrated in areas served by rail lines – providing the region with long-lasting benefits.

800px-WellingtonRailMap

Source: Wikipedia

In Auckland, of course, things were very different. After the role that rail played in Auckland’s early development, successive governments decided to:

And, of course, these years of refusal were coupled with a decision in the 1950s to invest heavily in a motorway network for the region. The Master Transportation Plan of the era contains some truly awe-inspiring concept designs, including an elevated Quay St motorway that would have doomed any chance of Auckland’s recent waterfront revival:

1950s Transportation Master Plan Quay St

Leaving aside a few extremely white elephants, many elements of the plan are quite familiar to modern Aucklanders. The Southern and Northwestern Motorways and the Harbour Bridge were built, kicking off development booms in Manukau, the North Shore, and West Auckland. In a 2010 Policy Quarterly article, Andrew Coleman assessed the effects of motorway development in Auckland and the US, concluding that:

transport infrastructure choices can have long-term and potentially irreversible effects on city form. A city that chooses to invest in roads rather than public transport infrastructure to improve its transport system is likely to reduce the efficiency of any subsequent public transport investments, by causing population and employment in the city to disperse widely over space. When making decisions to build roads, therefore, the city planners need to take into account the way roads affect the operation of subsequent transport infrastructure investment choices.

So it’s worth asking: Are we valuing future outcomes in the right way? In economese, this means asking about our “rate of time preference”, or the degree to which we value present-day outcomes over future outcomes.

A 2011 NZIER paper by Chris Parker provides a fairly accessible introduction to this topic. (Transportblog reviewed the paper when it originally came out.) Parker highlights how much of an effect different discount rates can have on our decisions about the future. As Figure 1 below shows, an 8% discount rate – recommended by the NZ Treasury – means that we place no weight on outcomes that occur 40 years in the future. (To put that in perspective, the average New Zealander lives twice as long as that. I certainly expect to be alive in 40 years!) A 3% discount rate, by comparison, means that we place a much higher value on outcomes that far in the future.

NZIER discount rate comparison

Last July, NZTA decided to lower its discount rate from 8% to 6%. This change means that transport evaluations now place a slightly greater weight on future outcomes than before. However, as NZTA’s documentation showed, we still discount the future to a much greater extent than countries like Germany (3% discount rate) and the UK (1% to 3.5%).

NZTA’s new discount rate might still be too high to properly account for the long-lived effect of infrastructure development on urban form. As we’ve seen, Auckland and Wellington are still benefitting from, or coping with, with the effects of investment decisions made 60 to 80 years in the past. Under current evaluation procedures, we wouldn’t have considered such long-lasting effects.

A new research paper by economists at the University of Chicago and New York University suggests that people place significant value on outcomes that occur dozens or even hundreds of years hence. The authors measure long-term discount rates using an innovative method that relies upon observing differences between the prices for freehold and leasehold houses in the UK and Singapore:

In Giglio, Maggiori and Stroebel (2014), we provide direct estimates of households’ discount rates for payments very far in the future, by studying the valuation of very long (but finite) assets. We exploit a unique feature of residential housing markets in the UK and Singapore, where property ownership takes the form of either very long-term leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities ranging from 99 to 999 years, while freeholds are perpetual ownership contracts. The price discount for very long-term leaseholds relative to prices for otherwise similar properties that are traded as freeholds is informative about the implied discount rates of agents trading these housing assets. This allows us to gather information on discount rates much beyond the usual horizon of 20-30 years spanned by bond markets.

This analysis suggests that long-run discount rates are significantly lower than those we use for project evaluation – in the range of 2.6%. In other words, people making significant financial decisions today place some value on outcomes for future generations that they will never meet:

We use these estimated price discounts to back out the implied discount rate that households use to value cash flows to housing that arise more than 100 years from now. We find the discount rate for very long-run housing cash flows to be about 2.6% per year. Interestingly, we find similar implied discount rates in both the UK and in Singapore – two countries with very different institutional settings.

The authors suggest that their findings have implications for intergenerational fiscal policy and climate change policy. They’re also likely to have implications for the way we evaluate transport projects. Today’s planners should take care to preserve and improve transport options for future generations, rather than “locking in” a particular urban form.

Finally, with that in mind, it’s worth recalling the findings of the 2012 City Centre Future Access Study, which compared options for improving transport capacity to Auckland’s growing city centre. In Section 7 of the Technical Report, the authors found that when a longer evaluation period (60 years vs. 30 years) and a lower discount rate (5.7% vs. 8%) were used, the benefit-to-cost ratio of the City Rail Link almost doubled. In other words, the CRL looks even more valuable for Auckland if we take a longer-term view.

If our great-grandparents had decided to invest in Auckland’s rail system in the 1930s, we’d still be thanking them for it. Because they didn’t, though, we’re just getting around to electrifying Auckland’s rail network and still debating whether to build the CRL to unlock greater frequencies across the entire network. It is essential that we take a longer-term view on transport investments than we have previously done.

So, what’s your discount rate?

City centre parking rates: economic literacy versus special pleading

This weekend the NZ Herald’s motoring correspondent Matt Greenop published an article denouncing the “insult” of parking fees. Now, at Transportblog we’re always up for a good debate over the merits of different parking policies, but this doesn’t add much to the conversation:

Parking used to be a doddle. Now it’s just another cost of car ownership that makes us feel we’ve committed a heinous crime against humanity by daring to buy and use our own vehicle.

Every little bit that gets added on to the cost of driving a car in the city is an insult — and the next insult we’re facing is another hike in parking fees.

From an economic perspective, this is a totally absurd statement. It completely ignores the supply and demand dynamics at play in urban areas. Parking takes up space, and as anyone who’s been downtown in the last decade has noticed, there’s a limited amount of space in the city centre. Demand for commercial and residential space in the city centre is increasing. The residential population tripled from 10,200 to 31,300 between the 2001 and 2013 Censuses; over the same time period, employment in the city centre rose by a quarter, from 81,000 to 100,100.

Using prices to manage demand for scarce resources is an efficient and sensible response. This is basic Econ 101 material, and we accept it in most areas of life. City centre office space is priced, and priced highly, due to the fact that a lot of people want to locate there.

It would be ridiculous if companies leasing space in the city centre to complain that a rent increase was an “insult”. And if they insisted on paying no rent at all, we’d recognise it as special pleading for a market-distorting subsidy.

It’s the exact same thing with parking. Essentially, the Herald’s using emotive language to demand a costly, distortionary subsidy for a small number of people.

If the Herald wants to avoid printing such embarrassing nonsense in the future, I strongly recommend that they run their articles by an economist first.

Guide to economic evaluation of transport projects: Part 1 – Principles of cost-benefit analysis

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

The good news is that there is a manual that explains it – New Zealand Transport Agency’s Economic Evaluation Manual (EEM). The bad news is that it’s tediously long and not written for a general audience. This series of posts aims to provide a guide for the perplexed. In it I will cover issues such as the principles of cost benefit analysis, the identification of economic benefits arising from transport projects, forecasting of transport outcomes, and accounting for the land-use impacts of transport projects.

Part one of this series provides a high-level overview of the principles of cost-benefit analysis.

Cost-benefit analysis, or CBA, is the general approach used to evaluate transport projects and many other public investments. It is commonly used by both local and central government for project evaluation, although it is not strictly required in all situations. (The Treasury’s Better Business Case guidelines, which apply to most public investment, provide an indication of which areas are covered by the standard approach.) The output from a CBA is a benefit-cost ratio that compares a project’s net benefits to society with its net costs to society and allows a funding agency to compare different projects in a consistent way.

CBA, which estimates the economic efficiency of a project, is not necessarily the only input to project evaluation. In recent years, NZTA has introduced several additional criteria to its assessment framework – “strategic fit” and “effectiveness”. In practice, these are more nebulous than CBA, and as a result I may leave them for a future post.

NZTA and other agencies such as Auckland Transport use CBA for two main purposes:

  • First, in order to choose a preferred solution to a particular transport problem. For example, AT’s 2012 City Centre Future Access Study (CCFAS) used CBA to compare six different options for adding capacity to city centre-based transport networks and concluded that the CRL was the best-performing option.
  • Second, in order to prioritise its investment portfolio. NZTA generally uses project BCRs to choose how to allocate funds to different projects within its funding categories. For example, when choosing how to allocate its walking and cycling budget, which totalled $53 million from 2012-2015, it would generally select the projects with the highest BCRs. Same deal for the budget for new and improved local road infrastructure – although these projects often have much lower BCRs than the walking and cycling ones, since NZTA is obliged to spend a greater share of its funding on them ($475 million over 2012-2015), regardless of the relative BCRs.

Cost-benefit analyses are generally conducted using a similar set of underlying principles. CBA seeks to:

  • Quantify all costs and benefits to society regardless of their incidence, or who benefits or pays
  • Identify the net benefits and costs of a project relative to a “do-minimum”, or what would have happened anyway
  • Consider benefits and costs over a longer forecast period, with future costs and benefits discounted to present values.

Worked example – a new bus line for Ruritania

In order to explain how CBA can be applied to transport evaluation, I’m going to present a simple worked example. In this example, a fictional transport agency in Ruritania, a small central European country, has noticed that transport demands are increasing in the capital city, Streslau. In particular, car congestion is worsening on the arterial road between two outlying neighbourhoods that are about 5 km apart from each other. We’ll call these neighbourhoods A and B.

Like many other European cities, Streslau has a mix of transport networks. Several subway lines were constructed during the 1920s, but work stopped during the Great Depression and never resumed after World War II. The post-war Communist government scrapped the damaged tramlines and replaced them with a mix of trolleybuses and diesel buses that mostly provide radial service to the city centre. In the early 2000s, a light rail line was built to connect the newly expanded airport to the city centre.

Unfortunately, none of these directly serve trips between A and B, and Streslau’s transport planners would like to add a new public transport service to meet demand on this route. Prior to the global financial crisis, the Ruritanian government had been considering borrowing money for a light rail line, but European austerity policies scuppered that plan. Now the transport agency must focus on finding a cheaper option that still provides good service between A and B. They’re investigating different options for a new bus line.

FANSHAWE ST red and green

Perhaps they were inspired by AT’s quick action on Fanshawe St bus lanes?

CBA principle: Identify all costs and benefits to society

Cost-benefit analysis aims to quantify all costs and benefits to society, regardless of who bears them or benefits. All of the effects of a project should be considered. When considering the benefits of a transport project, it would be incorrect to account for the benefits that a project would have to one group of transport users without considering any disbenefits or negative effects on other users.

In our Ruritanian example, let’s say that the transport agency was considering converting two traffic lanes to bus lanes to enable it to run a fast service between A and B. This would have benefits for bus users: they would get a quicker trip. But it may also inconvenience the remaining drivers, who might find it harder to make turns or pass turning cars. It’s also possible that motorists might benefit from a quicker trip, thanks to reduced congestion. CBA should account for all of these effects.

Similarly, when calculating the cost of a project, it is important to add up all costs. In our Ruritanian example, adding a new bus route will require both capital expenditure (capex) and operating expenditure (opex) from the transport agency. Capex includes any spending on infrastructure, such as painted bus lanes, new bus shelters, reconstructed intersections, new vehicles, etc. Opex refers to the annual, ongoing spending required to keep the buses running – drivers’ wages and benefits, fuel, maintenance costs, etc. Any changes in the costs of owning and operating private vehicles are generally counted on the “benefits” side of the equation, rather than the cost side.

Streslau’s transport agency will be able to recover some of these costs from public transport fares. If it’s like New Zealand, fares might cover 50% of the operating costs. If it’s more like most European cities, fares might be lower and only cover 15-20% of operating costs. In any case, it’s not important here, as CBA doesn’t distinguish between public and private costs. It’s worth knowing, though, that the “C” reported in a BCR doesn’t always reflect the net cost to government.

CBA principle: Compare projects against a “do-minimum”

In transport, it is seldom possible to do nothing. Even if nothing else is changing with your transport system, it will still be necessary to spend a significant amount of money on maintaining and operating the system. Even if car congestion is an acceptable level and traffic volumes aren’t growing, you’ll have to spend money fixing potholes and resurfacing streets. Likewise, a PT system that’s standing still will still be paying drivers, buying replacement vehicles, and repainting bus shelters and stations.

Consequently, an important part of transport CBA is the identification of a realistic do-minimum, or the minimum amount that could be done to ensure that the existing system continues to operate. The do-minimum forms the baseline against which you evaluate all other options. In some cases, the do-minimum will include some costs that you are able to avoid by implementing another project.

To return to Streslau: let’s say that the city’s transport agency has found that if nothing else were done, it would need to add new turning lanes to three intersections on the road from A to B to avoid gridlock. The do-minimum should therefore include the cost of three intersection widenings. If adding a new bus route would avoid the need for this spending, it should be subtracted from the net cost of the bus route.

Likewise, transport CBA should consider the net benefits rather than the total benefits. For example, let’s say that the owners of a large pickle factory in neighbourhood B are planning on relocating the plant to a provincial town in two years’ time. This will reduce the number of people commuting by car along the road from A to B, whether or not a new bus route is introduced. This should be considered when evaluating the new bus route, to ensure that the project doesn’t take credit for some reductions in congestion that would have occurred anyway.

CBA principle: Consider costs and benefits over a longer time period

Transport infrastructure projects often have impacts over a long time period. For example, every day tens of thousands of people travel across the Auckland Harbour Bridge, which was opened in 1959 and expanded a decade later. Similarly, Wellingtonians make over ten million trips a year on the regional rail network, which was electrified in the 1930s. Transport projects often have significant up-front costs that must be compared against benefits that accrue over a longer period.

In order to do so, CBA typically forecasts future costs and benefits over a long time horizon and discounts them to present value (PV) for comparison. In order to discount future effects, it is common to use a discount rate that reflects trade-offs between costs/benefits experienced today and those experienced at a future date. For example, using a discount rate of 10% means that if you expect to earn $100 in a year’s time, it will have a PV of $90 (=$100*(1-0.1)^1).

Using a higher discount rate implies that you place a lower value on future outcomes relative to future outcomes, and vice versa. The choice of discount rates can have some interesting implications for decision-making, as previously discussed on this blog.

In New Zealand, BCRs must be calculated using standardised evaluation periods and discount rates to ensure that they can be compared. However, it’s important to know that different agencies have different rules:

  • NZTA, which funds road projects out of a dedicated fund, announced last year that it would use an evaluation period of 40 years and a discount rate of 6% to assess its projects.
  • The Treasury, which funds most other government investments, including rail infrastructure projects, continues to require an evaluation period of 30 years and a discount rate of 8%. In effect, the Treasury’s approach places less weight on long-term outcomes than NZTA’s approach.

Let’s conclude by considering how this may apply to our Ruritanian example. Let’s assume, for the moment, that Streslau’s transport planners have determined that the project will have the following net costs and benefits:

  • $15 million in net capex at the outset, for purchasing new buses, building bus shelters, painting bus lanes, and adding bus priority to some intersections
  • An additional $2 million in ongoing annual opex to run the buses
  • Net annual transport benefits relative to the do-minimum scenario in which road users cannot avoid congestion on the road that start at $6 million in the first year of operation and increase by 5% per annum as bus ridership increases.

These costs and benefits are summarised in the following graph:

Peter Ruritania CBA example

It is difficult to look at this graph and determine whether the long-term benefits – shown in the green line – outweigh the significant up-front costs and ongoing operating costs – shown in the blue and red bars. However, Streslau’s transport planners can use the principles described above to calculate the present value of future costs and benefits. The table below calculates the present value of costs and benefits over a 30-year time horizon, using three alternative discount rates.

As you can see, it looks like Streslau’s transport planners will be able to make the case that the new bus line will benefit the city.

Peter Ruritania CBA summary

Next time: Wait, what do you mean when you talk about transport benefits?

NZTA makes positive changes to economic assessment criteria

Many of the debates on this blog and within in the wider community about the merits of projects, or lack of them, end up coming down to down to questions of economics. But as Peter Nunns pointed out a few weeks ago in his excellent guest post, most people aren’t aware of the specific aspects that go into the economic assessment

Readers of this blog will be familiar with the notion of the benefit cost ratio (BCR), a figure that compares the forecasted benefits of a project with the financial cost of building it. It’s often used as a shorthand for the quality of a project: If the BCR is high (i.e. substantially above 1) it is seen as a good use of public money; if not, it can be criticised as a boondoggle.

Everyone plays this game. Opposition politicians often criticise motorway projects such as Puhoi-Wellsford and the Kapiti Expressway on the basis of BCRs that fall below 1, while the Minister of Transport has in the past expressed scepticism about the City Rail Link on the same grounds.

However, there is relatively little public discussion of the hows and whys of these seemingly consequential numbers. How, exactly, does one calculate a BCR?

The procedures for conducting an economic evaluation of a transport project are set out in excruciating detail in the Economic Evaluation Manual (EEM) published by the New Zealand Transport Agency. This manual defines the exact procedures that need to be followed when evaluating any transport project and specifies the values that should be used in the evaluation.

He then went on explain one of the biggest issues that exists within the EEM being the value of time figures used for travel time saving calculations and how it differed depending on the region, type of road or what mode you are using.

EEM chart 2

Well last year we learned that the NZTA were in the process of reviewing the EEM and now they have released what those changes will be. The good news is they are positive and appear to address the issues raised by Peter in his post as well as many other issues. The changes are:

  • A revised discount rate of 6%, along with an extended evaluation period of 40 years.
  • The addition of wider economic benefits relating to imperfect competition and increased labour supply.
  • Greater emphasis on a multi-modal approach to evaluation, including:
    • public transport evaluation periods made consistent with other modes, and
    • equal values of travel time across modes for monetising the total value of travel time benefits.
  • Discontinuing the use of default traffic growth rates. Evidence will be required to support any traffic growth assumptions.

As mentioned some of these are quite positive so let’s look at them a little closer.

Lower discount rate and longer evaluation period

These two changes primarily will benefit larger and longer term projects like the Roads of National Significance and the City Rail Link where the benefits accrue over a long period of time. This isn’t actually as low or as long as what was proposed in April last year (4% and 60 years) but is at least an improvement on what exists now (8% and 30 years). The effects of the lower discount rate and a longer time period are excellently shown in the graph below which compares the original business case of the CRL from 2011 using the NZ methodogy with that used in the UK which has a 3.5% discount rate and a 60 year evaluation period. The differences are staggering with in the UK model suggesting the total benefits would be 6 time higher than how we assessed them.

CRL with UK method

Interestingly in their FAQs about the changes the NZTA say that 6% is in line with other nations yet this chart from a few years ago shows that 6% is still at the upper end compared to many countries.

discount-international

The addition of wider economic benefits relating to imperfect competition and increased labour supply.

I’m not an expert so hopefully some of you economists can explain exactly the impact that this will have.

Greater emphasis on a multi-modal approach to evaluation:

Both of the changes suggested make absolute sense and should mean that public transport projects are assessed equally rather than PT having one hand tied behind its back. The issue of value of time was covered really well by Peter and I’m not going to try and rehash it.

Discontinuing the use of default traffic growth rates

For roading projects this is a significant change as it means business cases won’t be able to just assume traffic will always grow. Constant traffic growth was a feature seen in NZ and overseas but then over the last decade or so things have changed with fewer people driving and those that do driving less. It should hopefully mean that projects like the Additional Waitemata Harbour Crossing won’t be able to just predict growth even when the numbers already show that growth hasn’t been happening.

Ak Harbour Bridge Traffic volumes

Ak Harbour Bridge Traffic volumes

Along with the changes to the EEM, the NZTA will also be taking changing their strategic fit assessments to ensure that crash prediction is consistently taken into account.

While they came into effect on July 1, we are unlikely to see a lot of change as a result of them in the short term. The NZTA say that all proposals in the 2015-2018 National Land Transport Programme will be subject to these changes while existing projects and even new ones that enter the 2012-2015 NLTP may still use the older methodology depending on certain criteria.

All up these changes seem fairly positive so it’s pleasing to see the NZTA improving how things are done. The next stage in the EEM update process will look at the procedures within the assessment framework and importantly the particular values used in the calculations e.g. the actual value of time, vehicle operating costs and crash costs used in the assessments.

Further evidence the cost-benefit analysis is too narrow

A couple of weeks back the NZ Institute of Economic Research released a paper which looks into the traditional cost-benefit analysis used for appraising transport projects and asks the question of whether the current process fully recognises all the costs and benefits of those projects.

Existing transport cost-benefit analysis misses critical impacts “Standard cost-benefit techniques significantly under-estimate the costs and benefits from transformational infrastructure projects like motorways.” said NZIER.

“Transformational projects change economic activity, regional population, and land use – changes missed by standard cost-benefit techniques.” “For instance, a standard cost-benefit appraisal of Transmission Gully ignores whether Transmission Gully increases the number of people living along the Kapiti Coast and the costs and benefits associated with this.”

Understanding how major transport strategies affect the way we live and work is crucial for allocating limited public funding. Getting it wrong wastes money and can harm the long-term prospects of cities. The problem of accounting for changes in land use occurs worldwide with transport appraisal. It happens because people generally don’t know how to value these sorts of impacts.

In short, existing appraisals don’t assess the main long-run impacts of major projects. NZIER has researched ways to broaden the scope of appraisals.

It’s important to note that the paper highlights the breadth of both costs and benefits is likely to have been under-estimated previously. In other words, doing appraisals in a more robust manner isn’t necessarily going to boost the argument for all transport projects, but instead likely shift some projects upwards and some downwards on a priority list.

The relationship between travel time savings and land-use impacts has been discussed previously on this blog, particularly in relation to the work done by David Metz a UK transport expert. The NZIER study once again highlights this really critical point:nzier-metzIn many respects this is just highlighting the Marchetti Constant – that people will on average spend a certain amount of their day travelling and the faster you make it to travel from point A to point B, the longer distance people will travel (rather than them spending less time travelling).

The paper itself is full of lots of complex equations which probably only really make sense to economists, but it comes to a particularly interesting conclusion:nzier-conclusionsMy translation of this is along the lines that projects which induce a land-use change which spreads development across a wider area and encourages longer trips may well create problems which undermine the benefits supposedly generated by the project. Basically that if a motorway encourages people to travel longer distances than they did before the motorway existed, then in the longer run (something current appraisal methods ignore) there may be little justification for said motorway project. This is particularly true if (as is the case) roads are not priced according to their use.

NZTA are currently reviewing the Economic Evaluation Manual – the guide for assessing transport projects. Let’s hope that some of the thinking in this paper gets incorporated into that review.

Future Competitiveness of Cities

You would expect a mega corporation with the name of Citi to be interested in how cities function – and it appears they are. The banking giant has an initiative called Citi for Cities which while obviously channel for their business, also provides some interesting information on cities. They describe it as.

Cities generate prosperity and advance society. They are where citizens strive, where businesses drive growth, and where governments create the conditions for success. As over 100 million people move to urban areas each year, our cities are in the midst of an unprecedented transformation. Citi for Cities applies the full capabilities and global expertise of Citi to meet urban challenges in more than 1,000 cities across the globe, every day.

One thing they have done as part of this initiative is to commission The Economist’s Intelligence Unit (EIU) to produce a benchmarking study looking at the future competitiveness of cities.  They have then compared the results for 2025 to see how they are expected to change from 2012. All up they compared 120 different cities across the world. Here is the list of cities they assessed

Citi for Cities - Hot Spot 2025 Cities

Competitiveness is obviously quite a complex measure so this is the methodology they used.

Competitiveness is a holistic concept. While economic size and growth matter, several other factors determine a city’s competitiveness, including its business and regulatory environment, its institutions, the quality of human capital, cultural aspects and the quality of environmental governance. These factors not only help a city to sustain high economic growth, but also secure its future competitiveness.

Against this backdrop, the Economist Intelligence Unit defines a city’s competitiveness as its ability to attract capital, businesses, talent and visitors. The 2025 City Competitiveness Index benchmarks the competitiveness of 120 cities across the world at two distinct points in time: today and in 2025. We do so by examining 32 indicators for each city. Indicators are grouped into eight distinct, thematic categories and assigned weights: economic strength 30%, physical capital and financial maturity 10% each, institutional character and human capital 15% each, global appeal 10%, social and cultural character 5%, and environment and natural hazards 5%.

The Index includes a total of 27 qualitative and five quantitative indicators.

A city’s overall ranking in the benchmark Index is a weighted score of the individual categories. For a full breakdown of the categories, individual indicators and sub-indicators, weightings and data sources, see the Appendix.

While the report doesn’t give detailed breakdowns of how cities perform in each of the categories, it does say that Auckland is in the top 20 for Institutional Character which looks at Electoral process and pluralism, Local government fiscal autonomy, Taxation, Rule of law and Government effectiveness.

The report also noted that there was no major correlation between the size or density of a city to its competitiveness rating however they did find a strong correlation to the quality of the cities physical capital.

The quality of a city’s physical capital is highly correlated with its overall competitiveness. Statistically, the correlation between a city’s competitiveness and the quality of its physical capital—defined in the Index as the quality of physical infrastructure, public transport and telecommunications infrastructure—is the strongest among the eight sub-categories that make up the Index. Two Chinese cities, Shanghai and Beijing, ascend to the top 20 in terms of their physical capital in 2025 and are among a group that is otherwise dominated by a mix of rich, well established global cities. Eleven of them are also among the 20 most competitive overall.

What’s interesting is how strong the mention of public transport is, the quality of the road network is one of the sub categories within the physical infrastructure group. The rankings come from the EIUs Global Liveability Index and we know from that the one thing that really lets us down is our PT infrastructure. Anyway enough about the methodology, on to the rankings – here are the top 10

Citi for Cities - Hot Spot 2025 Top 10

While Auckland is a bit further down the list ranking 42nd overall. While our score does improve slightly, it isn’t enough and sees us slip 11 places from 2012.

Citi for Cities - Hot Spot 2025 Auckland

As mentioned earlier, there is a strong correlation between the quality of physical infrastructure and competitiveness. We also know that one of the biggest areas that lets us down is the quality of our PT yet despite that, current plans still see 60-70% of all new funding going towards more roads. Perhaps it’s time to flip that funding around and focus on fixing one of the key areas that is letting us down.

While also looking around the Citi for Cities website, I came across this section which looked at different parts of the urban ecosystem and naturally I went to look at the transport section which contains:

To be prosperous, sustainable, and globally competitive, cities must increase their transport capacity, upgrade their transport technology, and make critical infrastructure investments.

The reason I found this interesting is that the focus is not on improving the speed of a single occupant vehicle but on improving transport capacity. I suspect that if we were to assess the various proposed transport project based on how much capacity they add to the overall transport system we might get some very different results in terms of project priorities.

Lastly a little something on one of the costs of parking that doesn’t often get thought about.

Citi for Cities - Cost of Parking

An ode to demand-based transport pricing

As you read this I’ll probably be sitting on a flight from Brisbane to Auckland that cost me $750. Sounds like a lot of money, and it is, but I’m happy nonetheless.

Why? Well, at late notice I had the opportunity of working for 2 months in Brisbane. This presented something of a conundrum, because I wanted to be home in NZ to spend the holidays with my Mum and a whole bunch of my favourite people. I therefore had to weigh up the price of the ticket against the benefits of what I could achieve while here (both in terms of financial and professional returns).

Obviously plane tickets around Christmas are expensive because many other want to travel at the same time, which signals to the airlines that they should put their prices up. This ensures 1) the airlines make more money and 2) there are seats available for people who really need them, like me. So despite the high price I’m more thankful I had the opportunity to both get to Brisbane and get back to NZ for holidays.

This got me wondering about what would happen if airfares were not priced this way; that is if the price of the ticket was set at the average price needed for the airline to do business. In this situation one would expect many planes to fly empty during off-peak times and sell-out over Christmas. There’d usually be either too many or too few seats and, in the case of the latter, you simply would not be able to get where you want to.

In this situation, I would have been faced with an even harder decision: Do I take the job in Brisbane and risk missing Christmas in NZ, or stay home but miss out on the work? Thankfully that’s not a choice I had to make because airlines price their seats in response to demand, or more specifically what economists refer to as “willingness-to-pay”. Willingness-to-pay describes what you are prepared to pay for goods and services.

From a layman’s perspective it means making economic hay while the sun shines. At this point people frequently assume that someone with high willingness-to-pay must be rich and vice versa. Well no, not exactly. In fact, detailed empirical studies of my purchasing behaviour over 31 years proves that willingness-to-pay has less to do with income than it has to do with my own personal preferences.

For example, on the same day as I booked my flight home from Brisbane I also booked a $150 return flight from Auckland to Christchurch. In this instance if the ticket had been more than, say, $300 I probably would not have traveled at all. The difference in what I was willing-to-pay for these tickets reflects that when travelling for work I’m prepared to pay a lot, whereas I’m more frugal when travelling for pleasure.

That frugality does not mean that I never travel at busy times, but it does mean that when I do I’m more flexible about when/where I travel (e.g. later at night). It’s ultimately got very little to do with how much money I have or don’t have. So it seems intuitive to me that willingness-to-pay to travel varies considerably for factors that are not related to our income, but instead depend on personal preferences.

Moreover, the fact that airlines use a demand-based pricing system tends to mean that the available capacity is allocated to the people who really want them. Of course that’s not why airlines price this way; they do it to make money. But in a competitive environment (such as trans-Tasman air travel) the ability of airlines to “price gouge” is of course limited by how other companies respond.

That’s why demand-based pricing makes so much sense. But despite it’s enormous advantages, we do not price parts of our transport system in response to demand. From what I can tell the debate about demand-based transport pricing often gets distracted by the following issues:

  1. “Alternatives” - i.e. we have to invest in public transport before we can price road capacity. In response I point out that even if we had no other transport options would it not still be in our interest to implement a demand-based pricing system to ensure road space was allocated to those who needed it most? Also, cities that have implemented demand-based pricing schemes, such as Stockholm, have not observed major increases in PT patronage, at least compared to the reduction in vehicle trips.
  2. “Social equity” - i.e. low-income people will be priced off the road. But low-income households a) tend to drive less, especially at peak times in metropolitan areas. So why not implement an efficient pricing system and then compensate those (few households) that are adversely affected? That way we provide the right signals to everyone, while supporting those affected who are unable to change (although that support should be tagged to people adversely affect at the time of implementation).
  3. “The devil’s in the details” – i.e. we need to flesh out the details before we sign up to demand-based transport pricing. I understand the sentiment but think we need to split the “strategic” and “operational” factors. Can we not as a society decide to support demand-based transport  pricing “in principle” and then undertake research to flesh out the details? And then put the result to a public referendum? Indeed, if way back in 2005 if Auckland had not made a strategic commitment (through the RLTS) to support public transport, then we probably would not have seen the gains we have seen – simply because the operational details had not all been worked through at the time.

The first objection is the most common and deserves more attention than I can give it here because my flight is now boarding.

But very quickly, I will say that the disappearance of “traffic” in the presence of demand-based pricing has two interesting implications. First that there are many people on the roads at peak times that are not  willing-to-pay very much, i.e. they’re just there because the price is low. Second, people have many more options open to them than public transport, i.e. PT is not an all-encompassing transport panacea.

And with that said this economic scrooge would like to wish you all a very merry and safe summer holiday.

Urban Transport Economics

Recently Auckland Transport and Ernst and Young hosted a seminar on the economics of urban transport. Sadly we didn’t get an invite but at least AT have videoed the presentations and put them up online.

First we have Paul Buchanan who is an international transport economist. The presentation is here.

There were a couple of things I found really interesting:

  • His points on the use of travel time savings to justify projects as well as the failure to take into account land use changes as a result of the investment. Travel time savings are something that makes up the bulk of the benefits in projects like the RoNS and it suggests we need to radically change how we view our economic analysis.
  • That we have to think stronger about how the impacts of safety as measures put in place in the name of safety often can have unforeseen negative impacts.
  • The importance and impact that CBDs have on the economy.
  • The importance of not only having a good natural environment but a good urban one to make it attractive to potential employees. This is something we are just starting to get with the improvements that have been happening in the CBD like the shared spaces.
  • The development impacts that cars, buses and trains have on development patterns. In particular the upward spiral of development and demand that rail can generate that simply isn’t possible with cars.
  • We have to be careful not to put too many buses into our city centre so that we don’t choke it and make it an unattractive place.

Next we have local economist John Williamson who gives a bit more detail on the things in Auckland and how they compare to the rest of NZ. You the presentation is here.

And last we have Joanne Ogg of Ernst and Young who talked about the move to their new offices right above the eastern entrance to Britomart. What I found interesting was once again more evidence of a generational shift that is occurring where young people are increasingly wanting different transport options and how rail in particular is key to that. My wife would fall into that category and chose the area we did because of the easy access to the train station simply because we want transport options available to us.

What I think these talks highlight is how important it is that we focus on the city centre if we are really keen to get good long term economic growth. Central to that is the need to be able to move more people into and out of the area at key times while at the same time making our street level environments much nicer places to be which will mean reducing road space. The only way we can really do that is through projects like the CRL. I wonder if any of those present were from the NZTA, MoT or Treasury because it seems like they could sure do with learning a bit more about this stuff.