The inflationary impact of road spend-ups

It’s time for a quick round of everyone’s favourite game, Ask An Economist. Today’s question is: What happens when the government decides to spend up large in a growing economy?

If you guessed that the answer is that it will drive up inflation and crowd out private sector spending, congratulations! You win a hug from the invisible hand. You’ve obviously either paid attention to the lessons of history or the words of latter-day popularisers of economic theory such as Bill English, who recently said that:

It was also important for the Government to run a counter-cyclical fiscal policy which, right now, meant running surpluses, paying down debt, and limiting future initiatives in spending and tax cuts to what would not push interest rates higher than they need be.

However, the government is acting as though the normal rules of prudent fiscal management don’t apply to the road budget. Instead of taking a conservative approach to transport spending, and focusing on the projects that offer the best long-term value at a relatively low cost, they’re pushing ahead with plans to build a number of expensive road projects. For example, the 2014 Budget announced another $800m in motorway projects in Auckland, paid for in part by borrowing, along with $212m in regional road projects paid for out asset sale proceeds.

As an economist, I’m nervous that the motorway spend-up will have perverse economic effects, driving up prices and crowding out other activity. When I went to look at the data, I found reasons to worry.

First, I looked at the data on New Zealand’s spending on roads (from OECD.Stat). The following graph shows investment in new or improved roads as a share of GDP. Essentially, New Zealand spent a fairly consistent amount on roads – and much less on public transport! – in the 1990s. In 2004, road spending started to increase rapidly, rising from about 0.3% of GDP to 0.7%. Unfortunately, the OECD’s data doesn’t cover the last few years, but NZTA’s data suggest that road infrastructure spending has risen further.

NZ road spending, 1995-2011

So the government has boosted spending on roads over the last decade. Has this had any impacts on inflation?

I used Statistics NZ data on inflation to examine the effects. The following graph compares the Capital Goods Price Index for civil construction, a measure of construction cost inflation, with the Consumer Price Index, which measures inflation in the general economy. (NZTA uses a slightly different composite measure of road construction prices, but I’ve chosen to look at civil construction prices as they provide a better indication of potential crowding-out effects on private construction.)

As you can see, the CGPI for civil construction tracked closely with CPI from 1995 to 2003, when road spending made up a relatively constant share of GDP. Between 2004, when the road spend-up started, and the Global Financial Crisis in 2008, civil construction prices rose much more rapidly than the CPI. Construction price inflation briefly cooled off in the aftermath of the GFC, due to falling private-sector demand for construction. But over the past two years it has again started rising faster than CPI, as a result of the economic recovery and spending on major road projects such as Waterview.

NZ civil construction inflation, 1995-2014

In short, spending an increasing amount of money building roads has coincided with a big increase in the cost to build roads. This is exactly what most economists, along with the current Finance Minister, would have predicted to happen.

Moreover, this is likely to have a significant negative effect on private construction. If you want to build an apartment building or a warehouse, you’ll have to compete with NZTA for bulldozers, cranes, and construction labour. Expect to pay higher prices as a result. If civil construction prices had continued to rise in line with CPI over the last decade, rather than being bid up by road spending, big construction projects would be almost 20% cheaper than they are now.

To be fair, other factors may have also played a role, such as the run-up in house prices in the 2000s and increased oil prices. But as Bill English says, government spending shouldn’t exacerbate the inflationary pressures that exist in a growing economy.

This is a tricky dilemma for any government. On the one hand, we do need to invest in a transport network that can accommodate future growth in Auckland. On the other hand, it would be better if the government’s spending didn’t create perverse outcomes for the private sector. If it wants to steer clear of the Scylla of underinvestment and the Charybdis of inflation, it would make sense to look at cheaper alternatives – e.g. the Congestion-Free Network.

CFN_4_SMALL

Guide to economic evaluation part 3: What is agglomeration?

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

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

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

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

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

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

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

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

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

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

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

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

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

A

Firms are willing to pay for proximity.

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

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

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

Is this what agglomeration looks like? (Source)

Is this what agglomeration looks like? (Source)

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

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

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

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

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

Next time: The dark art of demand forecasting.

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