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

This is the second post in a series on the Ministry of Transport’s working paper on New Zealand’s capital spending on roads, which was prepared as an input to the 2015/16 Government Policy Statement (GPS) on Land Transport Funding. It was released to Matt under the Official Information Act just before Christmas. Previous posts:

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

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

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

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

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

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

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

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

MoT BCR by funding priority chart 1

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

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

MoT BCR by funding priority chart 2

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

MoT state highway benefits

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

MoT BCR by activity class summary

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

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

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

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

MoT de-prioritised projects 1

MoT de-prioritised projects 2

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

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

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

MoT’s review of capital spending on roads, part 2

This is the second post in a series on the Ministry of Transport’s working paper on New Zealand’s capital spending on roads, which was prepared as an input to the 2015/16 Government Policy Statement (GPS) on Land Transport Funding. It was released to Matt under the Official Information Act just before Christmas. Previous posts:

As I said last week, MoT’s paper suggests that there are big issues with the land transport budget. Current road spending does not seem to represent good value for money. To their credit, MoT appear to be acknowledging this. However, it doesn’t seem to have percolated up into the investment decisions being made by the Government.

This week, I want to look at what NZTA’s money (the National Land Transport Fund, or NLTF) is being spent on, and how economically efficient that expenditure has been.

Section 4 of the MoT report contains a lot of useful data on past and future spending on roads. Here’s what’s happened to the roads budget over the last 15 years, and what’s expected to happen over the next decade:

MoT spending on new roads 1997-2022 chart

Basically, about a decade ago we started spending a lot more on new or improved roads. A lion’s share of new spending went to state highways, in spite of the fact that local roads carry more traffic. As we have previously discussed at length, this spend-up coincided with a flattening of growth in vehicle kilometres travelled. (It also coincided with an acceleration in price inflation for civil construction.)

In other words, we’ve spent a decade spending increasing amounts of money on roads for which demand is not increasing. And the last three Government Policy Statements plan for state highway spending to increase further.

In order to pay for state highway spending, it’s been necessary to divert money from other activities – local roads, maintenance, PT, and walking and cycling have all taken a hit. The Government has also raised petrol taxes several times. The MoT report offers some analysis of how spending priorities changed between the 2008 GPS and the 2012 GPS.

The following chart compares projected spending ranges for new and improved state highways (the darker uppermost bands) and new and improved local roads (the thinner, lower bands). It shows that funding for state highways – the Roads of National Significance – was raised by around half a billion dollars a year, while local road funding was cut back.

MoT GPS 08 12 road spending comparison

One would hope that the Government’s decision to allocate vast amounts of funds to state highway projects was based on a sound economic rationale. Unfortunately, there is no hard evidence of this in the MoT paper. Section 5 of the MoT paper analyses benefit-cost ratios (BCRs) for road spending. It notes some caveats with the data – BCRs for some projects had to be inferred from “efficiency scores” – but there is enough data to paint a picture.

Here is MoT’s picture. It is not a pretty one:

MoT state highway BCRs 2005-2012

Essentially, MoT finds that average benefit cost ratios for state highway projects declined significantly in 2008/09 and have stayed low ever since. An eyeballing of the graph suggests that BCRs prior to 2008 averaged a bit over 3.5 – meaning that state highway projects were expected to return $3.5 in social benefits for every dollar invested. Since 2008, they have averaged a bit over 2 – meaning that state highway projects now only return $2 in social benefits for every dollar invested.

MoT’s analysis of this graph is entirely blacked out in the released document. Nonetheless, the implications are simple: we have almost doubled our spending on state highways without achieving any more benefits from that spending. BCRs aren’t everything, but it’s really, really hard to understand why the Government would want to spend money so ineffectively.

The answer is that they feel that the Roads of National Significance offer a better “strategic fit” with their overall objectives for the land transport budget. I’m not necessarily opposed to this evaluation approach. In my experience, cost-benefit analysis invariably has some blind spots. Using qualitative “strategic fit” criteria can allow policymakers to take account of broader goals that aren’t well covered in NZTA’s Economic Evaluation Manual.

However, I don’t think that strategic fit should override all other analysis. If you think that a project is important for supporting a productive economy, that’s fair enough. But if an evaluation of the project’s impact on freight costs and agglomeration effects in urban areas results in a low BCR, you should question your prior assumptions about its economic benefits. It’s foolish to think that four-lane divided highways are magical devices for creating economic growth. Economics simply doesn’t work that way.

Next week: Do we have better options for spending the transport budget?

A good road project

My wife and I spent Christmas with some family out of Auckland. That saw us travelling and along the way we passed what I thought was an excellent roading project and the type of thing we should be doing a lot more of instead on spending so much money on motorway scale projects, many of which don’t stack up economically. The project is on SH2 and is half way between Waihi and Katikati and is known by the NZTA as the Ardern Cottage Curves Realignment. The curves being realigned are a series of tight bends that apparently have a poor safety record (and it’s easy to see why). The image below shows an aerial view of the curves which bulge out from generally sweeping nature of the roads that surround them. The realignment cuts that bulge out.

Ardern Cottage Curves Aerial

Here is what the curves look like from the road. As you can see there are quite narrow lanes with no shoulder (so quite dangerous for any cyclists) and there is poor visibility around the curve. Before this project there a permanently installed electronic sign not far behind here reminding people to slow down for the curves. It’s not hard to see why this was a safety issue and on average just over 8,100 vehicles travel this road daily.

Ardern Cottage Curves Streetview

Here’s what the NZTA say about the project which is costing $5.1 million

Project purpose

The key purpose of this project is to improve safety along this corridor, however travel time and efficiency will also improve as a result of these works.

Benefits

The Arden Cottage Curves Realignment project will help to improve safety along a high accident area and efficiency through this corridor of State Highway 2.

Features

Features of the project include realigning a series of curves on State Highway 2.

Other facts

The project is to be split into 2 stages:

  • Stage 1 works will focus on drainage and moving services in the disused railway corridor, lying adjacent to the existing State Highway. This work will be carried out March 2013 and May 2013.
  • Stage 2 works will start after the 2013 winter season, and will tie the newly built road into the existing highway. These works are expected to be completed in May 2014.

When we travelled through the realignment on Christmas Eve it was already open to traffic and despite not being due for full completion till May and there being a temporary speed limit of 70km/h the benefits of the project were immediately clear. Not only did the realignment shave off that bulge but it was easy to see it would be much safer for all road users as a result of having a straighter road, better sight lines and wide shoulders. I also think it is a wise use bit of use for that old rail corridor – which even if we had the most rail fanatic government has almost a 0% chance of ever being needed again.

So as I said it is a good project from the NZTA and at $5 million is tiny compared to some of the spending going towards the Roads of National Significance. For the same price as Transmission Gully we could get about 200 projects like this all over the country. I wonder what that could do to our road toll?

Should State Highways Be Funded The Same Way As Local Roads?

My post yesterday it reminded me of a question that has rolled around in my head from time to time, should state highways be funded the same way as local roads. There is clearly some logic to the current set up with the NZTA being responsible for state highways which are considered the stragetic roads that connect the country together and councils are responsible for local roads which tends to be how we get around our towns and cities. This is paid for as follows:

  • The National Land Transport Fund (NLTF) is where the money goes that comes from fuel taxes, road user charges, vehicle licencing  and the money gained though the leasing or sale of surplus state highway property. This is administered by the NZTA.
  • The development and maintenance of State highways is the responsibility of the NZTA and paid for out of the NLTF
  • The development of local roads is the responsibility of the local council (or Auckland Transport in Aucklands case).  The NZTA provides funding assistance out of the NLTF to each project differently but the intention is that the national average is 50%.

Now my understanding of the reasoning on that last point is the thinking that local communities who will benefit the most from the improved local roads should pay for some of the costs of building them. It also acts as a way to ensure that local bodies who are calling for roading improvements are actually prepared to put some money where their mouth is and that would help to weed out some of the less viable projects.

The problem though is that in practice we use the roads as a single network and whether its a motorway or a state highway through a rural town, they are often used just as much, and if not more for local connections as they are for nationally strategic traffic. The fact that these roads are paid for in full by the NZTA gives incentives for local authorities to both funnel as much traffic as they off their networks and onto them while also leaving the NZTA more open to lobbying from local authorities to have state highway development happen in their region. This is particularly evident today with the Roads of National Significance where regions that are getting RoNS developed or who think they will benefit directly from them are fighting to keep them on the books, even if they have appallingly bad economics. At the same time other regions are now starting to push for roads or state highways in their areas to become RoNS so they can get them ‘upgraded for free’. The RoNS have in effect seen the funding process politicised to a much larger degree than it was before.

NZ State Highways

The NZ State Highway Network

So back to the original question, should state highways be funded the same way as local roads. I think there is definitely some merit in the idea as just like local road investment, it would mean state highways have a direct contribution from those that benefit the most from it while like local road projects, would help to ensure that we are getting the best projects built. Local authorities would be able to weigh up if they are better off to spend say $1b on a motorway project or instead put that money into something else like improved local roads or even public transport which may provide a better overall outcome. As an example, how keen would Waikato or Wellington be to pay for half of the RoNS they are getting. Would them paying a proportion change how the projects are perceived by residents? Would Northland be so keen on calling for Puhoi to Wellsford to be built or would they instead push for something a bit more like operation lifesaver and use some of the other money to do similar upgrades to other parts of the route?

Of course I can hear some people already wondering how much rates would have to increase for local authorities to cover their contributions but the reality is they wouldn’t have to. One option could be funding assistance ration to increase so that the rates dollars could be used on a wider variety of projects e.g. instead of being 50% it could increase to 75% (or whatever works out as a netural figure). Another option could be for all local authorities to get a share of half the amount being spent on state highways as a bulk funding amount which they can put towards any project they choose but leave the NZTA contribution at 50%.

Interestingly the approach of having local authorities pay for a share of state highways is actually how things used to be done from the 1920’s until the 1950’s when funding was centralised to a much greater level and the country went on a road building spree. I’m sure such an idea would have some negatives over the current situation but it is one I think we should perhaps consider as it would give locals a much bigger say in infrastructure that affects them. It would of course represent such a huge giving up on centralised power by any government so unfortunately I just can’t see it happening.