Construction on Wellington’s controversial Transmission Gully road link will begin in the second half of next year – and open to traffic in 2020.
Prime Minister John Key confirmed the move at a keynote speech to Wellington’s Chamber of Commerce this afternoon.
It follows contentious comments he made earlier this year, claiming the city is “dying”.
Key confirmed work on the $2.5 billion “northern corridor” – from Levin to the city’s airport – will begin next year.
The preferred bidder would be announced early next year, probably February, Key said.
He emphasised the Capital’s importance as a transport hub.
“The recent earthquakes have boosted the already-strong case to upgrade routes into and out of the region so it can better cope with such events,” he added.
The upgrade will shave 40 minutes off the morning peak travel time from Levin to the Capital, he said. It will also cut road fatalities from 140 to 100 within five years of opening.
And he claims it will create “thousands of new construction jobs”.
However, the project has encountered opposition from locals.
The route also lies on a fault line.
Others say the money should be spent on upgrading a rail link.
A public-private partnership will maintain and operate the link for up to 25 years.
There are a lot of issues with Transmission Gully that I will try to go into in greater detail in a future post however the main problems are that:
it performs poorly economically -primarily due to its massive cost at about $1 billion.
it isn’t all that clear it would perform any better in an earthquake than the existing coastal road
it will be built as a PPP which will save us the upfront cost but will lock us in to paying huge annual fees over a 25 year period that will see us paying about 3 times what it cost to build. The NZTA have even removed the risk for the winning companies as they will have to pay for the road even if no one uses.
Due to some steep elevation changes it is unclear that trucks will even bother using the route, especially if it is tolled
The map below shows where the road is going
The image below shows the change in elevation over the route.
While the videos below give an idea of what it will look like. You can see there are going to be some absolutely massive cuts into the sides of hills along with some massive embankments just to build the route.
Whether or not transport public-private partnerships (PPPs) are a good idea has once again reared its head in recent times – due to discussion about the Transmission Gully project near Wellington. The Transmission Gully project (which is a decidedly dodgy project regardless of how it’s funded) will cost around $1 billion to build, but because the construction will be done through a PPP the amount of money that will eventually be paid by NZTA is more like $3 billion.
This is what the Green Party noted, after a Select Committee meeting where the figures were discussed:
NZTA head Geoff Dangerfield conceded at the Transport and Industrial Relation Select Committee that it would cost the Government $1 billion to build the Transmission Gully motorway, but that service payments under the preferred PPP approach will be triple that over a twenty five year timeframe.
“The Government is locking tax payers into long-term payments for an expensive and unnecessary motorway that will be very profitable for the private consortium building it,” said Green Party transport spokesperson Julie Anne Genter.
“Public-Private Partnerships are just an expensive form of borrowing, and borrowing to build an uneconomic highway is an irresponsible use of taxpayer money.
“The benefit under a PPP contract is that, in so far as possible, risk is assessed up front and allocated to the party that is in the best position to manage the risk. When risk is not assessed correctly the party making a mistake is the party that pays for it.
“This is exactly what we have seen in Australia, where several PPPs have underestimated the risk that traffic demand will not be as good as expected. A common misconception is that these PPPs have failed. In fact the opposite is true. In passing demand risk onto private parties, the government, and the tax payer, have not had to carry this cost. It has almost fully fallen on the investors and the financiers who have put their money at risk. Under conventional procurement, we often don’t see these sorts of failures accounted for because the tax payer’s deep pockets keep poorly designed projects afloat and hide the real costs to taxpayers.
“Limited Knowledge also plagues understanding about the total costs of PPPs. In the case of Transmission Gully, it is easy to make headlines by saying the total cost of the project will be three times its $1billion construction cost.
“Again, what is poorly understood is what that $3 billion represents. It includes the cost of construction plus the operation and maintenance of the motorway over 30 years plus repayment of debt plus interest and transfer of construction and operating risk to the private sector. Cost blow-outs or failures do not sit with tax payers and if the road is not open and to standard every day for 30 years, the public withholds payments. The PPP will only proceed if a successful private sector bid to design, build, finance, maintain and operate the new road provides a better overall outcome than more traditional procurement methods.
“This will require bidders to develop innovative solutions to constructing and maintaining the road for the duration of the 30 year concession period, and beyond, maximising the value for every dollar spent.
“Although debt funding will incur capital and interest repayments into the future, the benefit is that people using the corridor in the future will also contribute to its cost.
“The purchase of a home provides a helpful analogy to understanding the structure of a PPP. Before you even bid at an auction or build a home, you may well spend several thousand dollars on lawyers, builders reports, designers, bank loan applications and engineers. These are comparable to the $60 million on Transmission Gully, with the notable exception that the upfront costs for Transmission Gully include sophisticated analyses which must always show that the public is getting best value for money, or the project does not proceed as a PPP.
“After you’ve bought your house, as any homeowner knows, the spending doesn’t stop. Sometimes you find there’s something wrong that needs fixing. That risk sits with you, which is why smart buyers pay for builders and inspections before they buy. Then there are the lawns that need mowing, the drains that need clearing, the repaint, the new roof, a replacement hot water cylinder and all that sort of thing.
“Once you collate all these expenses and add them to the debt repayment over 30 years, whatever you have in total paid for your house looks nothing like the figure you paid for the home. This is the equivalent of the $3 billion figure associated with the Transmission Gully project.
I understand the logic behind borrowing for infrastructure investment – even if it means that you end up paying much more for the project in the form of long-term repayments. This means that those who benefit from the project end up paying for it and can smooth out the cost of paying for large pieces of infrastructure. It’s essentially a larger form of buying your house with a mortgage.
However, it’s pretty easy to borrow money without needing to involve a private partner. Furthermore public agencies are generally able to borrow at lower interest rates than the private sector so there’s actually a disadvantage from the beginning from going with a private partner – if you set the issue of risk aside. And it is that issue of risk that becomes clearly the important issue here: as NZCID note the failed Australian PPPs aren’t actually failures in terms of the public partner, they have actually been quite successful in getting the piece of infrastructure built and it’s the private sector which has worn the messy results of terrible demand risk estimates.
The failure of Australian PPPs on the demand risk issue (i.e. projecting far higher traffic demand than what actually eventuated – a familiar story!) has had a huge impact on the structure of transport PPPs, with the Transmission Gully PPP being structured in a way that doesn’t actually transfer any of the demand risk onto the private sector. In effect, it sounds like NZTA will pay the private partner a set fee each year regardless of how many people actually use the road.
In effect this leaves the only risk for the private partner to take on being related to standard things like construction and maintenance. As far as I know these are things which NZTA already undertakes a lot of ‘risk-sharing’ on – which might sit behind why it’s incredibly rare for motorway projects these days to go over budget.
So to summarise I can’t actually understand what the advantage is from having Transmission Gully as a PPP if there isn’t going to be any demand risk in the deal allocated to the private sector. NZTA might as well just borrow the money themselves at a much lower rate, cut out the middle-man of the PPP’s private partner and undertake a normal risk-sharing arrangement in the construction and operation of the road itself. Of course an even better thing to do would be to simply not build the road because it’s a stupid waste of money – but the PPP arrangement seems to be turning a stupid waste of money into a REALLY BIG stupid waste of money, for pretty much no gain whatsoever (except to the private partner who basically gets a risk-free investment at the taxpayer’s cost).
Yesterday in Parliament Julie Anne Genter asked Bill English about the PPP that is going to be used for Transmission Gully. I think the thing I am most concerned about from the answers is just how little he appears to know about the deal, something you would think he would have a good understanding of due to being the minister of finance.
Last week the NZTA and government announced that they were going to build Transmission Gully using a PPP and in the process seem to either shovelled a whole pile of ideological crap or admitted they are completely incompetent at the one thing we thought they seemed good at, building roads. To see why that is the case, first you need to look at the details of the project and the PPP so lets start with those. The project according to the NZTA:
Transmission Gully, which links MacKays Crossing in the north with Linden in the south, is a 27km section of the 110-km Wellington Northern Corridor Road of National Signficance, which is being developed as a four-lane expressway from Wellington Airport to Levin to enable economic growth, improve road safety and reduce traffic congestion.
Now they make it sound like its a great project but it isn’t all pretty flowers and butterflies. The reality is that despite being talked about for decades, there is a reason it hasn’t been built up until now and that is because it will be incredibly difficult to do due to things like the terrain and geological conditions, as such the project isn’t going to be cheap with this section alone coming in at around $1 billion. It also hasn’t performed well in economic tests with the last BCR seen for it having a result of 0.6 although I have heard rumours that it is even less than that. The short version is that section is clearly in the c”we should not be building this” category. But the NZTA are of course proceeding with it, most likely because their political masters told them to.
So what about the PPP, heres what the NZTA has to say:
The NZTA will use an availability and performance-based contract, which means the PPP consortium will be paid for making the road available to traffic when they have achieved specified performance levels. Payments are not linked to the volume of traffic using the road. An availability PPP contract is more attractive to potential consortium partners as it removes demand risk. As a result, availability contracts offer greater potential of delivering value for money for the government.
What that effectively means is the private company will finance, build and maintain the road and the NZTA will pay them an annual fee for doing so. In other words it is just a form of lending that allows them to keep the debt off the books. Currently all roads are paid for using PayGo where we pay for the project in full up front. Now I don’t mind using debt to pay for projects as in many ways the benefits of particularly these large projects will be felt more in the future than now however it is the use of a PPP for the debt that I do have an issue with. That is because there is simply no way that the private companies can lend the money at rates as cheap as the government can so in an effort to keep debt off the governments books, we as a society end up paying more.
Even the NZTA seem to acknowledge this but give this answer, which seems straight out of the Act party, to the issue,
Although the cost of capital is higher for the private sector than for the government, this cost differential can be offset through private sector innovation and efficiencies in design, construction, operation and risk management. In other words, private sector efficiencies can outweigh the higher private sector cost of capital.
Putting private sector capital at risk is an incentive for the PPP consortium to deliver optimal whole-of-life performance and innovation. Typically, the larger the project the greater the ability for private sector innovation and efficiencies to offset the capital cost differential.
They also say
The NZTA will only proceed with a PPP if it offers a value for money proposition that betters the cost of traditional public sector procurement.
The additional private sector finance costs on a $1 billion project over 25 years are going to add up to hundreds of millions of dollars. It seems to me that they are suggesting that their traditional competitive tendering processes are so bad that we are paying hundreds of millions extra for projects than we need to. If so then those running these tender processes should be shown the door this afternoon. Personally I don’t believe they could be that bad and as such think that the agency is effectively shovelling a load of of ideological crap. It is the crap that says the private sector is always better and more efficient at everything.
This isn’t the only thing with this issue though. One of the points of financing this project through debt is that it reduces the current demands on the NLTF by $1b. We already know that the NZTA has been struggling to pay its bills and even had to get some temporary financial help from Auckland a while ago so what are they going to do with the money that had previously been earmarked for Transmission Gully? Well they will pour it into other state highway projects, including other parts of the Wellington RoNS, to get them going faster.
Really this PPP decision is about the government trying to load up as many road projects as possible to prevent them from being stopped in the future. Further by doing this, all transport capital will be so tied up for so long into the future it will help to make it difficult for any future government to really do much. You really have to wonder if this is the part of last hurrah when it comes to motorway building.
There were some videos from the NZTA that admin posted around the beginning of the year looking at the Puhoi to Wellsford RoNS and there was also a video of the Waterview Connection that was posted last year. Looking around online it appears there are a few more for other RoNS projects that were released.
First up we have a newer version of the Waterview Connection which is a little more detailed that the original (I quite like the Hendon Rd footbridge)
Next up we have North and Southbound animations of the Victoria Park Tunnel project
Heading South East we have the Tauranga Eastern Link
Lastly here is some videos showing what Transmission Gulley would look like, the cuts through some of those hills are huge and the of those embankments are pretty high. This will massively change the geography of the area.
One thing you notice is that in all videos is that their magically isn’t any congestion, funny that.
It was heartening to open up the newspaper this morning in Wellington and read this opinion piece on the poor economics of the “Roads of National Significance” (RoNS), prepared by Dr Michael Pickford, the former chief economist at the Commerce Commission and now an independent economic researcher.
Transport Minister Steven Joyce announced the Roads of National Significance programme in March 2009, before knowing what the return on the proposed investment might be.
Nine months later, a final report from consultant SAHA International raised serious doubts about the programme.
The Government never published the report, and later sent it back for reworking. However, a copy of the original was obtained by an expressway action group on the Kapiti Coast.
And then that Kapiti group kindly sent me a copy of the report, which can be read here.
Though the programme as a whole could have a positive return, above-average returns on some projects can mask negative returns on others. Projects with negative returns should not be built.
The SAHA Report shows that three of the expressways had negative returns when assessed conventionally – the value of the benefits generated, in terms of travel time, fuel savings and reduced accident costs, is less than the sum of the costs to build and maintain them.
Among these is the Wellington to Levin expressway. It has a benefit-cost ratio, or BCR, of only 0.6, meaning that the project would generate benefits amounting to only 60 per cent of the costs.
The table below shows the results of SAHA’s economic analysis of the various RoNS. You can see why the government has tried to do everything it can to bury this report – given that some of the projects have absolutely pathetic cost-benefit ratios:
I’m not quite sure of the exact reasons SAHA’s assessments differ from NZTA’s assessments – and it would be interesting to find out a bit more information on that fact. But anyway, the article continues:
Mr Joyce has repeatedly claimed that building the roads would promote economic growth. This was tested in the SAHA Report, which attempted to incorporate the indirect or growth benefits of the roads.
These were measured in two ways, one being as “wider economic benefits”, or WEBs. When the “low” estimate for the WEBs was added, the BCR of the Wellington-Levin project remained below one, but it rose above one using the “high” figure.
The WEBs concept is relatively new internationally. The SAHA Report urged caution. It made repeated caveats about the poor quality of the data and the uncertain accuracy of the estimates. It cited the British Government’s Eddington Report, which found that “agglomeration benefits” of the type included in the “low” estimate could be up to 30 per cent of the conventional benefits in highly congested urban areas in London.
Yet the estimate for even the “low” WEB figure is much higher than 30 per cent. The Kapiti Coast is hardly a centre for economic growth in the country. The largest employer is thought to be either the local district council or the Pak’n Save supermarket.
The contentiousness of evaluating “wider economic benefits” is something that really needs to be resolved in my opinion. There are some projects that it would appear obvious will result in wider economic benefits – such as the Auckland CBD Rail Link – as it will encourage the concentration of economic activity in the CBD and therefore generate agglomeration benefits. For other projects, with the Puhoi-Wellsford road and the Wellington Northern Corridor Road, the veracity of these WEBs seems highly questionable. I’m yet to see how Puhoi-Wellsford does anything other than undermine agglomeration by encouraging the dispersal of economic activity.
The article sums up:
IN SHORT, the addition of so-called growth benefits fails to tip the scales in favour of building this road. The SAHA Report concluded that “accelerating the Roads of National Significance . . . may not be the optimal investment and funding outcome when considered in its broadest context against other roading projects and/or other government portfolio areas”.
After the unhappy experience with the Muldoon-Birch “Think Big” energy projects of the 1980s, New Zealand could be burdened with massive new debt to fund the Key-Joyce “Think Big” roading projects of equally dubious merit.
Somewhat unsurprisingly, many commentators have been quick to write off Len Brown’s transport vision for Auckland as impossibly expensive, ‘pie in the sky’ aspirations. Some of the criticism has come from predictable sources, like David Farrar’s Kiwiblog:
Len may think he has a mandate for the rail – and he does if the ratepayers of Auckland who voted for him are willing to pay for it. But he does not have a mandate to demand the taxpayers of Wellington, Napier, Nelson and Christchurch pay for it.
Other criticism has come from less predictable sources, with Labour MP Stuart Nash getting grumpy about Auckland demanding a bigger slice of the infrastructure spend:
All this posturing, threats and huge budget promises re Auckland from their new councillors etc makes me shake my head in disbelief.
Akld is but one of many cities in this wonderful country and if Aucklanders think they have pre-eminent rights on all of our taxes then they need to pull their heads out from their nether-regions and get real. New Zealand does well when all New Zealanders are thriving.
What both comments indicate is a growing awareness of one of the outcomes of local government amalgamation in Auckland – and that is a far stronger a more unified voice from those ‘north of the Bombays’. This more unified voice means that Auckland should have a better ‘seat at the bargaining table’ with central government – and may well mean that Auckland cannot continue to be given the raw deal from transport investment that happened throughout the 1980s and 1990s in particular.
A Brian Rudman NZ Herald article from last year detailed how poorly Auckland has been treated when it comes to transport spending over the years:
In 1991, when Auckland’s last attempt to get a light rail commuter service fell over for lack of Government support, the Auckland Regional Council revealed that Aucklanders paid $150 million on petrol taxes to Transit New Zealand, but only $84 million came back to the region in transport funding.
ARC member at the time, Gary Taylor, said: “Let’s face it. Auckland is getting ripped off by Transit New Zealand. We should use some of the electoral muscle this region has and go to Wellington and exert it.”
It didn’t work. Between November 1993 and November 1999, under a National Government – with Aucklander Maurice Williamson as Transport Minister – only 25 per cent of Transit’s income was spent north of Pukekohe despite just under 40 per cent of the tax-paying population living here.
The relevance of all this, in terms of answering the question of “how to pay for the big three rail projects?” is that I think Auckland has a very legitimate claim for getting a significantly better deal out of central government when it comes to our share of transport spending. As I noted a week or so ago, over the next 40 years Auckland’s population will grow by a million people, whereas the entire rest of NZ will only grow by a third of that. Here’s the relevant graph for those who don’t remember:
I think the graph above shows that it’s pretty hard to argue against the notion that Auckland probably deserves at least half of the “new transport infrastructure spend” over the next 40 years.
So while I’ve generally advocated that a big chunk of the CBD rail tunnel could be funded by choosing a more cost-effective option for the Puhoi-Wellsford Road, and redirecting the billion dollars saved there into being a big chunk (perhaps even all) of Central Government’s contribution to the rail tunnel, at least one thing Puhoi-Wellsford has going for it is the area’s population is growing significantly.
By contrast, between now and 2030 the population of the Wellington region is expected to grow in population by 74,900 – compared to Auckland’s population growth of 573,700 during the same time period. Over the next 20 years, Auckland will absorb 60% of the country’s population growth, while Wellington will only absorb 8%. Despite this very slow growth, the government wants to spend around $2.4 billion on the Wellington Northern Corridor “Road of National Significance”. Parts of that road, most notably Transmission Gully, have cost-benefit ratios even lower than the Puhoi-Wellsford “holiday highway”. Furthermore, most of the Wellington Northern Corridor project simply duplicates the railway line and is likely to undermine the current investment going into improving the Wellington rail network.
So why is NZTA’s motorway spend elsewhere in New Zealand relevant to finding money for rail projects in Auckland? Well, quite simply, it is because NZTA is spending an enormous amount of money on motorway projects throughout New Zealand over the next 10 years. In fact, NZTA generally spends a huge amount of money on transport – much of it on highly necessary things like maintaining local roads and helping pay public transport subsidies. Looking at the 2009-2012 National Land Transport Programme gives us some idea of the amount of money that is available for spending on transport. This is summarised in a section of NZTA CEO Geoff Dangerfield’s introduction to the 2009-2012 NLTP: Overall, NZTA will spend around $8.7 billion on transport over the next three years, meaning that over half that amount will be spent on new state highways. A lot of that is going on projects that do make economic sense (like the Victoria Park Tunnel), but a lot will be spent on projects that have been shown to not make economic sense: like Puhoi to Wellsford and Transmission Gully.
If we recall what Len Brown’s rail vision for Auckland actually entails: a start on the CBD Rail Tunnel within three years, substantial completion of the Airport Line within 10 years and (the one where I think he’s a being a bit optimistic) construction starting on the North Shore Line within 15 years, its’ a pretty big timeframe we’re talking about. At best, he’s probably asking that all three projects be completed by around 2030: in twenty years’ time when Auckland’s population will have grown by approximately another 575,000. Over that time NZTA will have spent (at current trends) around $60 billion on transport throughout the country. Even if the three rail projects cost a total of $8 billion, that’s a pretty small share of NZTA’s total spending throughout that time period – particularly as it’s likely local government would contribute a fairly significant chunk of money to the projects too.
So in my opinion, there’s plenty of money available to pay for the three big rail projects – because we’re not planning on having them all completed tomorrow. The key is ensuring that Auckland gets its fair share of NZTA’s funding pool – and ensuring that ‘fair share’ takes into account Auckland’s utter domination of population growth statistics – and also enabling NZTA funds to be spent on rail. Stupidly, that cannot happen at the moment. So while Len Brown’s transport vision is certainly visionary, I think it’s very unfair to say that it’s unachievable and unaffordable. The money’s there (or will be there), we’re just spending it on the wrong stuff and in the wrong parts of the country.
Interesting question by Green MP Gareth Hughes to Steven Joyce in parliament today about the economic justifications of the Roads of National Significance (RoNS):
Good to see this kind of debate happening in parliament. I’m quite impressed by Mr Hughes.
The OECD report being referred to in the questions and answers is here, and I have previously blogged about it here. Overall, I must say I’m not quite sure how Mr Joyce says that the study supports the notion that building motorways generates economic growth. My (somewhat untrained admittedly) reading of the tables which support the report says quite the opposite.
So it has been confirmed: the Transmission Gully Motorway will not even come close to providing benefits that match its cost. An interesting article from the Dominion Post on it:
The cost of upgrading the coastal highway north of Wellington could have ballooned to nearly $2 billion, almost twice the cost of building Transmission Gully.
However, documents obtained by The Dominion Post through the Official Information Act show that neither project is economically viable and would never be built under old funding criteria.
Transport Minister Steven Joyce announced last month that the $1.025 billion Transmission Gully highway would be built as part of a $2.3b roading project from Levin to Wellington Airport.
The Gully was chosen over upgrading the coastal highway, which was deemed to be more expensive, prone to earthquakes and would take longer to build.
A report by New Zealand Transport Agency officials to Mr Joyce said the coastal highway could cost $1.227b to upgrade. However, that could escalate significantly to “mitigate impacts”, with the worst-case scenario costing $1.813b.
That would leave little change from the $2.3b set aside for the entire state highway upgrade from Levin to Wellington Airport.
“Transmission Gully represents a more affordable option to progress than the coastal highway upgrade,” the report said.
However, a separate Transport Agency report into the two options shows neither comes close to meeting the Government’s own benefit-cost ratio guidelines.
The Gully route has a benefit-cost ratio of 0.6, meaning the costs would significantly outweigh the benefits. The coastal highway, however, has a benefit-cost ratio of just 0.35 at best. That cost analysis was considered by the Transport Agency board when it decided in late October to give Transmission Gully the green light.
Mr Joyce said the benefit-cost ratio of the entire Levin to Wellington project was higher, taking into consideration the overall benefit to the wider community.
“You’ve got to look at it longer term,” he said. “I wouldn’t want to see us just do one part without the other part. On that basis, it stacks up OK.”
The briefing documents also found that Transmission Gully would improve amenity values at Mana, Plimmerton, Pukerua Bay and Paekakariki through reduced traffic noise and improved air quality. It would also provide a better connection to the Hutt Valley and Wairarapa.
Transmission Gully would be more resilient in the event of an earthquake, because the section of the highway that crosses the Ohariu Fault has been designed so it could be quickly reinstated.
“The construction of the Transmission Gully route when combined with the existing coastal route would provide enhanced route security during both major and minor events,” the report said.
Green Party transport spokeswoman Sue Kedgley said the low benefit-cost ratios for both highway options offered further evidence that neither should be built.
“They are so low that really they can’t be justified. If motorways worked, Auckland would be one of the most efficient cities to get around in the world.
“All over the world, nobody is building huge motorways into cities. They have come to realise that the only solution is a mass transit system.”
While I probably agree that Transmission Gully is a better option than the coast route, it seems crazy to flush $400 million down the toilet in the way that building a motorway with a BCR of 0.6 does. I’m guessing this will set a precedent for whether the Puhoi-Wellsford “holiday highway” goes ahead.
Steven Joyce has demanded that public transport projects offer good value for money, and “stack up” in a business sense. One has to wonder why the double-standard when it comes to these massively expensive motorway projects. Furthermore, what’s the point of undertaking cost-benefit analyses when you’re just going to ignore them anyway?
Yup, that’s the good old Basin Reserve cricket ground (heritage listed by the way), with a flyover right next to it. I’d hope if anything like this was proposed for Auckland all readers of this blog would put on their activist hats. The time for flyovers through downtown areas has passed.