Monday, December 31, 2012

Derailing Auckland - Unravelling the Assumptions

Public spending and productivity
Economic commentators call increasingly for the private sector to lift productivity  to compete in trans-national markets.  However, we hear less about the need for wise public investment as a condition of productive nations, cities, and business.  Maybe we need to hear more.  

In particular, ill-considered infrastructure imposes unnecessary costs on producers, consumers, and taxpayers. It does so directly through excessive spending and racking up liability for the maintenance and depreciation of poorly performing assets, and indirectly through the impact on credit markets. 

Governments at all levels need to take a highly rigorous approach to investment if they are to avoid undermining the competitiveness of regions.  Yet all too often major public projects are based on weak assumptions. Ideally, no public spending of substance would be undertaken without considering  the risk of getting it wrong and the regret that follows bad decisions – fiscal, economic, and political.

Risks – and the regrets
That does not appear to have been the case with the latest report justifying spending up large on a central rail link/loop (CRL) to enhance public transport in Auckland.

This post considers some of the assumptions about employment that underpin the latest argument for the $3bn or thereabouts needed to improve rail-based commuting into and around central Auckland. It compares the employment numbers projected to justify rail with recent  history.

Of course, recent history is not necessarily a guide to the future.  But forecasting significant shifts to justify the CRL calls for more convincing arguments than we have seen to date. The contingencies - events or behaviours that vary in practice from those projected - need to be analysed.  And the regret arising from getting the assumptions  wrong (which include wasted funds, reduced revenue, foregone opportunities, and fiscal blowout) need to be fully assessed.  

In this case, there is every chance that these assumptions are too weak and potential regrets too big to justify proceeding with the CRL.
Weighing up alternative outcomes
Assessing risk does not simply mean drawing high and low variants around a central projection.  This inevitably favours adoption of a single central forecast which, by definition, will be a compromise and countenances little departure from trend.  And if there is one thing we know about the future of our cities, it is that the events and technology we don’t expect will play a big part in shaping it.

Assessing risk means weighing up the probabilities of different events and outcomes and appraising the costs they might impose.  At the very least, a risk-averse approach would review downside rather than upside risks as a basis for sensible investment.

Projecting past mistakes
There is no sign of risk analysis in the documents promoting the Auckland CRL.  And this is a critical shortcoming with respect to the key employment projections on which the promise of unacceptable congestion without the CRL rests. 

The growth assumptions that underlie the most recent arguments about inner city congestion derive from a model developed by the now-defunct Auckland Regional Council. Projections from the model published in 2009 suggested total employment growth of 41,000 jobs between 2006 and 2011, a 6.8% gain (for a projected city total of 642,800). In fact, Statistics New Zealand’s Business Directory show just 12,500 jobs gained (from 616,230 to 628,780 – based on the new Auckland City boundaries). 

In other words, the projection published just two years earlier overshot actual growth to 2011 by over 300%!  How can we have confidence in this model, especially when in its latest incarnation the 2011 estimate is 682,000, or 53,700 (7.9%) more than the actual Business Directory count.
Forecasting future employment – or simply wishful thinking?
The 2031 projection on which the case for the CRL is based requires  an annual increment of 12,500 jobs a year: in the five years to 2012 the equivalent figure was just 2,600.  True, it was much higher over the preceding five years (19,000 a year) but the questions that need exploration today are (1) are we are faced with a ground shift in the economy as a result of the GFC, a complete restructuring for which the outcome remains a mystery and, if not, (2) when  might we expect the return to business as usual implicit in the model.  Because the later that happens the further astray the model projections will be and the greater the regret from overinvesting in rail infrastructure.  

In fact, there are still too many risks on the international economic horizon to have confidence that an early correction might offset the current shortfall in actual compared with projected employment.  Why risk funding a marginal increase in Auckland’s public transport capacity and patronage based on what are demonstrably over-optimistic employment growth assumptions? 

(And it is a marginal increase: according to the study, 45% of commuters into Auckland already use public transport - 8% rail.  Boosting that high level of public transport dependence, especially if at the same time we are pushing cycling, walking, and inner city dwelling as responses over-dependence on the private car is a tough challenge.  How much do we need to spend just to get a slightly bigger rail share and not, at the same time, cannibalise an effective bus system? Executive Summary, p45).
Where will business – and employment -- grow?
The case for the CRL depends heavily on assumptions about business growth and location.

According to the study employment in the city centre was 90,940 in 2006 (Supporting Report p.22). It projects this to reach 147,000 by 2041 (1,600 more jobs per year).  This  62% growth contrasts with  51% projected for the rest of the City. It bears little resemblance to what has gone before.
Between 2000 and 2012 employment in the CBD grew by 25% (660 per year) and in the rest of the City by 24% (9,460 per year).  So where is the analysis or logic to support the fundamental shift assumed, especially if it contributes, as the report suggests, to increasing congestion?  The likelihood is a return to declining CBD employment share (the long-term trend) in the interim as more firms opt for localities elsewhere. 

Or is the plan simply to reduce the location choices available to business?  Because it won't work.  If it gets too hard to locate where they want to go, or the cost of favoured land -- and rates -- get too high, then businesses may exercise their choice to leave Auckland altogether, relocating some or all of their functions elsewhere in New Zealand or overseas.  Why adopt spending policies to accelerate this process?

Back to the assumptions: when the city fringe is added, inner city employment is projected in the report to reach 203,100 in 2041.  This is 25% of an already optimistic forecast for the entire City .  This substantial gain in inner city employment share is based primarily on the CBD growing from 12% to 18% of the total – another overdose of optimism on the part of the proponents of the CRL.

So what’s the starting point?
How these figures are derived is difficult to follow in the published reports.  However, a quick analysis of whether different parts of the city are gaining or losing employment share illustrates why we should be wary of assumptions about a substantial increase in centralisation.

Between 2000 and 2012 the CBD, CBD fringe, and inner suburbs (Rest of Isthmus) all lost share to other parts of Auckland in manufacturing, retailing and wholesaling (see table, below). Production, distribution, and lower-order business services are decentralising, especially into the southern corridor. Retailing and hospitality services – considered drivers of CBD growth– have also been decentralising.  The CBD is losing share in health and social services and professional and scientific services, although some of these are still gaining on the fringe and inner suburbs. 

Changes in Shares of Auckland City's Jobs by area, 2000-2012
(Source: Business Directory, Statistics New Zealand)
Some sectors are becoming both dispersed and centralised at the same time.  Logistics, information services, and financial services gained share in the CBD and further out in the city, perhaps hiding emerging sub-sector specialisations.   Others certainly favour the CBD.  Various business services and education stand out, but these, and arts and recreation services, have not necessarily been the big movers in  the past decade and there are no strong grounds for expecting them to be so in the future. 

A self-defeating case?
The fact that the proposed CRL does not stack up  on economic grounds makes reliance on the ill-founded projections of central city employment on which it is based all the more worrying. 

If we narrow our "recent history" to just the last two years there is some evidence of a gain in CBD jobs relative to the rest of the city.  But such  centralisation is simply an outcome of recession, the geographic expression of companies consolidating in difficult times, and the rate of growth slowing slightly faster outside the CBD.  However, projecting this state of affairs forward raises interesting questions about  how far we  expect the New Zealand economy to stagnate – and what the long-term consequences will be for Auckland of it doing so.  The conditions favouring centralisation may also be the conditions that undermine the city's growth. Equally, healthy growth across the city is a precondition to a healthy CBD.

At this time of  uncertainty it is manifestly unwise to  promote substantial capital expenditure that may well lower capital productivity and incur the ongoing taxpayer and ratepayer liability  this imposes when it is more important to promote sustainable growth .  If nothing else, addressing economic and employment growth by overspending on a project of dubious merit will guarantee that the exaggerated demand projected to justify the CRL does not come about. 

Monday, December 17, 2012

A Flawed Case? Auckland’s City Rail Link Project

A tale of two cities
Two newspaper stories on infrastructure investment caught my eye last week. The first praised the approach undertaken by the
Port of Tauranga. The Port has performed extremely well for shareholders, including 55% owners Bay of Plenty Regional Council. This is put down to rigorous analysis of the financial impacts of any capital spending:

For years Tauranga has used its capital resources astutely to lift cargo volumes and improve efficiency to build economic value for its shareholders. ...

The port has an outstanding record in kicking for the right goalposts when determining strategic capital development. ....

For Tauranga, a vital key has been to back innovation-driven capital investment with rigorous economic and financial analysis.

Contrast this with the latest addition to the grab bag of evidence assembled by Auckland Council to justify an underground central rail link (CRL) . Admittedly, Auckland Transport is not a commercial operation. However, making the best possible use of capital is a key to the efficiency and productivity that will underlie the long-term prosperity of the city and the country. And this project will not deliver.

Fiscal irresponsibility
I have not read the
latest report in depth. But I did have a quick look to see what the financial implications of implementation might be for the ratepayers of Auckland, and how risk was assessed. I couldn't find any discussion of them. And interestingly, in their absence it would be easy to use the analysis to demonstrate why we should not be risking substantial public funds on it. Yet the Mayor was quoted as saying that this report provides a strong basis for funding negotiations with the government.

The Transport Minister won’t buy into this. He quickly
responded by pointing out what the latest report demonstrates. The project is not viable. There is no financial analysis suggesting that this project has a life. 

An unsustainable city?There is no assessment of the impact on public sector finances and the fiscal sustainability of the project, or of the consequent demands on ratepayers and, if they are to be roped in, taxpayers. It does not begin to address the impact of borrowing, operating costs, maintenance , and fully funded depreciation arising from this capital expenditure on the council's long-term financial position or on the city’s ratepayers.

Financing the CRL should be assessed against the funding needed to maintain and renew basic infrastructure and meet other new capital commitments. I suspect that the CRL alone could trigger substantial rate increases and thereby contribute directly to a reduction in the appeal of the city as a place to live and do business. And suggesting that the taxpayer should bail the city out on this project before it even gets off the drawing board demonstrates a cargo cult mentality that has little resonance if Auckland is to be a truly successful 21st Century city, a leader of New Zealand's economic growth rather than a drain on it.

Bigger is better: yeah right
As I understood it one of the reasons for creating a single Auckland Council was to reduce wasting money on uneconomic and unwarranted projects. Well, this obsession with the CRL simply demonstrates how a bigger council can make even bigger mistakes, and that more residents will experience the consequences on a project aimed primarily at maintaining private values in the inner city.

An economic evaluation?
There is an economic evaluation of sorts in the report ( Appendix G) but it does not mention costs, risks, or return on capital. Instead, it’s a sort of wish list that suggests that rail may be more effective than other modes in bringing people into the central city, and that this will boost property values there, increase jobs, and lift productivity. Well, I am sure there are a few CBD landlords who will gratefully accept such a wealth transfer. But I wouldn’t bet the bank on the job projections behind the latest study, and that somewhat undermines the rest of the analysis (more on that in a future blog, but I do not see the
grounds for growth that the authors seem to). 

A B:C ratio of WHAT?
Anyway, the economic analysis simply does not stack up. The benefit cost ratio for the CRL project is just 0.4: for every dollar of resources committed we will get 40 cents worth of benefits back (in terms of quantifiable resource costs and benefit)! And this ignores the $1.1bn already committed to the
electrification necessary for trains to travel underground .

This is a serious deficiency; such a low ratio denotes a grossly inefficient use of resources that will undermine aggregate capital productivity in the city. 

Even bringing to bear a speculative assessment of agglomeration benefits (based on a 2008 study which is
contestable as grounds for policy) brings the ratio to just 0.9. And that is simply not good enough when it is based on a host of arbitrary assumptions. There is no contingency analysis, no assessment of risk and no consideration of the additional cost of getting what is already a shaky case wrong. 
Wider economic benefits?
In any case, the wider economic benefits, if they are not already counted in the analysis (because, after all, the travel cost savings and congestion impacts measured in transport analysis already incorporate elements of them) are not captured by the project. They add nothing to its viability. Rather, they represent a transfer from the funders of the project (ratepayers and perhaps taxpayers) to business and property owners. 

Any link between investment in an uneconomic and financially flawed rail project and region-wide agglomeration economies is tenuous to say the least. And even if such advantages do exist, they rely on satisfying a whole range of conditions external to the project, and may well be better achieved by other means (including land use policies actually tuned to the diverse needs of households and businesses). 

Avoiding inner city gridlock - again
I have not looked yet at the modelling that underlies the claim that without spending another $2.8bn on the CRL (after electrification) traffic in downtown Auckland will halve its speed on the morning peak within a decade. The evidence is, though, that
vehicle use is stabilising if not diminishing (for demographic and financial reasons), and I wonder how far this tendency was built into the assumptions. 

The report’s claim that without the tunnel “there will be inadequate road capacity to meet demand after 2021, and relying solely on more buses to improve public transport will hasten gridlock” has the ring of the 1965
de Leuw Cather report for Auckland transportation. This promised inner city gridlock if the motorway system (and supplementary transit provisions) was not completed in around 20 years. 

Well it wasn’t – and isn’t nearly 50 years on – and still the traffic moves. And the inner city appears more attractive and prosperous than ever. Why sink it now with irresponsible capital expenditure? That is a bigger threat to Auckland’s wellbeing than the possibility that cars will move more slowly in the city in the future and the remote possibility that throwing more ratepayers' money at the CRL will solve the problem.

It’s time for the Auckland Council to begin to work in the long term interests of all its ratepayers and bring some discipline – and common sense - to bear on its capital spending.

Tuesday, December 11, 2012

Down and up or down and out? Confused heritage thinking in city hall

Oh no, not another one
Another overseas expert has been called in to tell us how to do our business here in Auckland.  Peter Marquis-Kyle, a heritage architect, spoke to councillors, officers and heritage advocates about how they protect old houses in Brisbane.  There the default heritage planning position is that all old houses are protected and can only be demolished if owners can successfully argue why that should be allowed.

Now it seems that Auckland Council is seriously considering new rules that would ban the demolition of all pre-World War II houses.  The exceptions would be houses that are damaged beyond repair. Apparently these rules would apply to "23,344 houses in the existing character zones of the inner city suburbs, Devonport, Birkenhead and Northcote, plus thousands more pre-World War II houses being identified in other parts of the city”.

Looking backwards
So much for heritage policy identifying and protecting those markers of the past worthy of preserving and passing through the generations.  We seem to have lost the capacity to discriminate and to balance the needs of multiple generations – past, present, and future.

If all dwellings over seventy years old are worth preserving, no doubt in 20 years time the suburbs of the 1950s will qualify, and then those of the 1960s.  The urban heritage of my generation that will qualify for blanket protection will be the sprawling suburbs that mark the triumph of automobility . 

I might have no problem with such move but I suspect there will be some serious confusion in city hall where such suburbs are anathema to the compact city brigade. 

So, how does this affect the Auckland Plan?
Development expert Martin Udale recently told the Auckland Council that if it wished to achieve its ambitious plans for urban consolidation and medium density residential growth, it needed to rethink its approach.  For starters, the targets set out in the Auckland Plan require the demolition of perhaps 15% of housing stock.  As the Plan calls for consolidation around existing centres and the CBD, demolitions need to be more extensive in these areas, the very areas in which pre-World War II houses are concentrated.  So now the Council is thinking about adopting heritage rules in its proposed Unitary Plan that will frustrate the compact city vision shaping its adopted spatial plan. 

Given the Auckland Plan’s unrealistic emphasis on compacting Auckland, perhaps there is a silver lining in this cloud of confusion!

But the latest proposal certainly doesn’t look like the sort of rethink Martin suggested was needed.  Because now the Council is planning to put a large chunk of the housing stock that has to go if it is to fulfil its vision out of the reach of the bulldozer – or at least substantially lift the cost of pulling it down in favour of multi-unit housing.  And cost is already one of the reasons that the Council’s plans for upping medium density housing are running into downdrafts. 

Is the Council really prepared to further frustrate its recently completed spatial plan in order to follow Brisbane’s indiscriminate approach to heritage?

Some other questions
Before we can take this latest silly idea seriously, we might ask a few more questions.
  1. Where is the consultation and analysis that might underpin this particular silver bullet?  The occasional controversy over the odd demolition is not all that unhealthy because it raises awareness and stirs debate.  This move will only stir resentment
  2. Is this a make-work plan for under-employed city planners?  Just how much time and money is absorbed in pedantic resource consents processes and opportunities lost to conservative decision-making, and how much more will be lost if this rule is introduced?
  3. Or is this initiative a further joining of the legions as planners, already leaning on reinforcements from urban design to justify resisting discretionary resource consent applications, can now add heritage architecture to shore up their resistance to change?
  4. Have the protagonists of this approach even considered the state of repair of many of these houses, not yet ready for demolition but already a liability for their owners,  especially now that earthquake risk and readiness are on the public agenda?
  5. How far will old houses now be left to deteriorate by their owners until they are beyond repair?  And what will that do for our inner city rental stock?
  6. The Council is proposing a sledgehammer to crack a nut.  So what will happen to the sales of sledge hammers that might be more gainfully employed– to shift a pile, bend a beam, or strike a stud?
  7. Has the Fire Service been consulted?
No easy answers
It is hard not to be cynical in the face of shallow policy thinking.  But heritage is not easy, and there are no quick fixes.  It inevitably involves the application of subjectivity and exposes conflicting values that need to be worked through.  It requires trade-offs to be made, and sacrifices.  What the public really values it may have to pay for, and not simply shift the burden of preservation onto the private sector. 

There is no silver bullet in this area, and we need to be suspicious of those who tell us that there is. 

Multi-purpose, multi-layered, multi-metaphored
Perhaps the problem of shallow thinking lies in the confusion of goals in a large, multi-layered, multi-purpose behemoth.  Creating a super council in Auckland was not the way to get the region moving forward.   Not only do we now have the poacher as gamekeeper and mountain-making out of molehills in our council, but it also looks rather like the left hand doesn’t know what the right hand is doing. 
How confused - and confusing - is that?  And how costly will it prove to be?



Saturday, December 8, 2012

Selective Thinking – When Common Sense Works for Some Projects it Should Work for Others

Auckland’s ambitious port plans
Earlier in the year, I suggested that the Port of Auckland plans for expansion are over the top. The ambitious reclamation that the company claimed was required seemed to be a step or two away from reality in its projections of demand. And it was inconsistent with the Council's ambitions to turn downtown Auckland into a major destination for living, tourism, recreation, and business.

Applying a dose of reality
Now the Council is acknowledging that the port plans were unjustified.  It has received a commissioned report that went somewhat further than my thinking by addressing the potential for greater productivity to make better use of existing capacity on the port, deferring any proposed reclamation, and potentially reducing its scope.  The report also highlighted the potential in Auckland for increased congestion on related rail and roads.

It seems likely that the Auckland Unitary Plan, currently under preparation will adopt a more grounded approach to the provisions it makes for port expansion than anticipated by either the Port Company or, indeed, by the council itself in its earlier spatial plan. Less is definitely better in this case. 

Better planning
Indeed, promoting incremental investment around existing infrastructure often makes better sense than going for the big “transformational” spend.  Pulling back the planning time horizon to avoid the risk of locking communities into long-term projects that they don’t need or can't afford is also good economics.  Acknowledging that there is a range of possibilities for achieving desired outcomes, not all of which are obvious on Day 1, is sound planning.

The bigger picture
In the case of the development of our ports, there is much to be said for the wider perspective and the greater range of options that arise from taking the bigger view.  This means, among other things, \acknowledging the inter-connection of land and sea transport chains, and recognising in Auckland’s case that the future of its port cannot be separated from the future of other ports in the region – whether the region is the Upper North Island or the South West Pacific, and from ongoing changes in shipping and shipping companies.  

The report on Auckland’s port even goes so far as to acknowledge the possibility that at some time in the future New Zealand freight could trans-ship through a Sydney or Brisbane hub.

Now there is a distinct possibility, and it’s not all bad.  It may well reduce costs to our producers, in part through creating a greater diversity of (indirect) connections into Asia and the Americas where demand growth is likely to be concentrated.  (It happens already for much of our freight through different sea-sea and sea-land connections in places like Singapore or Rotterdam).

And it would incidentally breathe new life into regional ports, potentially reduce internal transport costs, and effectively create much more capacity – and more options – at Auckland.

Dealing with uncertainty by retaining options
Simply assuming “build it and they will come” does not make sense, especially when the build is out of proportion to the demand. Bold long-term plans full of commitments to expansion do not reduce uncertainty as some planners and politicians would like us to believe, they simply raise the costs increase the risks..

True, the uncertainty that we are faced with when contemplating infrastructure investment, land use changes, and urban development generally shouldn’t paralyse us, or lead to endless rounds of report proliferation and workshops rather than decisions.  But it does call for a degree of realism in our thinking, the avoidance of over-stretching, and recognition of when apparently bold plans are demonstrably bad plans.  And often decisions that consciously limit risk – including decisions to defer investment – may be better than no decision at all, and certainly better than those built on little more than blind optimism.

The elephant in the Council Chambers
So maybe preparing the Unitary Plan may be just the time to rethink the underground rail link.  The Council could apply a reality check to the demand thinking, the shonky economics, the flaky business case, the fiscal risk, and the land use assumptions behind the proposed underground passenger rail link, and just how far the spending on this transformational project will limit Auckland City’s options in the future.  

There may well be better, less risky ways of maintaining accessibility in and around the city than one which not only misallocates public resources but also locks in a particular and contestable image of urban form and assumptions about land use for a very long time. Isn't this just what has happened to those unrealistically ambitious port plans?