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.
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.