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. 

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