Wednesday, June 24, 2020

End of the line for Auckland light rail?

Rethinking the future
While New Zealand has restored modest levels of domestic activity following the Covid19 outbreak, prospects for full recovery are undermined not just by continuing border threats, by the twin blows of falling global trade and rising global indebtedness. Even if the country remains largely virus-free, it faces ruptures to the economy and employment, migration and housing, commuting and travel. Under these circumstances many of the shovel-ready projects placed before Government for funding may be of minimal long-term value, leading instead to additional fiscal strain and lower productivity.

It is time for a real rethink.

Rethinking Auckland’s Public Transport
This post suggests that Auckland can no longer afford to indulge in think big public transport projects. First, it again flags the need to shelve Auckland’s Central Rail Link. 
It then lists the documents supporting various light rail rapid transit options, which led to the questionable government commitment to light rail, reflected now in the postponement of the Minister’s decision on who might build light rail to the airport.  But if that decision is made in due course, this would lead to a greater fiscal disaster than the CRL. LRT should now be jettisoned.
Instead, it may be time to revisit the prospect for a modern, bus-based transit system to better respond to major shifts in demand and reduce the exposure of ratepayers and taxpayers to a fiscal black hole.

Back track on this one first
For starters, it makes sense for Auckland to follow economist Tim Hazeldine’s advice and pull the plug on Auckland’s Central Rail Link. The cost of shelving it should be far less than the cost of completing it.

As for LRT, do not even get started
It also makes sense to abandon plans for light rail transit. A solution in search of a problem, there was never a robust case for it.  And even if investment funds are willing to front up with the dollars, ratepayers (and taxpayers) will struggle to meet the returns they will require to justify such a high-cost, high-risk project. 

It appears that LRT has been shunted aside by the government for the moment, athough evidently officials continue to work on it. 
Now, though, is the time to finally lock it away.

Tracking light rail proposals
I intended to review the economic rationale for the LRT but could not pin down exactly what we are going to get, for how much, and why. So, all I can offer are conclusions based on reviewing as much of the associated documents as I could find.

Here is what I covered (with links).

·         The Auckland Transport Plan (Auckland Regional Transport Authority, 2009) suggested rapid transit would be needed in the long-term to relieve commuting congestion on four cross-city routes.

·         The Auckland Regional Land Transport Strategy 2010-2040 (Auckland Transport) firmed up on these prospects with proposed construction between 2031-2040.

·         The Auckland Regional Land Transport Plan 2015-2025 (Auckland Transport) switched tracks, promoting LRT to fill the gap in services between the inner suburbs and the CBD. 

·         The Auckland Central Access Plan (CAP) Programme Business Case (Auckland Transport, March 2016) proposed “higher capacity rapid transit” services on the isthmus.

·         A Peer Review (April 2016) supported the CAP but noted that it was based on a heavy focus on public transport; reliance on land use assumptions from the 2011 Auckland Plan (Auckland Council), and most significantly, ignored affordability, which “should be addressed as soon as possible” (p2).

·         The South-western Multi-Modal Airport Rapid Transit: Draft Indicative Business Case (SMART, Jacobs NZ Ltd, June 2016, for Auckland Transport) compared the economic and financial performance of heavy rail, light rail, and bus-based rapid transit for the CBD to Auckland Airport route.  While LRT was favoured, further investigation of Bus Rapid Transit was also recommended.

·         The Advanced Bus Solution (LEK, January 2017, for NZTA) specified a more advanced system offering a higher level of service over a larger catchment. It indicated an incremental B:C ratio of 1.28 from the improvements proposed. While different discount rates prevent detailed reconciliation with the SMART report, the analysis suggests that a bus option could match LRT in economic terms.

·         The Advanced Bus Solution Report (Auckland Transport, February 2017) suggested the LEK may only be sufficient until the 2040s, and involved technical uncertainties and transition risks. It instead proposed staged transition from bus to light rail.

·         The Auckland Transport Alignment Project (ATAP), a collaboration between Auckland Council and central government, advanced rapid rail to Auckland Airport and Westgate as part of the rapid transit package in its 2018 report.

·         The Auckland Regional Land Transport Plan 2018-2028 confirmed these routes.

·         The final ATAP report (2019) called for a $8.4bn investment in rapid transit over ten years (excluding the western line).  This included heavy rail, busways, and light-rail. The cost of light rail, scheduled post-2024, was not identified.

Government gets on board
In 2015 the government and Auckland Council agreed to align transport spending for projected growth of 700,000 people over 30 years. The government committed to $18.5bn of $28bn total funding called for by 2028. The Minister of Transport then proposed prioritising the CBD-Airport link from this “indicative package” (Cabinet Economic Development Committee, July 2018).  He requested NZTA to prepare a business case, and called for measures to accelerate the project.

Treasury and the Ministry of Transport reported on an early draft of the business case in November 2018. They noted expectations for “balanced and robust” economic analysis, a “rigorous process” for considering risks to government, “clearly articulated financial implications”, and “appropriate” governance arrangements. While their advice was redacted, the report said that the NZTA Board was unlikely to be “in a position to resolve all issues that a business case requires as a minimum” at its November meeting.

And off again?
It appears that the rigorous analysis recommended by Treasury[1] was sidestepped. Instead, in June 2019 two potential suppliers were announced for the City-Airport LRT, with proposals received in August from NZTA itself and from NZ Infra, a joint venture between Canadian investors CDPQ Infra and
the NZ Superannuation Fund. The NZ Infra pitch raised the prospect of funding it off the books.

A decision on the preferred partner was not made, although $1.8bn was committed to seed funding.  However, the total cost of just this link was estimated at $6bn, suggesting earlier estimates were wildly out and that LRT would never be economically rational, and throwing doubt on delivery of ATAP’s $8.4bn full rapid transit package.

In October 2019, it was revealed that the NZ Infra proposal was likely to provide for grade separation (including undergrounding) at a significantly higher cost than the at-grade NZTA proposal (costing perhaps $10bn). While this has the advantage of retaining capacity on existing corridors for other modes and might lead to lower long-term operating costs, it is impossible to see it stacking up in economic terms.  Add in likely cost over-runs and it is surely a fiscal step too far.

Hence, reported splits in the governing coalition over the issue in May 2020 are hardly surprising. Labour is reportedly leaned towards the NZ Infra PPP proposal while junior partner New Zealand First appeared unwilling to commit to any LRT.

LRT at any cost?
Despite changing technical and financial parameters, and the uncertainties of a post-Covid19 world, the NZ Super Fund remains “enthusiastic about” Auckland LRT. That is not surprising: securing long-term, government-guaranteed returns is commercially clever in an uncertain, recessionary economic environment in which equities so much riskier and bonds so much less rewarding. But it wouldnot work for Auckland and Aucklanders.

So, what can we take from this history?
There is considerable variation in the policy trail regarding what LRT services might be required, and in what order: long-term cross-regional commuting? linking the inner Isthmus suburbs and the CBD? lifting capacity between the outer Isthmus suburbs and the CBD? or linking other employment centres (Westgate, the airport) with the CBD? This makes it difficult to trace the costs – and economics – of even the version currently being advanced, the CBD-airport LRT.

After more than a decade of official deliberation, we have no idea what the configuration of regional LRT will be, or of the costs, but we can be confident that they will be a lot more than the figures bandied around at present. (With four years to go before completion, the CRL is already 70% over the original budget). One way or another ratepayers and taxpayers will be footing a substantial bill if LRT development proceeds. [2] If nothing else, uncertainty over the future of international travel and the recovery of aviation mean that the time has come to dump the proposal for a CBD -airport line.

The public has been sold the sizzle but there is no sausage.

Time to take the bus?

Just as disturbing as undue preoccupation with LRT is the failure to fully evaluate advanced bus transit. This would offer the ability to invest incrementally to cater for short and medium-term shifts in public transport demand.  It provides opportunities to:

·         Adopt new technologies as they evolve, continuously advancing service levels;

·         Respond to major changes in land use and patronage;

·         Fashion a network that provides wide-ranging connections across Auckland’s distinctive geography; and

·         Align investment and funding more clearly with benefits. 

At the same time, a bus-based transit system would substantially lower economic and fiscal risk compared with large scale, fixed-track solutions.

If nothing else, the shock of Covid19 provides the opportunity – and excuse –to avoid repeating the Central Rail Link experiment. The future is more likely to be about demand-responsive rolling stock using largely existing corridors to serve communities and commercial activities across Auckland, rather  than carving out new routes or reducing the flexibility and accessibility of existing arterials to favour limited corridors of residents and prop up values in selected commercial destinations.

[1]    “Given the size of the project, the fiscal risks and the build and operational challenges, we consider a strong examination of the implementation choices is essential” Treasury report T2018/1002
[2]    The CRL experience, Treasury advice, and global experience all point to the likelihood of costs blowing out, this in a period when it is almost inevitable that patronage will be less than projected.

Wednesday, May 20, 2020

No light at the end of this tunnel - reflecting on failed infrastructure

The big risk and high cost of thinking big.
I flagged a concern in the last post about the fiscal and productivity impacts of projects that don’t stack up economically. The risk is that the post-Covid recovery leads to indiscriminate infrastructure spending which would compound the already severe fiscal effect of essential deficit spending on public health, household incomes, and business support .

Given their dismal track record here and overseas, it is likely that large infrastructure and especially transport projects will dig the fiscal hole deeper without delivering the benefits that might help the country climb out of it. We know that the Think Big energy projects of the early 1980s precipitated a foreign exchange crisis.  Had they been economically sound the ten hard years of economic restructuring that followed may have been moderated. 

Looking back to go forward
There is no sense in trying to replicate the past.  But it does make sense to learn from it.

In this case, it seems the lesson was not learned. I posted several critiques of Auckland’s Central Rail project back in 2011 and 2012. Today we can see just how big a cost ignoring past infrastructure failures has imposed - so far - in the case of the CRL if only to temper a new found enthusiasm for thinking big.

Auckland’s Central Rail Link, 25c in the dollar?
How ever long it takes to finish and however much it gets used, Auckland's CRL is an economic disaster.

The first cost estimate for the tunnel was $2.3bn, released by Auckland Council in 2011. That did not account for the prior expenditure of $500m on electrification to make the tunnel environmentally acceptable, or the consequential costs of purchasing new rolling stock, extending and updating existing stations, and compensating business owners badly impacted by prolonged civil engineering works. 

Even with those omissions, though, the project was deemed unworthy of government support by Transport Minister Brownlee, with “a decidedly weak benefit:cost ratio of just 44 cents in the dollar”. 

In any case, the estimated tunnel benefit:cost ratio turns out to have been on the high side.  That the project was under-specified is evident in the 2018 announcement that platforms had to be lengthened, adding around $250m to the costs. 

And it was under-costed.  By April 2019 the cost estimate was up to $4.4bn.  This covered construction cost increases of $327m, “non-direct costs” of $130m, and a new provision for escalation and contingencies of $310m.

Converting the original budget and additional costs to December 2019 dollars (using the price index for construction inputs) reveals an over-run of around $1.7bn, 70% ahead of the original budget after accounting for inflation.  Given that there has been no suggestion that the projected benefits will increase, the potential economic return now sits at around 25c in the dollar.

We can expect further cost escalation given that completion date (prior to Covid19) was pushed out from 2021 to 2024. This is likely to be extended further by pandemic-related constraints including disruption to contractors, labour, and supply chains, and by increased competition from local and international “shovel-ready projects”. That's more bad news for those central city businesses that have seen revenues plummet in the face of ongoing disruption by the prolonged street works.

Strong growth rates are misleading
Let's consider potential benefits in light of the past ten years' public transport performance.  The introduction of electric units in 2014 and station and service improvements across the network saw strong relative growth in rail patronage. It seems the benefits of improved service levels on the network are already being reaped without the $4.4+bn CRL.

However, this needs to be kept put in perspective. While rail boardings almost tripled over the ten years to February 2020, the real gains were in bus use (70% of the total):

Significantly, 87% of gains in bus patronage were in “frequent, connector, local, targeted” services according to Auckland Transport.  This strengthens the argument for flexible bus services rather than high cost, fixed route rail. 

It is also likely that gains to rail included a transfer of some passengers from buses so that the impact on car use and the increase in public transport use will be less than indicated by increased trips by rail. 

How important is rail to central city commuting?
According to the 2018 Census, a relatively low 55% of work trips by the 159,000 people working in the Waitemata Local Board Area were by private or company vehicle. Of those, 6% of were made by passengers.  Company vehicles accounted for 11% of the total. As these vehicles are most likely required for work purposes their occupants are unlikely to transfer to PT. 

This means that the market for improved rail and bus services is just 46% of possible commuter trips .  Public transport already has a high penetration rate of 29% of commuters working in Waitemata.  However, less than a third of these were by rail, despite the relative growth in numbers. The prospects of getting many of the remaining private car users to shift to rail are low. Rail patronage may have to grow mainly through trips transferring from buses.

Narrowing the focus , there were 18,000 commuters to the inner city in 2018. Only 19% relied on a private or company vehicle (between 3,100 and 3,200 vehicles) in 2018. The likelihood of getting a significant reduction in this number is slim. 

A surprisingly high 50% said they walked to work, while 22% used public transport (only a fifth of those by rail).  The strategy of getting more inner city workers living there seems to be working. Ironically, it’s a success that raises questions over expectations that investment in the CRL will influence travel in the inner city. 

Will CRL even deliver a significant mode shift?
The Council wants people out of cars.  Whether or not that's achievable - or even reasonable  - was the CRL the way to achieve it?

Apart from the fact that the project is uneconomic and fiscally damaging, the fact is that over three quarters of Auckland’s labour force works outside Waitemata Local Board area, with 77% of them relying on private or company vehicles to get to work.  

Even if the billions invested into the CRL were to effect a significant lift in public transport patronage, it is a spend that could have been much more effectively directed towards offering  more flexible bus-based transit serving the wider urban area.

And that was before Covid19.
Today, the lack of flexibility of rail comes into even sharper focus in light of the potential changes in working practices, the diminished appeal of high density living, commuting, and working, possible land use changes, and the imposition of social distancing for the foreseeable future. These prospects, along with post-Covid19 delays in constriction, mean that the CRL is likely to fall even further short of helping to achieve “Government’s plans for higher economic productivity and the Auckland Plan vision of being the world’s most liveable city” (City Rail Link, Business Case 2015).

Spending $4.4bn (and climbing) on lifting the capacity of rail patronage by building the  CRL tunnel looks like an economic and and fiscal fail. It is also looking like a major policy fail.

Which brings us to the even bigger white elephant in the room, Auckland's proposed light rail. This is the subject of my next post.

Monday, May 11, 2020

Its not the shovels that count: its what they're shovelling

Is boosting infrastructure the best road to economic recovery for New Zealand?
If we do not get investment for recovery right we will undermine productivity and economic progress for generations to come. Indiscriminate infrastructure development at this time risks limiting options by absorbing and concentrating resources in an area in which performance has been demonstrably deficient.

New Zealand's recovery from Covid19 requires short-term job gains and long-term income growth if we are to throw off the shackles of public debt. Committing substantial resources to “shovel-ready” projects without rigorous assessment risks excessive spending to meet uncertain demand. The result of over-investment will be lower foreign reserves, a diminished credit rating, and a prolonged productivity deficit.

Get the economics right first
Economic justification is essential to establish whether the benefits generated by infrastructure justify the resources consumed in its development. Projects that do not stack up have a negative fiscal impact, requiring ongoing tax- or rate-payer subsidy. While otherwise uneconomic projects may provide non-market benefits (to the environment, social equity, or public health for example), if we do not first consider their economic efficiency, we cannot know whether they are the best means of achieving those benefits. 

We do know, however, that the wrong projects can set our economy back: the Think Big projects contributed substantially to a run on foreign exchange reserves in the early 1980s.

Current failures
The damage from uneconomic projects tends to increase if they are large scale. The literature on cost blowouts for major infrastructure projects – especially in transport – is extensive. Auckland's Central Rail Link , for which the case was flawed from the outset, and Transmission Gully are text book cases.  Consider the following:
  • Under-specification at the outset, with inadequate technical assessment or design myopia leading to re-specification and add-on costs in the course of development;
  • Under-costing from relying on precedent and current (or historical) costs for estimation, failure to consider the effect of competing demand for resources, and the optimism-bias of project protagonists leading to unwarranted approvals and subsequent cost blow-outs;
  • Contract failures from accepting low tenders and engaging at-risk contractors to meet tight project budgets, leading to higher costs when contractors fail and re-tendering is necessary;
  • Project delays from under-specification and under-costing compounded by resource shortages (including labour and skills), tying up capital and delaying benefits.
The failures threatening the CRL are such that economist Tim Hazeldine’s view is that it is time to stop pouring good money after bad. The contingencies facing such large scale projects should double down the call for rationality in today’s perilous economic environment. 

Unproven Demand
Because large-scale investments take time to finish, demand at completion may be quite different from what was projected at inception. Along with the impact of unexpected disruptions, extended pay-back periods add to uncertainty over what demand a project may eventually have to meet. 

As of today, the Infrastructure Commission’s pipeline of major public capital works , although incomplete, outlines around $16b or more of spending. Approximately 60% of this is for transport. (These figures are based on the cost ranges provided).  Yet major transport projects today face substantial shifts in demand, such as:
  • Revised working conditions lowering building occupancy and increasing the appeal of large footplate, low-rise, suburban workspaces with natural light and airflow;
  • Changed working arrangements (staggered hours, home-based working);
  • Newly suppressed demand for and lower passenger densities on public transport;
  • An increased preference for medium/low density suburban living environments;
  • A shift from large scale venue-based recreation;
  • Reduced international travel and tourism;
  • Reduced demand for mall-based retailing in favour of local services and centres;
  • More on-line retailing and in-home services.
We can add to this market uncertainty the impact of changing technologies, including prospects for:
  • Enhanced face-to-face telecommunications;
  • Gains in vehicle autonomy increasing capacity on existing highways;
  • Falling electric vehicle costs boosting private transport and demand-responsive public transport;
  • Aircraft operations favouring smaller aircraft on point-to-point rather than hub-and-spoke networks;
  • Continuing logistics gains integrating production and distribution with direct delivery;
  • Artificial Intelligence, product printing, design refinement, innovation, and changing consumption preferences jointly supporting local production of specialised goods;
  • Distributed specialist services (law, health, medicine) supported by AI, gains in computing power, seamless tele-conferencing, and advanced instrumentation;
  • Decentralised settlement with modern, localised infrastructure, decentralised employment, and efficient inter-regional and international information and transport connections.
A Shortage of Resources
Supply chains are over-stretched in the development sector.  This flows through to delays, costs, and failures all-too-often overlooked by local politicians and their consultants in the haste to justify economically suspect projects. 

Shovel-ready projects track straight into this quagmire of unrealistic supply chain and labour market expectations.  Yet, Infrastructure New Zealand has effectively lobbied the civil engineering/development complex to the top of the national economic agenda. It is supported by a network of professional players (engineering, consulting, planning, design, and legal) and the vested interests of operators. Because of its visibility, infrastructure building also plays to political monumentalism. 

What are the alternatives?
A shovel ready recovery locks us into projects based on the economy and labour market of the past. Uneconomic or marginally economic projects limit our ability to do other things. It would be better to focus on initiatives that lift adaptability (the ability to change what we are doing), and flexibility (the ability to vary how we are doing it). 

Here are some ideas that might contribute: 
  • Vet and prioritise infrastructure projects, ditching those like Auckland light rail plans with costs bound to blow out and which face uncertain demand; 
  • Pursue best practice in the assessment, design, specification, and management of any projects that may be justified (most likely in public health, water quality, and the like); 
  • Prioritise social infrastructure (education, health, and housing) for  short- and long-term benefits. 
  • Promote innovation and entrepreneurship with vocational education to increase career mobility and deepen domestic skills and experience. 
  • Pursue an open business environment to facilitate enterprise, mobilise capital, ensure productive resources and feedstocks can be widely accessed, and streamline regulation; 
  • Address business support to future-oriented capacities, rather than propping up existing structures and practices; 
  • Review approaches to trade facilitation, support for innovation and technology, and business taxation. 
  • Maintain household incomes: increasing local consumer spending, especially among low income households, will have the highest immediate impacts on employment while providing breathing space as the country and the world adjust to the economic shock of Covid 19.

Quite simply, an infrastructure-dominated programme that imposes new and potentially open-ended fiscal demands on currently constrained incomes is more likely to undermine than boost economic activity.