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):

     Source: https://at.govt.nz/about-us/reports-publications/at-metro-patronage-report/

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.

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.

What’s happening to central city services?

Questioning the future of the CBD
In an earlier posting I speculated about the future of white collar employment. This raised the question of what confidence we might have in service sector growth underpinning the future of the CBD, and incidentally how risky is investment – public and private – based on assuming that it will. 

This was construed in the comments as “giving up on the CBD” and a criticism of the proposed $2bn plus central rail link (CRL).   Well, I haven’t given up on the CBD, but I do differ in my analysis and prognosis from people who believe that a combination of coercive plans and think big projects will do the trick (see, for example, Hey, City Planners,  Remaking the CBD and Central City Dreaming). 

But the questions raised certainly go to the heart of the “business” case for the CRL.  In this blog I dig a little deeper into changes in the white collar sectors in the CBD to see if we can cast more light on the subject.

Projecting even more of more of the same
I have looked at service employment in the CBD and the rest of Auckland from February 2000 to February 2011 using Statistics New Zealand Business Statistics job count data (which does not distinguish between full- and part-time jobs).

The City Council’s economic update on the CRL projected central city employment to jump by two thirds, or 60,000 jobs, over 30 years, or 20,000 jobs a decade.  Now that’s real optimism in light of growth of under 12,000  from 2000 to 2011, and I don't see any underlying analysis supporting it.

The risk of depending on white collar growth
But this is only one of my concerns.  Changes in white collar employment raise other, more fundamental issues around the future of the urban area and especially the CBD.

White collar services (omitting hospitality and retailing for this analysis) accounted for virtually all the CBD job growth and rose from 71% in 2000 to 75% of employment there in 2011.  Commercial services accounted for two thirds of this.  So what happens in the service sector seems petty critical to the future shape of our CBD especially is we hope to counter a long-term tendency for work to decentralise (i.e., to grow faster outside the CBD than inside).

Decentralisation - international examples
A quick review of international examples suggests that greater contracting of public service delivery favours deconcentration (e.g. Washington DC); that dispersal to suburban and town-based offices contributes to decentralisation (e.g., Dublin), but that there may be a simultaneous decentralisation of some services and concentration of others (e.g., Paris).  

This is quite apart from the increasing international mobility of white collar jobs, and potential changes in functional interdependence and the need for clusters of centralised specialist services as a result of the deskilling traditional specialist occupations.

So what’s been happening in Auckland?
The 11,800 new white collar jobs in the CBD in 2011 represented 19% of Auckland’s total growth in those sectors.   Because they collectively grew faster elsewhere in Auckland (42%), though , the CBD’s share was down from 22% at the beginning of the decade.  

This tendency to decentralise varied by sector.  In Chart 1 the bars denote absolute gains (or losses) of jobs (left axis) and the points show the rates of change (right axis).  The CBD gained employment share in the sectors on the left hand side of the chart (centralising) and lost share in those on the right (decentralising). 

Chart 1: Changing Shares in White Collar Employment, the CBD and rest of Auckland, 2000-2011

                                              
Some sectors centralising
Centralisation increased in the specialised but small information and media and arts and recreation sectors.  The bigger finance and insurance sector also continued to focus on the CBD where 51% of the city’s employment in this sector is now located .  There was a slight increase in the CBD share of Auckland’s total education employment, although 87% is still located elsewhere.

While the others decentralise
But what about the fast growing – and highly significant – professional, scientific, and technical service sector?  Over a third of employees were in the CBD in 2000, but this was down to 27% in 2011.  A gain of 3,550 CBD jobs was dwarfed by 20,800 new jobs elsewhere.

And health care, medical and social services were clearly driven by suburban investment and demand.

In fact, 50% of white collar employment in the CBD in 2011 was in sectors which had grown faster outside it than in; not an especially strong foundation for projections that require annual employment gains in the area to almost double over the next three decades.

Recession can change these spatial patterns, of course, if lower order services and services directed towards individuals and households bear the brunt of a slowdown.  So we could see some re-concentration of services in the CBD in the next year or two, but it’s unlikely to be driven by high growth rates.

The CBD – a centre of specialisation?
Digging a bit deeper confirms the more specialised nature of CBD services. In the education sector  45% of tertiary jobs are located there.  This share didn’t change over the period, but the number of CBD jobs was still up by a solid 4,200 (47%).  Community and adult education jobs were up by 1,600. 

Chart 2: The Changing Share of Scientific, Professional and Technical Services in the CBD, Auckland 2000 and 2011

Scientific and market research services increased their CBD presence, but these are minnows in the wider picture (Chart 3). 

So it’s today's bigger employment sectors that show signs of decamping – especially management consulting and legal and accounting services.  In fact, 75% of employees in perhaps the most "knowledge-based" sector,  professional, scientific and technical services, were in sub-sectors that have been decentralising.


Chart 3: The Composition of Auckland''s Scientific, Professional, and Technical Service Sector 2011

So what can we take from the past?
There are two broad reasons for questioning reliance on white collar jobs to continue to underpin CBD growth.  The first is structural – a changing mix of jobs (and we haven’t seen the impact of global financial restructuring in New Zealand ... yet), including the international realignment of services suggested by my earlier posting on the white collar sector. 

The second is location preferences – with the analysis here suggesting that the CBD may not be the focus of future white collar growth that city and transport planners hope for. 

The international experience cited above suggests some reasons for this.  There may be others.

For example, people may be more concerned today with the quality of the work environment.   For many, elevator-dependent, air-conditioned, fluorescently-lit, high rise (and high cost) offices may no longer cut the mustard.  The convenience and amenities of working in the heart of the city can increasingly be replicated in suburban centres, without the congestion.

And perhaps issues of resilience, reliable infrastructure, flexibility, and proximity to the work force are important suburban attractions to the investors who employ them. 

Time to ask the hard questions
I don’t have the answers.  But I suspect that the people planning to spend billions on offering better transport to, from, and around the CBD should at least ask the hard questions, and particularly explain the grounds for expecting such a boost in job growth in the CBD and the consequences for their plans (and the city) if it does not happen.

If we cannot rely on the growth drivers of the past – and the evidence suggests that we cannot, not with any confidence at least – then we have to continue to question the very foundations of our plans.