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.

Expanding Horizon: Rethinking Auckland’s Port Plan

Far-reaching plans

In my last blog I suggested that it’s time for a rethink of Ports of Auckland Ltd’s (POAL) plans for expansion. The current plan cements in a commitment to a critical downtown location by continuing to promote stepped investment, including substantial further reclamation.  The analysis of demand behind the plan seems too slight in content and too inflated in expectations to justify this costly long term commitment and the prospect of a four-fold increase in port related rail and road traffic. 

Today

 Source: Port Development Plan, Ports of Auckland Ltd, 2008

Tomorrow?

Source: Port Development Concept Plan, Ports of Auckland Ltd, 2008

Debatable assumptions

We are facing a period of unprecedented post-war change to the economies of New Zealand and our trading partners.  Who knows what the configuration of goods crossing our ports will be in 20, 30, or 40 years’ time?  Or the sorts of demands that might be made on some of the city’s most valuable real estate - currently occupied by a transport operator?   Obviously an efficient port is critical to New Zealand’s trading future, but that might just be why it is also important to consider radical alternatives: to achieve the efficiencies and flexibility that uncertain and challenging times demand.

This post provides a few more numbers to suggest why the POAL view of the future may be a little narrow .  It also proposes an alternative – no doubt just one of several that might be considered to promote the evolution of the nation’s long-term trade.

Changing production patterns erode Auckland’s primacy

New Zealand cargo figures from 1989 to 2011 (sourced from Statistics New Zealand 1) reveal interesting shifts. First, growth in cargo handled was slower at Auckland's port than elsewhere:

% Growth in Cargo, 1989-2011

That means its share of national trade has fallen.  I saw no analysis of the reasons for this in the port plan.  

Auckland Port’s Share of National Cargo, 1989 and 2011

In fact, if we think about it, its not  necessarily bad news.  For a start, Auckland’s sea trade is of a higher  value than elsewhere; between 1989 and 2011the unit value of its exports grew by 29% (in nominal dollars) compared with just 8% elsewhere, to reach $3,800/tonne (compared with $1,300/tonne). A  regional focus on higher value exports was reinforced  by the growing freight role of the Auckland International Airport which today accounts for 12% of New Zealand exports by value, and 21% of imports.

Also, Auckland seaport still takes a large share of national  imports reflecting the region's twin roles as centre of consumption in New Zealand and as a trans-shipment point for imports to other parts of the country.

Nevertheless, if more trade is being channeled elsewhere it suggests that there may be other options for growth which are less likely to adversely impact on Auckland's valued harbourside.

Looking to the wider region

Take a look at what is happening elsewhere in the northern North Island.  The ports at Tauranga and Whangarei have grown faster than Auckland, and today jointly account for a larger share of exports by value and tonnage.  Whangarei is, of course, a special case given the role of shipments to the oil refinery.

           Growth, 1989-2011                                                       Share of New Zealand, 2011

Responding to structural change?
These figures hint at an emerging specialisation.  Over the past thirty years, the primary processing industries on which Auckland’s export trade was built have moved out.  Consequently, the downtown port is a bit of an anomaly.  The migration of export trade to Tauranga simply reflects an adjustment in traffic to the changing geography of production.  As higher fuel prices bite, and the overheads of overloading Auckland's transport system increase, there may be good reason to act to sustain that trend.


Manufacturing has changed, too. The import-substitution industry which grew so strongly in Auckland between the 1940s and 1970s has been dismantled by a lowering of trade barriers and by the impact of the new manufacturing culture of North and Southeast Asia.

Today Auckland has a smaller number of specialised, hopefully more sustainable manufacturers.  Some of these do, however, rely for expansion on efficient channels to international markets.  Its is incumbent on the POAL to make sure it responds to their hopefully growing needs.

Is more specialisation an answer?

Of course, our analysis needs to delve deeper before we can be confident about the possible effects of ongoing structural change on the composition and volume of future trade.  But even the crude figures here suggest that there is an opportunity for greater specialisation and consequently more intensive and productive use of the assets of the three northern ports. 

For a start, a strong focus on value-based trade through Auckland seaport would enable the company to do more with less.  At the same time, fully exploiting its inland port sites as consolidation and break-down points for these and other more traditional trades should ensure that they too play a full role in integrating and streamlining internal and international transport.

Tauranga has boomed as a result of a booming rural sector – both by importing inputs and exporting products.  As a gateway to New Zealand’s most productive hinterland – the Waikato, Bay of Plenty and central North Island – we can expect this role to grow.  And if New Zealand’s trade future really is just “more of the same” as implied by the exponential growth on which the POAL port plan is based, then Tauranga  is an  obvious choice for  investing in the capacity to service the primary sectors and associated processing industries as these sectors expand, diversify, and intensify their output.

Whangarei’s long-term role is more speculative, but it possesses an underutilised port which can readily adopt and develop best practice commodity handling, as it has done for forestry.  There may also be real value in shifting lower value and bulk trades from Auckland’s downtown to Whangarei’s Northport as a means of extracting the greatest value out of both.  

Beyond the horizon: the logic behind Northport

Playing to and building on port specialisations would exploit existing investment in inland port operations and boost the productivity of any new investment across the entire transport chain.  It would probably require the rail link between Auckland and Whangarei to be upgraded and the Oakleigh extension to Northport at Marsden Point to be built.  This can probably be justified  anyway for the additional capacity it will provide on the  highway between Auckland and Whangarei by removing bulk traffic.  And by providing a sound alternative to  Auckland for high volume, low value trade  it will avoid  costly reclamation there, and help sustain the quality of Auckland's waterfront. 

The potential development of a new nearby Marsden City and the solid industrial base associated with the oil refinery mean that more trade and investment at Northport could play  a major role to play in  freeing some of Auckland's  harbour edge  for higher value uses.

Radical change calls for lateral thinking, and integrated action
This is just one option.  But looking at it – and others -  seriously might begin to meet former POAL board member Rob Campbell’s concerns about the narrow thinking that promotes incremental change at a legacy port as a way to cater for apparently undifferentiated volume growth - regardless of the wider costs.

Of course, any such suggestions may call for more than rethinking where and how different goods are shipped in New Zealand.  Perhaps the existing owners and operators cannot work together to extract the best out of their investment (for shippers or shareholders).  Perhaps current governance and ownership structures make that too big an ask, as suggested  by the Productivity Commission.

An important  part of the answer may lie in the emergence in New Zealand of an organisation -- or organisations -- capable of integrating and managing the flows across all modes to the advantage of individual trades, regardless of the ownership and management of individual components of the transport infrastructure. Actually, integration in response to globalisation is  not so radical, even if the notion of working together may be anathema  for some of  today's port players.

---

[1]               Value measured as nominal $CIF for imports and $FOB for exports.